Albertson’s Sale Mirrors Supermarkets’ Challenges: More acquisitions and restructurings are expected as chains weigh emphasizing price versus premium quality and service

The retirement of Albertson’s Inc. from the bitterly contested supermarket wars may be a metaphor for the quixotic nature of the 21st Century food retailing industry as well as a harbinger for future acquisitions and restructurings. In a unique format, Albertson’s is departing in a transaction that is both an acquisition and a breakup, as well as a reversal of a major long-running strategic trend in the field. Under the complex deal, valued at $17.4 billion, Boise, Ida.-based Albertson’s agreed to sell more than 1,100 stores to rival SUPERVALU Inc., another 655 units to a consortium led by private equity firm Cerberus Capital Management, and 700 freestanding drug stores to CVS Corp. On one level, the divvying up of the supermarkets between SUPERVALU and the Cerberus group was designed to skirt antitrust objections to a possible concentration of market power in SUPERVALU’s hands. But the deal also marked the breakup of a company that had acquired heavily to expand its reach to near national proportions from its home base in the Rocky Mountains. Does this dent the concept of the large national food chain? Initially, the answer would have to be no since Minneapolis-based SUPERVALU essentially is replacing Albertson’s on the national stage with additions on the West Coast, in New England, and in the Mid-Atlantic states, as well as the Rockies and its Midwest base. But the future might show a different picture, and it’s not entirely clear how it will shake out and exactly which retailing approach – e.g., low-cost versus specialization – that key players will take. The supermarket industry is facing “probably more turbulence than we’ve seen in years,” says Janet Hoffman, head of the North American retail practice at Accenture. She attributes the challenges to a combination of the industry’s consolidation over the last decade with changes in consumer preferences that merchants must deal with. “The next wave,” she adds, will be driven by an assessment of the consolidation to see “what is working and what is not.” “There are a couple of formats that will work,” she notes. “There are those driven by price, which is best enabled by being a company that can purchase at scale and reduce costs to the greatest extent possible. But there are other consumers that are more motivated by selection and service. That is more complicated to do by the larger organizations.” Ultimate winners, she says, may be the chains that perform a balancing act by “executing on what we call local market optimization, including products, service, and price.” Food chains also are wrestling with the industry’s increasing number of channels, e.g., discounters, specialty chains, convenience stores, and entrepreneurial start-ups in several niches. Hoffman says channelization and fragmentation of consumer preferences “is at the intersection of the turbulence that we’re seeing.” “The challenge is how to extract top-line growth through size but also profitability and meet customer needs as well,” she says. (c) 2006 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com