Just when everything was finally starting to go good for Wal-Mart (NYSE:WMT), this had to happen.
European supermarket giants Ahold (NASDAQOTH:AHONY) and Delhaize Group (NYSE:DEG) agreed to a $29.5 billion merger that will create one of the biggest supermarket chains in the U.S. Netherlands-based Ahold owns Giant, Stop & Shop, and the Peapod online grocery store, while Belgium's Delhaize owns Food Lion and Hannaford. Together they will create a 6,500-store, 375,000-employee global grocery shopping behemoth with more than $60 billion in annual revenue at current exchange rates.
A super supermarket
Under the terms of the deal, Delhaize shareholders get 4.75 shares of Ahold for each share of Delhaize they own. At the end, Ahold shareholders will own 61% of the new company, while Delhaize shareholders would own the remaining 39%.
But does that mean Wal-Mart needs to worry, or that Kroger (NYSE:KR) should alter its plan? After all, Wal-Mart's turnaround seems to be just gaining traction as it was finally able to post back-to-back quarters of same store sales growth and Kroger's stock has enjoyed a 50% gain over the past year as it's commanded a greater percentage of grocery sales.
No, not really. According to the industry watchers at Euromonitor International, the merger, while large, will create only the fourth largest grocery story chain in the U.S. with a 4.6% share of the market. Wal-Mart, in contrast, continues to dominate with a 25.8% share while Kroger, though a distant second at 8.3%, still has almost double the market of what will be the combined two. Third-place Albertsons has 5% share.
Further, an Ahold-Delhaize company will have around 2,000 stores here in the U.S., which will generate about half its annual revenues, while Kroger has 2,600 stores employing nearly 400,000 workers. Wal-Mart has almost 11,500 stores worldwide employing 2.2 million people, with over 4,550 stores in the U.S.
The merger doesn't really change the dynamic of the marketplace for Wal-Mart or Kroger, though it indicates the industry remains one of sharp elbows that can only register growth through consolidation.
Cleanup in aisle 7
Because of the typical razor-thin margins the grocery industry typically operates at, and due to the intense and growing nature of competition from stores like Costco (NASDAQ:COST) and Whole Foods Market (NASDAQ:WFM), along with smaller upstarts including Fairway Group Holdings (UNKNOWN:FWM.DL), Sprouts Farmers Market (NASDAQ:SFM), and Trader Joe's, one of the few ways left to expand the top line is via acquisition.
The industry is in the midst of a two-year shopping spree. Among the more notable deals were:
- Cerberus Capital Management acquiring Albertsons from Supervalu (NYSE:SVU)
- Cerberus also buying Safeway and merging it with Albertsons
- Kroger's acquisition of Harris Teeter
- Alimentation Couche-Tard buying The Pantry
According to The Food Institute, there were 28 grocery store deals in 2013 and another 37 last year, the busiest spate of mergers since 2003 when there were 36 deals. The Ahold-Delhaize merger shows there's the still plenty of appetite for deals left.
Delivering the goods
Where the acquisition could prove a challenge is on online grocery shopping, where Wal-Mart and importantly Amazon.com (NASDAQ:AMZN) are making concerted efforts to expand their reach.
Ahold's Peapod is the biggest Web-based store by sales, having a two-decade headstart on most rivals, as well as surviving the dot-com era flameouts of Webvan and Homegrocer.com. According to a Reuters report, Peapod had an 11.4% share of the U.S. market last year, ahead of Amazon's 2.7% share for its AmazonFresh service.
But like the bricks-and-mortar grocery market, there's a lot of competition for consumer dollars with Fresh Direct, Instacart, and more all vying for a share of the pie. Still, the merger could inject new life into Peapod, which had estimated sales of $585 million in 2013, according to Internet Retailer.
The online grocery market has grown over 14% annually for the last five years reaching $10.9 billion in sales last year. IBISWorld estimates it will keep growing for the next few years, albeit at a slower 9.6% pace. Profits are also supposed to contract, from the current level of 8.5% of revenue to 6.9% by 2018, particularly as competition from Amazon intensifies.
In the slow lane
Mergers rarely work out the way the participants plan, particularly in large scale unions like this one between Ahold and Delhaize, and the vaunted synergies of the deal that are always touted as justification for the hookup -- in this case some $557 million in annual cost savings by the third year after the deal closes -- often fail to fully materialize.
These two European chains seem like a natural fit, but as it doesn't change the makeup of the U.S. market Wal-Mart's turnaround shouldn't be affected by their pairing and Kroger's torrid pace of growth isn't in danger of being knocked off track. Investors needn't worry about getting into the express lane to checkout of their stocks.