After a year that saw fewer than expected M&A deals in the grocery market, analysts expect head-turning activity in 2017.
Last year, the total value of deals remained at close to $33 billion — the same level as 2015 thanks to larger acquisitions. But deal volume fell 12% overall.
Still, 2016 wasn’t without its share of mega deals. For instance, the $13.6 billion merger between Ahold and Delhaize brought East Coast chains Giant, Shop & Shop, Food Lion and Hannaford under the same corporate umbrella.
So what’s different about 2017? Bahige El Rayes, principal for the consumer industries and retail practice for A.T. Kearney, said that competition in the U.S. has intensified as discounters like Aldi and Lidl aggressively expand, and online players like Amazon enter the brick-and-mortar space.
“In addition, we are seeing major retailers sit on a record amount of cash,” El Rayes told Food Dive in an email. “All these factors make us bullish on 2017, where we expect to see more M&A deals in the grocery market. Broadly, we expect the retail M&A activity to continue growing in 2017, potentially breaking records set in 2008 on key market metrics [including both financial and overall activity].”
Greg Ellis, managing director for deals strategy at PwC, said there continue to be many interesting M&A opportunities ahead for 2017.
“The grocery retail industry will continue to consolidate over time. The continued turmoil in the broader retail market will likely be a net neutral for grocery,” he told Food Dive. “The bigger impact in retail is in categories more susceptible to online intrusion than grocery.”
What’s driving growth?
Big retailers like Albertsons, Ahold Delhaize and Kroger are seeking opportunities to gain a larger share of consumers looking for meals at a reasonable prices.
“Spend per capita on food at home hasn’t grown for years,” Ellis said. While the population continues to grow in the low, single digits and new communities are formed that require grocery retail, for the most part, new store expansion is limited for conventional grocery retailers.
“There are few places in the country that don’t already have a grocery retail option. M&A remains the primary option to drive faster revenue growth.”
As earnings growth remains subdued, El Rayes noted multinational consolidation will be critical to improving bottom-line results, suggesting more large deals in 2017.
“There are few places in the country that don’t already have a grocery retail option. M&A remains the primary option to drive faster revenue growth.”
Greg Ellis
Managing director for deals strategy, PwC
“Europe will be very attractive for major U.S.-based grocers, given lower exchange rates and shaky valuation in a period of uncertainty,” he said. “Valuable assets can be up for grabs.”
Big retailers will also continue to look for new growth opportunities. A.T. Kearney data projects an increased appetite for smaller acquisition targets, spurred by a greater reliance on new technologies and customers. Nearly 40% of the executives the firm surveyed said they will emphasize M&A deals under $100 million, versus approximately 6% in 2016.
El Rayes notes this will be especially true for bigger grocers, as they will be likely to acquire smaller businesses focused on key trends — such as e-commerce, data analytics, and specialty retail.
Prime acquisition candidates
Conventional grocery retailers have been losing market share for years as new upstart players of all kinds have entered the market. Discount grocers and dollar stores have been the biggest culprits. The erosion has slowed recently as major players have fought back the influx of specialty retailers -- and continue to look to drive growth through acquisitions.
Stores have refocused efforts on niche products, expanded meal kits and making things more convenient for shoppers. Whole Foods, Kroger and Ahold are among food retailers introducing smaller, more limited-assortment stores that deliver convenience and affordability.
Analysts suggest that some of these retail giants might be looking at Ingles Market, Sprouts, recently bankrupt Fairway and Fresh Market. All of these stores are smaller fresh-focused chains with high-income customers and good business models.
At the end of 2016, Kroger executives told investors that a change could be coming in their M&A strategy. While they noted they were eager for new acquisition deals (and who wouldn’t be after the successful 2014 purchase of Harris Teeter), it wasn’t finding the deals it wanted.
Ellis said there are a number of areas of acquisition that could be attractive to conventional grocers.
1. Sub-scale, regional players
These could range from small grocers with a few local stores that major retailers buy to drive cost-effective expansion to large regional players that cover multiple states. Examples include King Kullen in New York and H-E-B in Texas.
2. Ethnic grocery retailers
Neither Hispanic nor Asian grocers have kept pace with demand.
“Conventional players are realizing that they can’t address the full needs of many ethnic consumers within their existing footprints,” Ellis said. “Acquisition of some of the larger chains in ethnic that are encroaching on $1 billion would allow conventionals to tap into a new customer base and new occasions.”
3. Specialty players that offer higher quality, limited assortments
Many of these are focused on natural and organic products. They are attractive because of the elevated experienceu they offer with more selective products.
4. Online grocery —or more broadly, any food delivered to the home
This continues to be a very dynamic market driven by both start-up companies and partnerships between start-ups and established grocery retailers.
“Consumers are demanding online grocery options, but the category remains significantly under-penetrated versus others,” Ellis said. “Profits in the space have been elusive. It remains to be seen who will be the winners in the space, but there will likely be continued transactions as the game plays out.”
How about private equity?
Private equity funds’ share of deal value in the grocery space declined in 2016 for the fourth-consecutive year -- from about 40% in 2012 to about 16% in 2016. The most notable transaction was the $1.37 billion sale of Save-A-Lot to a Canadian private equity firm.
A.T. Kearney research shows the main drivers of this trend are high asset prices, a sharp increase in high yield rates in early 2016, and ongoing uncertainty in global markets -- including the effects of Brexit and the U.S. presidential election. Moreover, while individual buyout funds continue generating strong returns, grocery investments as a whole have been relatively dismal. Stock prices of PE firms continue to underperform the broader market, and many are lower today than at their IPO.
“In this context, we expect to see the return of the financial acquirers to the consumer/retail market this year,” El Rayes said. “A full 92% of the private equity executives we surveyed expect greater or equal M&A activity in 2017; only 8% expect further declines.”
