Mergers and acquisitions are continuing to shake up the grocery retailer rankings in the U.S. as mid-range operators rapidly consolidate in a bid to survive in a highly competitive market.

The recently announced takeover of Safeway Inc (NYSE: SWY) by Albertsons' parent company Cerberus marks yet another example of how mid-range players are finding it more and more difficult to compete with the growth of value-oriented retailers - or hard discounters - and the increasingly popular specialty and premium chains.

Before making its latest US$9.4 billion move for Safeway, last year New York-based investment firm Cerberus Capital Management bought the remaining Albertsons stores it did not already own, as well as four other retail chains from SuperValu - Acme, Jewel-Osco, Shaw's and Star Market. In January, The Kroger co (NYSE: KR), which owns the Fry’s Food Stores, also acquired regional chain Harris Teeter.

"In general the U.S. grocery market is undergoing massive consolidation," Kelly Tackett, a U.S.-based research director at Planet Retail tells www.freshfruitportal.com.

"Kroger and Walmart are dominating, so consolidating is a way of defending against the growing competition. It's clear that retailers need more scale to win with suppliers."

Albertsons spokesperson Christine Wilcox confirms the market has grown increasingly competitive with grocery stores, lower-price supercenters, upscale food stores, club stores, ethnic markets, and a plethora of other store formats all vying for the same customers.

"This deal will enable Albertsons and Safeway to deliver higher quality products, better service and lower prices to more shoppers."

Following the deal, Albertsons and Safeway will operate over 2,400 stores in 34 states across the U.S., just shy of Kroger’s 2,640-strong grocery store network in 34 states.

Company statements indicate that no stores are expected to close as a result of the transaction. Analysts, however, remain skeptical since there are always underperforming stores, with some suggesting that shutters may fall in Phoenix.

Indeed, speculation remains rife within the industry that Kroger may still make a bid to buy Safeway. Tackett, however, downplays the possibility of a complete takeover, instead pointing towards a potential minor play by Kroger.

"Kroger may take over some of Safeway's stores on the East Coast," she notes.

"There is a lot of geographical overlap between Safeway and Kroger’s stores so it doesn’t make sense to acquire the whole business."

For Albertsons, meanwhile, analysts claim the partnership with Safeway will give the retailer a broader geographic spread of stores and a stronger presence in the west, enabling it to become a better player.

Competing with Kroger

Overall, Tackett believes the merger will succeed in making Albertsons and Safeway a more competitive supermarket chain.

"They will be up there with Kroger. But Kroger will remain the best in class because it has done a phenomenal job with its shopper marketing and analytics in terms of using its loyalty program to understand customers. Also any weaker areas will be bolstered by its acquisition of Harris Teeter," Tackett says.

Kantar Retail senior vice-president of retail insights John Rand also claims Kroger's number one position is not in any immediate danger.

"Although the merger will create a very large customer base, with store counts that approach those of Kroger, many challenges remain," Rand says.

"Kroger's average per store volume is nearly US$34 million per year, while the combined Safeway/Albertsons entity would average just under US$23 million. This substantial level of difference in effectiveness will be reflected throughout the enterprise in a lack of comparative efficiency and profitability.

The challenge for Albertsons and Safeway is to keep up with Kroger, according to Tackett.

"That's where its scale will come it because the duo should be able to match Kroger on prices and investment in stores," she notes.

Through the merger, Albertsons' CEO Bob Miller said the retailers will create cost savings that will translate into lower prices for customers. However, Tackett suggests that will be a challenge since grocery stores already have tight margins.

"Cost cutting will continue on the U.S. retail market and price cuts will continue," Tacket explains.

"Albertsons does have the potential to build scale and reduce prices for customers but long-term customer loyalty is driven more by providing a better service and shopping experience rather than by cutting prices.

"That said, it will be interesting to see whether they can use their size to to achieve lower prices from suppliers."

Leveraging Safeway’s success

Ultimately, Tackett believes Albertsons should look to leverage Safeway's solid private label program as well as its health and wellness brands 'O Organics', 'Eating Right' and 'Open Nature', which have made interesting gains among shoppers.

"In general those products appeal to U.S. consumers," Tackett points out.

"The baby boomers are increasingly interested in healthy offerings to prolong their lifespan, while products that are good for you and the environment are attracting younger consumers too."

With the acquisition not due to be completed until the fourth quarter of this year, it remains to be seen just how well the merger works and how it benefits both companies.

"One has to wonder how the very different cultures of these two companies will merge and function.

"Safeway and Albertsons, in their original forms, competed for many years. There will certainly be deep differences of outlook.

"Internal metrics will need to be revised and aligned and the total will be two very different retail brands that will only co-exist uneasily across banners and markets for a long time to come."

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