Supermarket mergers may speed up

An analyst for the industry says consolidation is vital in the face of stiff competition.

By MARK ALBRIGHT

© St. Petersburg Times, published May 9, 2000

CHICAGO -- Consolidation will continue to tear through the supermarket industry as big chains keep gobbling up the industry laggards, a top analyst predicted Monday.

"Within five to seven years, 80 percent of all supermarket sales will be done by five chains," predicted Peter Gertler, national retail partner with Deloitte Consulting. "It's either lunch on somebody or become lunch yourself."

That would signal an acceleration of big chains buying up the weaker regional ones, a trend that erupted in the late 1990s. In just the past five years, the nation's eight biggest supermarket operators increased their market share to 46 percent, up from 31 percent. For most of them, acquisitions were their only way to increase market share in a long-overcrowded industry that Wall Street is forcing to become more efficient.

Such warnings permeated the Food Marketing Institute's convention here as 35,000 supermarket executives and their suppliers gathered to compare notes, unveil thousands of new products and check the pulse of their $440-billion-a-year industry.

There wasn't much celebrating at the trade group's annual meeting. Supermarkets are getting it from all corners. In today's tight labor market, their annual turnover of part-time employees soared to 82 percent in 1999, up from 63 percent the year before. The annual full-time employee turnover rate has doubled to 17 percent since 1991.

Meanwhile, supermarkets are watching convenience stores, drugstore chains and discount stores such as Wal-Mart, Target and Kmart muscle in on the food business. About 24 percent of pet supplies, office supplies, over-the-counter drugs and cosmetics are bought at places such as Petsmart, Beauty Warehouse and Office Depot or Staples.

Indeed, in a survey supermarket executives for the first time in years ranked discount store supercenters as their toughest competitors. Previously, they gave the top competitor ranking to other supermarkets.

Then there is the still-nascent threat from Internet grocery shopping, which has gained investments recently from several chains as a defensive move.

Despite coming off its best sales gain of the decade in 1999, the supermarket industry does not offer much of a growth picture. Minimal price inflation blocked grocers from generating bigger profits in each of the past five years. Yet the industry kept building newer and bigger stores for customers who never appeared.

As a result, the industry's floor space devoted to sales increased 26 percent since 1994 while its sales productivity dropped 22 percent. "Let's not kid ourselves," said Michael Sansolo, senior vice president of the Food Marketing Institute. "The industry's growth pattern remains static." In many respects, what has happened in Florida, where three rival supermarkets are often on the same corner, is a microcosm of the national picture.

Florida is headquarters to two of the nation's eight biggest chains. The state also has two others in the Big Eight elbowing them for market share. Meanwhile, Wal-Mart Stores has built supermarkets at 55 of its discount stores in Florida. Target opens its own version of a combination discount store supermarket in Orlando this year.

While Lakeland-based Publix Super Markets has prospered in the 1990s, amassing a significant market share in new markets such as Atlanta, Jacksonville-based Winn-Dixie Stores Inc. is closing 10 percent of its stores and fighting rumors it eventually will be sold to a bigger player. Albertson's Inc. has doubled its size nationally by buying the biggest grocer on the West Coast, a move which has hurt its profitability. Kash n' Karry Food Stores parent Food Lion reorganized as Delhaize America to keep up with the bigger-is-better trend and is paying a hefty premium to buy the 154-store Hannaford Brothers chain that covers eight states in the Northeast.

"The Hannaford acquisition is the last one you're going to see purchased at a premium," analyst Gertler said. "It's going to take years for them to work through that deal."

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