Eat What You Know: The Way We Buy Food Will Never Be The Same

It is a sign of how our options and inclinations have changed that a multi-billion merger of two major supermarket chains is greeted not with exclamations of horror at the potential monopolistic potential but as a rather pathetic defensive maneuver. One that many argue is doomed to fail or at least to generate value only from the eventual sale of the underlying real estate for other purposes.

As urbanization drives buying habits, many are returning to the traditions of their forefathers, buying fresh at local markets on a daily or frequent basis.

Others, perhaps the majority, driven by economic need, are patronizing vast emporiums like Walmart or even what used to be called drug stores but now carry liquor, dry goods, canned foods and the like. In many places - most, in fact - where food safety has become a concern, that has factored into the purchase decision. Some unscrupulous governments have attempted to use this as a cudgel to affect competition or pricing, but customers remain primarily pragmatic and focused on the basics.

Some are opting for the upscale chains like Whole Foods ('Whole Paycheck' as it is sometimes called) and Trader Joes. But business at the traditional supermarket is battered and buffered by all of this competition and has yet to figure out how to effectively differentiate themselves in ways that will secure their market share.

The reality is that consumers now have knowledge and choice. They are applying both to their discretion and in some respects to their advantage. In this regard they are ahead of the chains that have succored them for two or three generations - 'The Wonder Years' that began after WWII. Shoppers feel no compunction about going to Tiffany's - and to Target. They are using their knowledge to inform their choices and so, are truly eating what they know. JL

Dale Buss reports in Brand Channel:

The intended $9 billion merger of Albertson's and Safeway will be a play meant largely to shore up the combined operations defensively against sea changes that have been sweeping the food-retailing business that simply don't favor traditional chains

Cerberus is buying Safeway and blending it in with the Albertson's supermarket chain it already owns. But the transaction seems more like the end of an era rather than the beginning.

The rise of grocery availability at Walmart, Target and other discounters; the spread of dry goods through drug stores and dollar stores and other new formats; the rising popularity of Trader Joe's, Whole Foods and their organic, natural, locally-produced and private-label ethos; the fact that online CPG sales finally seem to be gaining traction; and the strength of club stores in the grocery trade—all are conspiring against the merger of two of the long-time giants of the business.
The other remaining giant, Kroger, has sniffed around Safeway in the past and still could mount a bid to compete with Cerberus', some analysts say. At the least, Kroger might want to buy some of the operations that would be shed as Cerberus combines the two chains seeking economies of scale.
For now, Cerberus is attempting to create a dominant grocery store franchise on the West Coast that would have more than 2,400 stores and 250,000 employees—without closing stores, at the moment. It would continue Cerberus' consolidation of the supermarket business; last year, the private-equity group acquired Albertsons and Jewel-Osco from Supervalu for $3.3 billion.
The effort to create one larger, more stable brand will bolster its chances to survive an increasing push by Walmart—already the largest grocer in the US—to infiltrate more suburban and urban areas through its smaller Neighborhood Market stores.
"This merger will improve our competitive position," Safeway CEO Robert Edwards said on a conference call. "Our customers will benefit from significant cost savings and a stronger management team."
Unfortunately, some sad history may be cautionary in that regard. Cerberus is the same company that couldn't shoot straight in the auto industry in its attempt to transform Chrysler, which it bought from Mercedes-Benz and then helped run into the ground before the 2009 federal bailout and Fiat's purchase of the automaker.
Also, if "Safeway" and "buyout" seem familiar in the same sentence, that's because it's happened before. In 1986, the company was taken over by the trailblazing LBO group, Kohlberg Kravis Roberts. The investment eventually returned KKR $7 billion for its $129 million investment, but in the process Safeway dropped tens of thousands of employees from its payroll and came to symbolize the microcosmic economic devastation wrought by debt-levered acquisitions during the era.
That likely won't happen this time. But neither is there a guarantee—in such a dynamic and fast-changing but low-margin industry—that the new Safeway-Albertson's combination will succeed for long.