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M&A in Retail: Why Scale Still Is Paramount in Grocery
Executive Summary
  • While local market share remains critical in grocery, we see increasing benefits from national and even global scale.
  • As grocers pursue scale M&A to consolidate, they’re finding fewer targets and slower deals.
  • With regulatory scrutiny extending deal timelines, retailers can’t afford to lose focus on their base business pre-close.
  • Grocers are also looking to M&A to find ways to de-risk their supply chains, reduce costs, and diversify revenue streams.

This article is part of Bain's 2024 M&A Report.

Across retail, all eyes are on the grocery business, which saw bigger gains in M&A value and volume than retailing as a whole in 2023. While retail overall experienced declining deal value and volume, grocery had a 46% leap in deal value as volume rose by 5% for the first three quarters of the year (see Figure 1).

Figure 1

Grocery deal value and volume outperformed the broader retail industry

Grocery deal value and volume outperformed the broader retail industry

Why is grocery M&A outpacing the rest of retailing? Grocers have spent the past two years coming down from an unexpected Covid-19 boost and are plotting for a less rosy future. Indeed, the pandemic delivered healthy top-line growth that has since subsided, leaving grocers to watch their already razor-thin margins get even smaller amid rising supplier and labor costs and consumers who are feeling an economic pinch and less willing to spend.

Yet players that make bold M&A moves can bolster their position and accelerate growth. Scale still is paramount for unlocking efficiencies and cost savings that can fuel investment in new growth engines. And while local market share remains critical in grocery, we see increasing benefits from national and even global scale as grocers seek to consolidate buying power and get greater leverage from their tech investments, data assets, and trade businesses.

Pushing for deals that offer a quick path to expansion, even outside of existing strongholds, can be attractive. For example, Aldi’s move to acquire about 400 Winn-Dixie and Harveys Supermarket stores will allow it to rapidly expand in the southeastern US while still pursuing an aggressive organic growth strategy across its targeted geographies. And in Europe, Carrefour’s planned acquisition of the Cora and Match banners in France and Romania from the Louis Delhaize Group will solidify its presence in eastern Europe and northern France.

But as they pursue scale acquisitions, companies are encountering multiple hurdles. In addition to the high interest rates that make deals more expensive in all industries, many markets in the grocery sector have already quickly consolidated to the point at which there are just a few suitable targets available. Deals large and small are now getting heavy regulatory scrutiny that can delay them for a year or more. Consider that Kroger announced its bid for Albertsons in October 2022. Every additional month is time during which an acquirer (and the target) can get distracted from the base business and risk degrading the deal’s intended value. The reality is that in a sector with such tight margins, any backslide can be critical.

Meanwhile, outside of traditional footprint and category expansion plays, there’s a major opportunity for scope M&A to help grocers achieve their strategic goals and build the offerings and capabilities needed to win with the consumers of today and tomorrow. Beyond traditional private labels, more grocers are acquiring or developing exclusive partnerships with suppliers or brands that can enhance their product offerings and deliver unique assortments to end consumers. Also, as online penetration continues to grow, we see many traditional grocers buying or partnering with digital leaders that can accelerate progress on front-end and back-end digital capabilities.

With retail margins under long-term pressure, many grocers also are looking to acquire assets that can help turbocharge growth outside of the traditional retail business—be that retail media, data monetization, consumer services, or even business-to-business offerings. And with input costs fluctuating and supply chains still recovering from pandemic-era disruptions, grocers are acquiring upstream suppliers or distributors to de-risk their supply chains and drive down costs.

Similar to consolidation plays, these scope deals can be challenging—for example, they typically come with less favorable valuation metrics and more difficult diligence and integration.

But just as the shortage of targets and regulatory concerns shouldn’t deter grocers from acquiring to build scale, the challenges of scope shouldn’t deter grocers from pursuing deals that give them access to new capabilities or growing markets. Success in deals will just take more thoughtful planning.

Don’t sleep. In this environment, grocers that sit on the sidelines may struggle to catch up, especially if the regulatory environment continues to become more challenging. Preload the funnel of potential targets, and maintain an always-on presence to be able to react quickly when unexpected opportunities arise. Don’t assume a target isn’t for sale; every company has its price.

Clarify your growth strategy and the role that M&A will play. Pinpoint your sources of differentiation, and develop an unvarnished appraisal of where you are (and are not) delivering against that vision today. Yes, M&A can be a powerful tool to fill gaps in your offerings or even leapfrog competitors, but it requires clarity on the end aspiration to be successful. Also, grocers can upgrade the M&A playbook for alternative deals. As out-of-sector dealmaking and nontraditional deal structures such as joint ventures and alliances become more common, your team will need new muscles to successfully perform diligence and integrate these assets. These alliances can be powerful ways to gain virtual scale quickly, but companies often fail to realize that such alternative deal types can require as much rigorous preparation and governance clarification as an outright acquisition.

Find fuel to grow. The pressure on profits means that companies need to find new ways to continually keep costs down and unlock funds to spur top-line growth. Many leading grocers are looking to advanced analytics (including generative artificial intelligence) for more efficient, data-driven approaches to supplier negotiations and other commercial functions. And if the fuel to grow is expected to come from inorganic sources, be sure to start with a strong thesis on how and why this specific deal will create value that can be thoroughly tested in diligence. Our survey of M&A practitioners found that internal factors such as availability of funds and greater organizational bandwidth will be more important to the M&A plans of retail companies than other industries in 2024.

Think big(ger). In retail, the best total shareholder return (TSR) performers are material acquirers that make large acquisitions once per year or more on average. These companies delivered an average 10-year TSR of 10.1% compared with an average 10-year TSR of just 2.4% for retailers that were inactive in M&A over the past year. So, while small deals have their place, big bets have the potential to change the trajectory of your business. Again, keep an eye open for transformative plays, even in new formats or geographies. Also, because regulators are extending the deal timeline, plan for the fact that a deal may take more than a year to complete, and be clear on your ability to ring-fence your base business. The worst thing you can do is to lose sight of it. Keep teams focused on their day jobs, and scale up planning as a deal becomes more imminent.

Read our 2024 M&A Report


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