Heather Haddon and
Recent upheaval in the U.S. grocery business is proving to be especially painful for regional supermarkets and their suppliers, creating opportunities for big-food retailers to further consolidate their position in the market.
Increased consumer spending at discount grocers, club chains and e-commerce sites are forcing middle-market grocers and distributors to take stock of their finances, resulting in store closures or other steps to pare down debt. Traditional chains captured 44% of spending on food and beverages last year, down 6 percentage points from a decade ago, according to Inmar Willard Bishop Analytics, a market-research firm.
There were 25,380 stores offering a full-range of groceries with at least $2 million in annual sales last year, down 6% from 2015, Inmar Willard Bishop found. The number of stores is expected to drop to roughly 19,000 by 2021, the firm says.
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Bankers who handle food-retail deals say the squeeze is creating more acquisition opportunities for big grocers, particularly as smaller family run companies face an older generation of leaders stepping back.
“The U.S. is clearly in another wave of grocery store consolidation,” said Mike Fordney, managing director of the Food, Consumer and Retail Group at BMO Harris Bank, whose clients include many family-run grocers in the Midwest.
Grocers have weathered previous rounds of bankruptcies over the past decade, but executives say the headwinds are stronger this year. Already, Marsh Supermarkets LLC and Central Grocers Inc. have sought bankruptcy protection in 2017.
Other food retailers, such as Gordy’s Market and Brennan’s Market in Wisconsin, have closed locations or sold stores to bigger chains to cut losses. Several grocers have been added to distressed-asset watch lists that circulate among investment bankers and lawyers, according to people familiar with the matter.
S&P Global Market Intelligence found a food-retailer default within a year was 30% more likely given the increased competition after Amazon.com Inc.’s announced it was buying Whole Foods Market Inc. Moody’s Investors Service said regional chains with high debt are at risk. Moody’s has downgraded debt owned by four smaller food-retail chains in the past year.
“I think what you’re seeing at a very high level is a lot of distress and disruption in the space,” said Keith Daniels, a partner at financial advisory firm Carl Marks Advisors.
Marsh and Central Grocers, once major Midwest food sellers, filed for bankruptcy protection in May. Central Grocers declined to comment, and Marsh didn’t respond to requests for comment.
Larger grocery chains, Kroger Co. and Fresh Encounter Markets, received court approval in June to buy 26 of the 44 Marsh locations. “It’s never been this busy,” said Scott Moses, managing director for Peter J. Solomon Company, the investment bank selling Marsh’s and Central Grocers’ assets.
Central Grocers, the Illinois-based wholesaler, laid off hundreds of workers and stopped supplying more than 100 grocers. The company’s troubles accelerated after news of financial stress prompted some suppliers to demand deposits and payments in advance, according to court papers. Suppliers including Coca-Cola Co. , General Mills Inc., and Mars Financial Services had earlier filed an involuntary chapter 7 petition for Central Grocers claiming they were collectively owed $1.8 million. General Mills, Coke and Mars declined to comment.
Some grocers in the Chicago area, who relied on Central to fill their shelves, say they scrambled to find other sources of meat and produce. Some products, such as dairy and goods from Mexico, couldn’t be immediately replaced. Strube Celery and Vegetable Co., a Chicago wholesaler, lost business as a distributor of Central produce, but is roughly breaking even after finding new suppliers.
Supervalu Inc., a Minneapolis-based food distributor, purchased Central Grocers’ distribution centers in Chicago and Joliet, Ill., for $61 million last month. New business from former Central Grocers customers helped boost SuperValu’s revenue 12% annually in the most recent quarter, the company said.
SuperValu Chief Executive Mark Gross said food retailers generally are shifting business to better capitalized suppliers in the wake of the central Grocers bankruptcy.
“Other similarly situated regional chains have seen that lesson,” he said.