The Royal Ahold and Delhaize Merger: How to Survive in the US Grocery Retail Market

On 24 June 2015, Royal Ahold NV and Delhaize Group announced their intent to merge, a move which is indicative of the increased competition in modern grocery retail and the need to compete on price. The combined company would have had a 4.6% market share of grocery sales with over 2,100 outlets in the US in 2014. Despite being international grocery chains, both generate around 60% of their total sales in US, making it a very important market. Their combined share will assist the new company in hammering out efficiencies by giving them the ability to limit redundant costs and utilize their increased bargaining power with suppliers to keep costs low wherever possible—both of which are essential to survive in a market that is focused mainly on low prices.

In today’s market, retailers must compete on price (and it will only get worse)

Belt tightening attitudes from the recession have lingered as shoppers have become used to seeking value wherever possible, often driving them to the lowest priced outlets, making price competition key for grocery retailers.

The focus on prices has raised alarms at a number of retailers that are looking to maintain their share in the light of the rising threat of discounters. In the US, Aldi announced its intent to open 45 new stores in California by the end of 2016 with a five year plan to open 650 more new stores across the country. Lidl, another foreign discount competitor, remains on track to enter the US by 2018 at the latest. Dollar stores too have seen significant growth, in large part because they offer more food products at bottom-of-the-barrel prices that get shoppers on a budget into their stores. Their sales have risen by 41% from 2009-2014, contrasted to the 12% sales growth seen by all modern grocers. In light of this environment, Walmart recently reaffirmed its commitment to an everyday low price (ELDP) strategy in order to uphold its brand (and sales).

Even brands on the premium side of the spectrum, which have largely been immune to this pricing trend thanks to the income growth of the more affluent, are looking to make moves to remain price competitive. Whole Foods’ announced launch of a value-oriented retail banner, 365 by Whole Foods, indicates that even higher-end retailers are looking to use value propositions to fuel future growth. With brands at the top of the market concerned about competing on price and flurry of competition already churning below, it makes sense for supermarkets to hold onto their share by focusing on price.

Merger efficiencies allow for savings for retailers today and savings for shoppers in the future

Mergers enable increased economies of scale, which then enable increased efficiency. Merging retailers will carve out efficiency first by getting rid of duplicated costs and underperforming stores. Not only can administrative tasks be merged across departments, but Ahold and Delhaize will likely use this opportunity to cut stores that have trouble contributing to overall growth. It is a natural step after a merger that has been seen across the grocery landscape. Albertson’s and Safeway sold 168 stores as they combined forces. Family Dollar and Dollar Tree, which are hoping to complete their merger this year, indicate that they will likely shed up to 300 outlets. Paring outlets is often necessary to appease anti-trust regulators, but it really helps companies focus on outlets that will underpin future success and leave those that struggle behind.

After Ahold and Delhaize merge and then trim, they will still maintain a significant share of the fragmented US grocery market. They will likely be the 4th largest player in the country, which gives them increased bargaining power amongst suppliers, particularly along the east coast where they are predominantly located. This increased power is likely the key to future success, as it enables them to take a tougher position with suppliers and demand better prices for their goods. These savings can then be passed onto customers, which is the sort of strategy that the combined company is likely to take in light of the price competition in grocery. This does not even take into account the ability of the larger firm to make use of its scale to sell more private label merchandise, which in turn can decrease reliance on branded suppliers, which reinforces the retailer’s increased bargaining power.

Neither the first, nor the last                                        

The US has seen its fair share of grocery mergers recently, and it is unlikely to stop. Mergers not only allow for the retailers involved to cut costs within the company, but enable them to seek out more savings which can then be passed onto shoppers. The economic wherewithal of many shoppers may be increasing, but wounds from the past have changed buying habits and doubt over the future helps reinforce them. This makes value via price a key selling point to many. As new grocery competitors and non-grocery brands look to crowd the market with a plethora of food products that compete on price, it is important for supermarkets to use efficiencies to remain competitive. It’s why Ahold and Delahaize have merged, why Alberston’s and Safeway and Kroger and Harris Teeter did so before them, and why the US grocery market is likely not done consolidating quite yet.