Supermarket companies face overcapacity

PHOTOGRAPHER: Marlene Kennedy

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Like other retail segments, supermarkets suffer from overcapacity, too.

For retail overall, 23.5 square feet of sales space per person exist in the U.S., about six times the per-capita median worldwide, according to industry estimates. That’s also way ahead of other industrialized nations such as Germany, China, France and Japan.

For conventional grocers, it will be an “ongoing, continual battle” against overcapacity, as long as alternative venues like convenience and dollar stores sell food and beverages and online purveyors strengthen their fresh and packaged offerings, says David Schoeder.

If online grocery grows as expected to 20 percent of sales by 2025, that’s how much the ranks of traditional supermarkets need to be reduced over the same period to keep whittling away at overcapacity, Schoeder told me this week.

Schoeder, principal at The Food Partners, a suburban Washington, D.C., investment banker to the food industry, discussed overcapacity last week at a webinar on mergers and acquisitions hosted by The Food Institute, an industry group.

He called a reduction of 2.5 percent in supermarket store count last year as “one of the bright spots” for 2018 because it meant operators recognized the “need to take out non-viable locations.”

“The majority of major supermarket chains in the U.S. are focusing on eliminating non-core stores to make material capital investments in the core business, including technology,” Schoeder said. “And you will see more of it.”

Some capacity will be lost through bankruptcy – four supermarket companies filed for bankruptcy in 2018, up slightly from the last few years, he said – and other stores may disappear as smaller operators “pause and consider whether they want to remain in the industry as a player.”

Schoeder predicted that 300 to 500 supermarkets will be sold in 2019, and a chunk of them could go dark, too.

“This consolidation is causing a lot of stress at retail,” he said. “I think when we come out on the other side of it, we’re going to be in a better place because there are a number of players that didn’t reinvest in stores that need to go away, and they will go away at an accelerated rate.”

Joining Schoeder on the webinar was Karen Martin, managing director of mergers and acquisitions for BMO Capital Markets Corp. in Chicago, who said she anticipates fewer big acquisitions in the near term but “smaller bets” by companies – even in partnership with one another – “to test out different methods of connecting with the consumer.”

She offered as a “big crazy” idea the cross-channel combination of an online retailer, a convenience store operator and a specialty grocer.

“If I’m going to be a consolidator and I’m thinking of the future and I’m looking at these trends of where the activity is, where the margin opportunity is, I wouldn’t put that out of the realm of possibility,” she said.

Marlene Kennedy is a freelance columnist. Opinions expressed in her column are her own and not necessarily the newspaper’s. Reach her at [email protected]