The US grocery industry is entering a strange new phase: retailers are getting bigger through acquisitions while becoming smaller on the ground.
Something unusual is happening in American grocery retail.
Supermarket groups are buying competitors, expanding their market power and spending billions on acquisitions.
At the same time, some of those same companies are closing stores.
That may sound contradictory.
It is not.
It reflects one of the biggest changes taking place in supermarket retail today: size is no longer simply about how many stores a company owns.
It is about whether those stores are still worth owning.
The supermarket industry is becoming more selective
For decades, supermarket growth was relatively easy to understand.
More stores meant more customers.
More customers meant more sales.
More sales meant greater purchasing power.
The formula encouraged retailers to keep expanding their physical networks.
But the economics of grocery retail have changed.
Some locations that were once profitable are no longer performing as well.
Consumers have changed how frequently they shop.
Online grocery has grown.
Discount retailers have expanded.
Walmart has become increasingly powerful.
And shoppers are more willing to travel between different retailers depending on price and convenience.
The result is a new supermarket philosophy:
Do not necessarily own more stores. Own better stores.
Kroger is a perfect example
Kroger is one of America’s largest supermarket companies, but it has also been reviewing its physical network.
The company has been reported as planning to close around 60 underperforming stores over an 18-month period. (nypost.com)
At the same time, Kroger has agreed to acquire Giant Eagle for approximately $1.7 billion.
That sounds strange.
Why close supermarkets if you are buying another supermarket chain?
Because the two decisions are not necessarily connected in the way consumers might assume.
Kroger is not simply trying to increase the number of doors.
It is trying to improve the quality and strategic value of its network.
The new supermarket equation
A supermarket is not automatically an asset just because it generates sales.
It also carries costs.
Rent.
Energy.
Staff.
Maintenance.
Security.
Insurance.
Logistics.
Inventory.
And increasingly, investment in technology.
A store generating $50 million in annual sales can still be a poor investment if the cost of operating it is too high.
That is why retailers are increasingly examining individual stores rather than simply looking at the size of their overall network.
The question has changed from:
“How many stores do we have?”
to:
“How productive is every store we have?”
The rise of the supermarket portfolio manager
This makes modern supermarket management look increasingly like portfolio management.
Some stores are high performers.
Some are average.
Some are strategically important because of their location.
Some support online delivery.
Some act as fulfilment centres.
And some simply no longer make economic sense.
Retailers therefore have to decide where to invest and where to walk away.
Closing a store can actually strengthen a supermarket company if the money saved is redirected into more profitable locations.
That is a very different definition of growth.
Acquisition does not necessarily mean more stores
The same principle applies to acquisitions.
When a large supermarket group buys another chain, it is not necessarily buying every store because it wants to keep every store open.
It is buying customers.
Brands.
Distribution infrastructure.
Private-label capabilities.
Technology.
Supplier relationships.
Real estate.
And market share.
After an acquisition, the combined company can examine the network and decide which locations make strategic sense.
Some stores may stay.
Some may be converted.
Some may be sold.
And some may close.
That can produce a company that owns fewer stores but is commercially stronger.
The Walmart problem
Behind much of this is the enormous competitive pressure created by Walmart.
Walmart has scale that few traditional supermarket operators can match.
Its combination of grocery, general merchandise, convenience, digital capabilities and purchasing power gives it a formidable position in American retail.
Traditional supermarket groups therefore face a difficult choice.
They can try to compete everywhere.
Or they can concentrate their resources where they have the strongest chance of winning.
The second strategy is becoming increasingly attractive.
Discount supermarkets make the problem worse
Aldi and Lidl are also changing the American grocery market.
Their smaller formats and limited-assortment models allow them to compete aggressively on price.
That puts pressure on traditional supermarkets with larger stores and more expensive operating models.
The customer does not necessarily care how much it costs to operate the supermarket.
They care about what their shopping basket costs.
That creates a brutal reality.
If a traditional supermarket’s costs rise while a discount competitor continues offering lower prices, something has to change.
Technology can help.
Private label can help.
Supply-chain improvements can help.
But sometimes the answer is simply that a particular store is no longer viable.
The online question
Online grocery adds another layer.
A supermarket no longer needs every customer to physically walk through its doors.
A single fulfilment centre can potentially serve customers across a much wider area.
That means the physical network can be redesigned.
Some stores may become more important because they are excellent locations for online fulfilment.
Others may become less important because the surrounding population increasingly shops online.
The store of the future therefore needs to perform a role.
It cannot simply exist because it has always existed.
The death of the supermarket store may be exaggerated
However, this does not mean America is moving towards a supermarket industry without physical stores.
Quite the opposite.
Physical grocery remains enormously important.
Consumers still want to see fresh produce.
They want convenience.
They want immediate purchases.
They want to choose meat, bakery products and prepared foods.
And supermarkets remain powerful community locations.
The change is that retailers are becoming more ruthless about deciding which physical locations deserve investment.
The supermarket map is being redrawn
That creates winners and losers at a local level.
A town can lose a supermarket because a retailer decides the location no longer works.
Another community can gain a new store because the retailer sees stronger growth potential.
An acquisition can suddenly put two competing stores under the same corporate ownership.
A poorly performing store can become a fulfilment centre.
A large supermarket can be replaced by a smaller format.
The American grocery map is therefore becoming more dynamic.
Consolidation creates another question
There is, however, a bigger issue.
If supermarket companies continue acquiring competitors while closing stores, the industry could become more concentrated.
That can create efficiency.
It can improve purchasing power.
It can reduce duplication.
But it can also reduce competition in individual markets.
And that is why supermarket consolidation remains politically sensitive in the United States.
The question for regulators is not simply:
“Will this acquisition create a bigger company?”
It is:
“What will happen to competition in the communities where that bigger company operates?”
Bigger companies, smaller footprints
That brings us back to the apparent contradiction.
Why are supermarkets closing stores while buying other supermarkets?
Because the industry is no longer measuring success by physical expansion alone.
The new objective is efficiency.
A supermarket company can become larger through acquisition while simultaneously reducing the number of stores it operates.
That is not necessarily retreat.
It can be strategic restructuring.
The retailer is effectively saying:
We want to be bigger where it matters and smaller where it doesn’t.
The ISN View
The American supermarket industry may be entering an era where less can actually mean more.
Fewer stores.
Better locations.
More automation.
More online fulfilment.
More private label.
More consolidation.
And increasingly sophisticated decisions about which physical assets deserve investment.
For shoppers, however, there is a potential downside.
When supermarkets close stores, competition can disappear from local communities.
When companies consolidate, consumers may have fewer independent choices.
That means the next phase of US grocery retail will not simply be about who becomes the biggest supermarket group.
It will be about whether bigger companies can create a better supermarket network without creating a less competitive market.
The supermarket industry is therefore becoming something very different from the old expansion race.
The winners may not be the retailers with the most stores.
They may be the retailers that know exactly which stores they can afford to keep.