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03/02/2013

A Year of Retrenchment and Strategic Rethinking

Economic pressures resulted in major retailers revising their strategic plans in 2012, with several chains announcing decisions to sell underperforming banners.

The transactions are likely to affect the competitive landscape, while conventional supermarkets continue to grapple with a slow-growing recovery, some poor management decisions and, for many, tough competition from Walmart.

Headline-makers included Supervalu Inc., which decided to unload underperforming store groups; Tesco Plc, which announced a strategic review of its U.S. banner, Fresh & Easy; A&P, which emerged from bankruptcy protection as a leaner privately held company; and Walmart, which tweaked its expansion plans to pursue more disciplined growth.

The number of mergers and acquisitions among U.S. supermarkets totaled 29 in 2012 with a combined deal value of $370 million, compared with 34 transactions valued at $777 million in 2011, Dealogic reports. While a decline from 2011, the 2012 figures represent a substantial increase from 2008, when the recession triggered a pullback in deal activity and Dealogic reported 21 transactions valued at $43 million among U.S. supermarkets.

On the CPG side of the business, 2012 will be remembered for the demise of Hostess Brands, Kraft's split into Mondelez International and the domestic Kraft Foods Group, and ConAgra's acquisition of Ralcorp. Overall, 264 U.S. food and beverage company merger and acquisition transactions were recorded in 2012, with a total deal value of $81.41 billion, fueled by the $36.68 billion Kraft Foods Group spinoff, according to Dealogic. That compares with 212 transactions and total deal value of $5.96 billion in 2011.

But even companies that didn't close deals in 2012 took a new look at their strategic plans, with many deciding on new directions.

Managing Excess Capacity

The economic slump, with lower consumer spending, put pressure on grocery stores, says consultant David Livingston, head of DJL Research in Waukesha, Wis. But the underlying problem is too much retail square footage for the U.S. population, he says.


"Through poor management, many of these companies took on so much debt that they are going to fail."

–David Livingston,

DJL Research,

"The recession is just an excuse," says Livingston, who expects to see store closings this year. "Through poor management, many of these companies took on so much debt that they are going to fail."

The winners are regional store groups, especially family-owned and employee-owned stores that have experienced measured growth without adding debt, Livingston says. "The real test of a well-run company is this: When Walmart comes into their market, [do they] continue to thrive?"

Breaking even has proven to be tougher than Tesco expected when it opened its first Fresh & Easy stores in 2007. Now the U.K.-based giant is reviewing all strategic options for the struggling 200-store business. While some locations reportedly have been successful, others haven't.

US Retail – Supermarkets Subsector M&A

Source: Dealogic

29 The number of mergers and acquisitions among U.S. supermarkets in 2012.

"The stores are in very different areas. They didn't tailor the merchandise to the shoppers in each location," says New York consultant Maggie Gilliam, adding that the varied locations are likely to be a problem if Tesco puts Fresh & Easy up for sale. "I don't think they will be able to sell all the stores to one buyer."

Supervalu Shakeup

Supervalu recently announced it is selling Albertsons, Acme, Jewel-Osco, Shaw's and Star Market and related pharmacies to AB Acquisition LLC, an investor group led by Cerberus Capital Management, in a transaction worth $3.3 billion, including $100,000 million in cash and the assumption of $3.2 billion of debt.

But the remaining Supervalu business (which includes wholesaling, regional supermarkets and Save-A-Lot stores) has its own troubles, Fitch ratings stated in a report. "Comparing Supervalu's business today (after carving out the businesses to be sold) with SVU's business in fiscal 2006, prior to its acquisition of Albertsons, reveals the deterioration in the legacy Supervalu business over the past six years," Fitch analysts wrote.

Fitch estimates Supervalu's sales are an estimated $17.2 billion today compared with $19.9 billion in fiscal 2006, representing a 13 percent decline due to decreases in identical-store sales.

Walmart Pursues Growth

Overall, Walmart worked last year to regain its footing with more consistent low prices for customers and smarter capital spending. Walmart said it would beef up smaller stores in the United States, more than doubling the number of Neighborhood Market stores to 500 by 2016, while adding two more Express stores for a total of 12.

North American customers still prefer large stores, where they can buy almost anything in one stop, says analyst Gilliam. "Walmart uses the smaller stores to fill in where bigger stores aren't needed. And, amazingly, their small stores are just as profitable as the big ones. That's hard to do," she says.

In 2012, Walmart generated about 55 percent of sales, or $244 billion, from grocery sales as it focused on fulfilling customers' basic needs during a time of belt-tightening, industry observers say. Food purchases helped Walmart gain traction with customers.

In January of this year, Walmart announced new plans to put cash to work. Walmart has an eye on India, as that country eases restrictions on foreign investment, a move expected to open the market to multinational retailers.

At the same time, the company has announced its Canadian unit will spend $450 million on supercenters and distribution facilities. Shelly Broader, president and CEO of Walmart Canada, says the company is adding more full grocery sections to many stores. "We look forward to helping our customers coast-to-coast save money on groceries as well as their general merchandise purchases."

Ann Keeton is a Chicago-area business writer who has written about retail and manufacturing for a variety of publications. Keeton previously covered the U.S. airline, aerospace and defense industries for Dow Jones and The Wall Street Journal.