Dive Brief:

• The e-commerce segment of food retail, led by Amazon, and alternative formats will increase in market share from a current 30.4% to 44.9% by 2022, according to a report by Barclays analyst Karen Short. The result, she wrote, will be “carnage” for supermarket operators.
• “This share shift will result in staggering closures and job losses in the conventional food industry,” Short notes. The only solution for traditional retailers, according to her, is through mergers and acquisitions, which can help lower prices and drive operational efficiencies.
• Short also noted that conventional retailers face difficulties in evaluating potential mergers because of an “outdated” view of market share data that doesn’t factor in alternative formats.

Dive Insight:

Conventional grocers have been ceding market share to alternative formats like dollar stores and drug stores since the ‘80s, Short notes, despite rapid expansion. Nowadays, less than 50% of consumers say the traditional supermarket is their primary channel for food shopping.

For stock-up trips, shoppers will often visit warehouse clubs like Costco. For quick meals, they’re finding convenience stores an increasingly attractive outlet. And for consumables like snacks, beverages and laundry detergent, dollar stores have become a preferred outlet for many.

The rise of e-commerce presents an opportunity for conventional retailers to grow their sales and share, and many chains have developed their own platforms in recent years or partnered with third-party providers like Instacart. But according to Short, Amazon, through both its website and its newly acquired Whole Foods stores, “will endeavor to dominate the e-commerce segment of food at home.”

As Amazon and non-traditional formats like discounters Aldi and Lidl accelerate their growth, conventional grocers will continue to lose share, and bankruptcies will follow. Already in the past several years, the industry has seen evidence of this in the bankruptcies of Marsh, Haggen and A&P stores.

Grocers have remodeled their stores, increased their promotions and taken numerous other steps in order to stay relevant and differentiated in the marketplace. But according to Short, only through consolidation will these retailers be able to achieve the pricing and efficiencies that will allow them to effectively compete.

How might this play out? Regional grocers may merge and increase their footprint. Private equity firms are set to ramp up their acquisitions, and may target struggling grocers. Overall, M&A activity in the grocery industry has been quiet lately, but may ramp up out of necessity in the coming years.

An effective model for a large-scale merger is Ahold-Delhaize, which came together last year and has combined the resources and expertise of conventional chains up and down the East Coast. The company has a philosophy of sharing best practices; if something works well at Hannaford, it might be applied to Food Lion and Stop & Shop stores. Ahold-Delhaize has a centralized support center for its retail banners, and has focused on shared supply chains and combining its purchasing power.

So far, the merger has resulted in better-than-expected savings. Over the next three years, Ahold Delhaize expects to see €750 million ($880 million) in synergies as the combined companies continue to cut costs and seek efficiencies — a sharp increase from the €500 million ($585.96 million) the company originally expected to save over the period.