Slide PDF - The Food Institute

The Food Institute presents
Who's Buying Whom and What to Expect in the Future March 3, 2015
1:00PM EDT
A look at food industry merger and acquisition activity in 2014, which exceeded 500 deals for the first time in a decade. Learn which are the hot industry sectors and who has been doing the buying. Presenting: Brian Todd, The Food Institute
David Schoeder, The Food Partners
February 2015
Who Will Retailers Compete With Next Year?
Opportunities for Growth
www.thefoodpartners.com
THE
FOOD
INSTITUTE
Current Status of the Industry
The underlying fundamentals are improving
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The worldwide economy is improving
The world political affairs are a royal mess – the potential of a major
shock wave awaits us every day
The U.S. dependency on imported oil is declining
We have not seen the drop in oil prices translate into increased
expenditures on food
The runway to recovery continues to be lengthened – lower interest rates
facilitate borrowing to make acquisitions
Equity markets need to be on medication given their manic/depressive
trends
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Current Status of the Industry
Review of 2014
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Social Media
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Those that get it are reaping benefits
Those that don’t are fading into the background
Health and Wellness are driving quality, fresh, natural and organic at an
accelerated pace across all demographics
Consumers are redefining what quality food means to them
Retailers that became less relevant to their customers continued to lose
sales at an accelerating rate
Financial stress resulted in several industry bankruptcies including C&K
Markets in Oregon and Dahl’s in Iowa
Other retail grocery companies are being liquidated off the radar screen
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Current Status of the Industry
Review of 2014
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The number of non-viable store closings accelerated during the year
compared to last year
Capital expenditures for major remodels for independent retailers has
trended downward
The major issue for smaller independent retailers continues to be the
inability to generate a sufficient return to cover overhead expenses,
reinvest in stores and provide an adequate return
Retailers are reevaluating their Pharmacy Departments – Can I make
more money by allocation space to another category?
Expanding fresh or natural is one use for the space
Hardware Departments are another solution retailers are focused on as a
point of differentiation
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Current Status of the Industry
Financial Performance – Public Companies
EBITDA Margins
12.0%
10.4%
9.4%
10.0%
9.3%
8.6%
8.0%
8.0%
6.6%
5.8%
6.0%
5.7%
5.5%
5.3%
4.6%
4.4%
4.1%
4.0%
3.7%
3.5%
3.3%
2.0%
0.0%
Comp
Store
Sales [1]
Fresh Market
Publix
Whole
Foods
Sprout's
Natural
Grocers
Ahold
Weis
Ingles
Delhaize
Tops
Kroger
Smart &
Final
Safeway
Fairway
Village
Roundy's
3.3%
5.0%
3.1%
9.0%
3.7%
0.3%
2.6%
0.9%
5.3%
0.0%
5.6%
6.6%
3.1%
(3.9%)
1.6%
(2.7%)
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* As of 1/29/2015
[1] Comp store sales for the latest quarter
Current Status of the Industry
Financial Performance – Private Companies
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Traditional supermarket formats without a differentiated market strategy
are struggling – negative store comps for the last three years is a clear
sign that sales will continue to decline at an accelerating rate
On average, stores in the 30,000 to 40,000 square foot range are in the
sweet spot and generating the highest cash flows
Retailers that have adopted social media tools and focused on being a
conventional store with a nature twist (good quality fresh food) have
momentum and are printing money
The health care reform has had less impact than expected on benefit
costs
Those companies that have momentum and are relevant to their
customers have maintained or increased their cash flow
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Current Status of the Industry
Distressed operators
Supermarket Bankruptcies
Supermarket Bankruptcy Detail
No. of
State
Company
Date Filed
Stores
Filed
Status
Dahl's Foods
Associated Wholesalers
Farmers Foods (Highland Springs and Webb)
C&K Market
Fresh & Easy Neighborhood Market
Midwest Gourmet Foods (Fox & Obel)
Mi Pueblo San Jose
Belle Foods
Pro's Ranch Markets
Liborio Market
Michael’s Fresh Market
Associated Grocers of Maine
Azteca Ranch Market
Moo & Oink
Andronico's Market
A.G. Ferrari Foods
Rizk-Co-Zann Foods
Great Atlantic & Pacific Tea
Empresas Cordero Badillo
Grand Mart International
Supermercado del Pueblo
Star Food International
11/10/2014
9/9/2014
6/2/2014
11/19/2013
9/30/2013
9/19/2013
7/22/2013
7/1/2013
5/29/2013
4/13/2012
12/30/2011
8/26/2011
8/1/2011
8/24/2011
8/22/2011
3/30/2011
3/10/2011
12/12/2010
11/12/2010
10/19/2010
4/1/2010
1/5/2010
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n/a
2
60
167
1
21
57
11
8
7
n/a
n/a
4
7
13
1
336
n/a
6
4
3
IA
DE
VA
OR
DE
IL
CA
AL
CA
CA
IL
ME
CO
IL
CA
CA
PA
NY
PR
MD
NV
CA
Bankrupt
Sold
Closed
Emerged
Sold
Unknown
Emerged
Sold
Sold
Liquidated
Unknown
Dismissed
Liquidated
Liquidated
Sold
Sold
Dismissed
Emerged
Emerged
Sold
Unknown
Unknown
16
14
12
10
8
6
4
7
6
5
2
3
1
0
2010
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2011
2012
2013
2014
The number of supermarket bankruptcies
has remained steady over the past
several years
Since 2010, only 2 companies with over
100 stores (Fresh & Easy and A&P) have
filed bankruptcy
Excluding Fresh & Easy and A&P, the
average chain size is 13 stores
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Current Status of the Industry
Mergers and acquisitions
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The number of total transactions and stores sold have increased since
2009 (even after excluding the Albertson’s and Safeway acquisitions in
2013 and 2014, respectively)
Portfolio Versus Corporate Transactions
Stores per Transaction / Stores Sold
100
43
3,000
90
2,500
80
70
63
50
37
40
30
25
20
11
10
42
7
12
30
30
14
43
21
47
21
24
2010
2011
Portfolio
2012
1,500
877
14
2,007
1,335
1,000
0
2014 [1]
Corporate
749
288
130
2009
2010
0
-20
1,012
510
672
-60
-80
2011
Total Number of Stores Sold
Avg. Number of Stores per Trx.
8
20
-40
500
26
2013
16
1,889
0
2009
12
2,000
42
19
18
12
4
60
40
30
2012
2013[1]
2014 [1][2]
Large Transactions[1]
Excluding Large Transactions[1]
- Source: Company reports, The Food Partners
[1] Albertson’s and Safeway acquisitions in 2013 and 2014, respectively
[2] Includes announced but not yet closed transactions as of year end
Current Status of the Industry
Mergers and acquisitions – looking forward at the retail level
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The acquisition of Safeway by Albertson’s this year has set the stage for
the next round of consolidation
Kroger is firing on all cylinders and the acquisition of Harris Teeter’s 227
stores has been a home run; the new management team in place will
look for the next opportunity in an adjacent market
Unless A&P falls off of its perch this year, do not expect any mass
portfolio divestiture of a distressed company
Pruning by larger chains will occur on a granular basis and accelerate –
focus on the one and two store opportunity and don’t wait for the store to
become available
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Current Status of the Industry
Mergers and acquisitions – looking forward at the retail level
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Walmart’s focus on their neighborhood market format is good and bad
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The good news is their expansion of supercenters has slowed
The bad news is that no one is safe – they are radically altering metro markets
and they are destroying rural markets
The worst news is that they appear to be irrational because they are
cannibalizing the sales from their supercenters to pursue a scorched earth
strategy in the long run
Opportunity will come to those that seek out stores before they become
available in the market
Darwin’s theory of evolution is playing out in the grocery industry – the
strong will survive, the weak will become extinct
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Current Status of the Industry
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At the distribution level:
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C&S acquired AWI
C&S acquired Grocers Supply
KeHe acquired Natures Best
Unified and Super Valu will benefit from the divesture of Albertson’s/Safeway
to Haggen
We still have too many grocery distribution centers and too much overhead
dragging down independent retailers
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Current Status of the Industry
Mergers and acquisitions
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Based on the stock market valuations of select retail grocers, the market
is betting that natural/organic formats will continue to expand because of
the radical changing consumer tastes and preferences
Valuations of private conventional supermarkets have held constant over
the last year – the only push back is that buyers are less willing to share
their synergies by increasing the price they will pay
The value of select distressed stores has increased the last year as the
number of the new breed of retailers with alternative formats looking for
prime locations in tier two and three markets has increased
Super independents are willing to pay a premium price if they can acquire
stores that fit their strategy
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Grocer Sector Issues
Food Safety
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As retailers have focused on fresh foods and meal solutions to
differentiate their format, food safety has become a priority
In 2011, Jensen Farms is a prime example:
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contaminated cantaloupes resulted in 30 deaths and 147 total confirmed
cases across 28 states
a class action lawsuit resulted in Jensen Farms liquidation and lawsuits filed
against other parties including two major retailers
retailers that had loyalty card data that tracked who they sold cantaloupes to
were at risk if they did not notify their customers after the class one recall was
initiated
Retailers need to rethink their recall process to protect their customers
first and then to minimize the risk exposure to their business
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Looking Forward
Focus and discipline
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Quotes by seasoned grocery industry executives this year
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“If you wait for a customer to ask for something, it is too late. You need to
anticipate their needs and over deliver”
“The grocery industry is not getting tougher to compete in, it is just different. I
feel like I took a wrong turn this year and drove in the ditch. You just need to
back out and head in the right direction”
“I let my store level people focus on my existing customers, my job is to figure
out how to get new long term customers from my competitors’ parking lot, one
at a time”
“I always told my wife I would retire from the grocery business in a couple of
years. The problem is I have a new wife and can’t afford to do that anymore”
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David Schoeder
(202) 589-0436
Matthew Morris
(202) 589-0434
[email protected]
[email protected]
James Floyd
(817) 416-7006
www.thefoodpartners.com
[email protected]
Carlos Garcia
(202) 589-0437
[email protected]
Douglas Herman
(202) 589-0438
Jesica Mitchell
(208) 426-9220
Maureen Bates
(202) 640-4906
[email protected]
[email protected]
[email protected]
7200 Wisconsin Avenue, Suite 312, Bethesda, MD 20814