Is the current wave of M&A in the grocery sector a double-edged sword?

Welcome to dunnhumby's?The Science of Shopping?newsletter where we look at the trends shaping the future of retail, and share the top insights that matter most to retailers and CPGs. A recent wave of mergers and acquisitions (M&A) in the grocery sector witnessed a number of deals involving grocery giants, making it clear that the industry is consolidating at an unprecedented pace. In this month's edition, Siro Descrovi examines the key drivers behind this dynamic shift and highlights the opportunities and risks for retailers, CPG's and customers. Furthermore, he shares the three essential steps to stay true to a Customer-First mission post-M&A.

Grocery Mergers and Acquisitions: The impact on retailers, brands and customers

The grocery sector is undergoing a significant transformation, driven by many forces, including a wave of mergers and acquisitions (M&A). Recent deals like Groupe Casino selling a portion of its stores to Intermarché, Carrefour's acquisition of SuperCor stores in Spain, and Aldi's move to buy nearly 400 Winn-Dixie and Harveys Supermarkets in the US, are just a few examples of this dynamic shift. With giants like Kroger and Albertsons merging, it's clear that the industry is consolidating at an unprecedented pace. But what’s fuelling this M&A trend, and what could it mean for key stakeholders - retailers, consumer packaged goods (CPG) companies, and customers?

Why now? The key drivers behind M&A activity

Several factors are converging to create a fertile environment for M&A in the grocery sector:

• Post-COVID cash reserves: Many companies have more liquidity than expected, thanks to pandemic-driven sales surges. This surplus is now being reinvested into growth through acquisitions.
• Growth catalysts: For retailers looking to expand rapidly in saturated markets or enter new ones, acquisitions offer a fast track to growth. The potential for interest rate cuts in 2024 could further accelerate M&A activity as financing becomes more accessible.
• Purchasing power: Larger scale leads to stronger bargaining power, which in turn allows for better negotiation terms with suppliers.
• Tech transformation: As technology investments escalate, larger entities can absorb these costs more effectively, reducing the competitive pressure.
• Attractive buying opportunities: Inflation has strained the financial health of underperforming retailers, making them prime acquisition targets.
• Scaling private labels: As private labels become increasingly important, retailers need more volume to achieve economies of scale. M&A offers a quick path to that scale.
• Diversification: Diversifying portfolios through acquisitions allows retailers to mitigate risks and explore new revenue streams, positioning them more robustly against market volatility.

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Opportunities: the upside of consolidation

M&A activity presents several potential benefits for the industry:

• Retailers: Beyond what discussed in the previous paragraph, more scale and size would lead to increased efficiencies and purchasing power could lead to higher margins, allowing to negotiate strongly with international suppliers.
• CPGs: With fewer but larger retail partners, CPGs can achieve greater efficiency in distribution and customer reach. There’s also potential for deeper collaboration on innovation and product development, using customer insights with scale. Smaller CPGs that could benefit also from retailer backing, acting as catalyst for growth.
• Customers: If retailers pass on the benefits of greater efficiency and better negotiation to customers, they could enjoy improved shopping experiences and better value. The modern distribution system has already demonstrated how these efficiencies can transform the market, offering better choices and pricing than older, less efficient grocery formats.

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Risks: The downsides of a consolidated market

However, the wave of consolidation is not without its risks:

• Retailers: Smaller, independent retailers may struggle to compete, leading to a loss of diversity in the grocery ecosystem. This could result in a flatter, less dynamic market with creation of oligopolies in some markets-regions or de facto monopolies.
• CPGs: As the balance of power shifts toward larger retailers, CPGs may find their negotiating power diminished, potentially squeezing their margins and limiting their ability to innovate.
• Customers: The creation of oligopolies could stifle competition in the long run. With fewer players in the market, the initial benefits of consolidation—like better prices and experiences—could give way to higher prices and reduced choice as competition diminishes.

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Three steps to stay true to a Customer-first mission post-M&A

After the dust of an M&A deal settles, it’s crucial for retailers to ensure they remain focused on their customer-first mission.

Here are three essential steps to consider:

1. Review and update customer value proposition and promises: Post-merger, retailers should revisit and restate what’s their position in the eyes of Customers, given the new trade-offs, competition set, and how that varies across markets and region to ensure they don’t dilute brand equity whilst expanding and minimize financial loss that may result from this. This process should not be confined to the marketing team alone, but needs to engage employees across departments to identify their purpose, key customer needs and ensure that everyone is aligned on the company’s values, customer KPIs, and priorities. By doing so, the new organization can continue to deliver on its commitments to customers while adapting to its expanded capabilities.
2. Customer data masterpiece: With the merging of different customer databases, retailers have a unique opportunity to create a single, comprehensive view of their customers. This means consolidating data from both legacy systems and the newly acquired company to enhance customer segmentation and develop a more nuanced understanding of customer behaviours and preferences. A unified customer database can serve as the foundation for more personalized marketing efforts, better service, and deeper customer loyalty.
3. Capabilities health check and improvement: Every merger brings together different strengths—whether it’s a superior pricing tool, a more effective CRM system, or a well-established loyalty program. Retailers should conduct a thorough capabilities health check to assess what’s working well and what isn’t across both organizations. The goal should be to create synergies by scaling the most effective solutions and harmonizing processes across the board, ensuring that the new organization operates at its best from day one.

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Conclusion: a double-edged sword

The current wave of M&A in the grocery sector presents a double-edged sword. On one hand, greater scale and efficiency could streamline the industry, reduce waste, and deliver value to customers. On the other, if this power is wielded solely in pursuit of profit, it could lead to a less competitive market, stifling innovation and reducing the diversity of options available to consumers.

The future of the grocery industry depends on how this balance is managed. By focusing on clear customer promises, leveraging comprehensive customer data, and optimizing capabilities, retailers can navigate these opportunities and risks while maintaining a vibrant, competitive, and customer-centric market.