Grocery store sales have soared since the pandemic, but the industry is facing a slew of challenges including labor, inflation and supply chain, and competition from larger players such as Amazon, Walmart and Target. On the bright side, there is still room for growth in the sector and deals to be made. Scott Moses, managing director and head of grocery, pharmacy & restaurants at Solomon Partners, spoke to Mergers & Acquisitions about what kind of acquisitions PE firms are looking for, and technology’s impact on the industry.

How has the grocery sector benefited from the pandemic?

Grocery sales continue to be robust, particularly among the Grocery Giants, namely Amazon/Whole Foods, Walmart, Target/Shipt, Costco, Aldi and Dollar General, whose performance has been exceptional. No grocers have benefited more during the pandemic, with billions of excess profit (e.g., Amazon’s Ebidta has increased over $20 Billion since early 2020) at their disposal to invest in higher wages and benefits to retain employees. As the ‘Grocery Giants’ crowd out regional grocers from labor and supply allocations, they exacerbate regionals’ operating challenges, undermining their value proposition and market share. These pressures are again catalyzing the exigency for mergers.

Scott Moses

What kind of deals are PE firms making?

The most successful recent PE grocery acquisition has been Cerberus’ ongoing investment in Albertsons, which they used to create billions of dollars in combination savings from their acquisitions of Safeway, Supervalu retail (various former Albertsons banners), A&P stores, United Supermarkets, Haggen and its growth investment in El Rancho, among others. PE firms have always been very interested in specialty / ethnic grocery and done very well with various investments, eg, Apollo (Sprouts / Henry’s / Sunflower, on which they made a $2 billion profit), Leonard Green (Whole Foods) and KKR (Cardenas / Mi Pueblo / Ranch Markets). Given supermarkets’ clearly proven defensibility and renewed growth prospects, PE firms are exhibiting very strong interest in both traditional and specialty / ethnic grocery acquisitions, as well as their owned store and distribution real estate, where the arbitrage between operating company and real estate valuation is extraordinary.

What kind of technologies are businesses looking to add?

Online grocery has nearly tripled since 2019 to ~10 percent of all sales and is expected to double to over 20 percent by 2026. Businesses are looking to add a range of technology, including end-to-end e-grocery customer engagement platforms (i.e., alternatives to Instacart) like Mercatus; AI-driven fulfillment centers like Ocado and Boxed (which we just sold to Seven Oaks); in-store smart carts like Caper, in-store AI-driven inventory management systems like Focal; and last-yard “smart box” platforms like Home Valet (who just announced a partnership with Walmart to facilitate 24/7, contactless, safe-temperature food delivery).

Demitri Diakantonis