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Amazon, New Entrants Ramp Up Pressure on Traditional Supermarket Turnarounds, Restructurings

Amazon’s announced acquisition of Whole Foods for $13.7 billion1 is yet another sign of continuing competitive challenges faced by traditional supermarket chains. The Whole Foods acquisition brings Amazon a 468-store footprint, a fresh foods supply chain, new sourcing capabilities, and a strong private label brand with a consumer base of urban and higher disposable income customers. In the month following Amazon’s June 16 announcement, share prices of some of Whole Foods’ competitors fell by an average of approximately 14 percent, while the overall Standard & Poor’s 500 index was up approximately 1 percent over the same period.2

Another, more immediate threat to the traditional grocery business model is the continuing migration of traditional, nonperishable “stock-up” volume to online channels like Amazon’s Prime Pantry, Walmart’s Jet.com, and Boxed.com, which offer the prospect of fulfilling online-to-home orders at or below traditional self-serve store costs. Post-acquisition, Amazon will likely be able to expand its fresh grocery delivery options directly from the Whole Foods stores or through its current Prime Now offering. Some local grocery stores, such as Sprouts in Northern California, have already negotiated arrangements with Prime Now.3 These online competitive threats, in addition to other entrants in the brick-and-mortar arena that include supercenters and foreign discounters, have resulted in an increasingly competitive and oversaturated landscape in the U.S. grocery sector and drawn the watchful eye of restructuring experts. 

Overall, U.S. sales at traditional supermarkets and grocers in 2017 are estimated to be approximately $600 billion, with slowing growth trends. Sales increased 1.3 percent in 2015, 0.6 percent in 2016, and are anticipated to grow only 0.2 percent in 2017, excluding grocery sales in supercenters such as Walmart,4 the number one seller of groceries in the U.S. with annual sales of approximately $250 billion.5 Profitability at traditional supermarkets is expected to remain suppressed over the next five years due to consolidation costs and intense price competition from warehouse clubs and supercenters, as well as the aforementioned new entrants.

Recent Restructurings, Bankruptcies

Turnaround strategies in previous supermarket bankruptcy cases have typically focused on relatively straightforward balance sheet restructurings, operational fixes based on store closures, or new store openings and renovations. However, over the last two years, restructurings and bankruptcy filings of traditional regional supermarkets indicate these traditional restructuring strategies are falling short of achieving successful turnarounds without more significant changes to these grocers’ business models. 

For instance, A&P’s 2010 bankruptcy and reorganization consisted of closing 50 underperforming stores, restructuring its balance sheet, and infusing $500 million in new capital. Despite those actions, A&P was unable to remain profitable and re-entered bankruptcy in 2015, which eventually resulted in the sell-off or closing of all its remaining supermarket stores.6 

Haggen, another regional chain, filed for bankruptcy after trying to execute a rapid growth strategy. From a base of 18 stores in Washington and Oregon, Haggen acquired 146 stores in California, Arizona, and Nevada in December 2014. Albertsons sold the stores in connection with the Federal Trade Commission’s concerns regarding the Albertsons-Safeway merger.7

Haggen’s management said issues with the store transition process from Albertsons were a major reason for liquidity problems that led to Haggen’s bankruptcy filing less than a year after the acquisition. Another significant factor for the chain’s failure may have involved Haggen’s rebranding of California stores, which was accompanied by higher prices that led to significant customer losses.8,9 


 
The online channel/digital grocery market, now estimated at $20 billion in sales, is expected to grow to $100 billion in sales by 2025.

 


In May 2016, Fairway Group Holdings Corp., with 15 grocery stores and four wine stores in New York, New Jersey, and Connecticut, filed a prepack Chapter 11 and executed a balance sheet restructuring that reduced prepetition funded debt by 50 percent and swapped debt for new equity in the reorganized company.10 Post-bankruptcy, Fairway has closed one store and opened a new one but continues to struggle, as evidenced by a June 29, 2017, Moody’s ratings downgrade to Caa2, deeper into non-investment grade territory.

Traditional supermarket turnaround strategies were also unsuccessful in returning the Marsh Supermarkets chain to profitability. Marsh had 73 stores primarily concentrated in Indiana and Ohio in 2015 and was ranked as the third-largest supermarket chain in the Indianapolis market. Marsh’s CEO tried to turn around the chain with new store remodeling expenditures, new store construction plans, and cost reductions.11 However, Marsh was unable to compete with expanding national competitors Kroger and Meijer, which pushed ahead with their own multiple remodels and new store construction, including large-scale supercenters. Where new Kroger and Meijer stores opened, competing Marsh units saw double-digit sales declines.12

Marsh filed for bankruptcy protection in May 2017 to wind up operations, ultimately reaching separate agreements to sell 26 stores to competitors Kroger and Fresh Encounter’s Generative Growth and liquidate the remaining stores through a going out of business (GOB) sale transaction.13

In July 2017, the operator of Tops and Orchard Fresh supermarkets, with 172 stores in New York, Pennsylvania, Vermont, and Massachusetts, launched an exchange offer to address its 2018 debt maturities, seeking to extend certain bond debt to 2021. Before the exchange offer, both Moody’s and S&P downgraded Tops to Caa1 and CCC+, respectively, into their non-investment grade ratings.14

Competitive Dynamics

Competitive threats to traditional supermarket chains are continuing to increase due to (1) expanding big-box/warehouse clubs, foreign chains, and dollar stores; (2) declining retail foot traffic; (3) digital/online grocery new entrants; (4) direct-to-consumer consumer packaged goods strategies; and (5) FTC antitrust regulatory constraints. 

Supermarket competitors continue to expand, driven by big-box stores and warehouse clubs building smaller space format stores, such as Walmart Neighborhood Market stores for “pantry stock-up” trips. German-based grocers Aldi and Lidl are both pursuing aggressive U.S. expansion plans. Aldi plans to open 650 stores across the U.S. by the end of 2018, and Lidl has plans for approximately 200 stores in the mid-Atlantic region in coming years.15 

Suburban strip malls and shopping centers continue to suffer retail chain store closures due to the ongoing shake-up felt throughout the retail sector. This has resulted in less traffic flowing to the anchor supermarket stores in these traditional shopping centers.

Online channels in the grocery sector feature online orders either delivered to the customer or prepared for in-store pickup. The online channel/digital grocery market, now estimated at $20 billion in sales, is expected to grow to $100 billion in sales by 2025.16 Driven by increasing customer ordering trends, one in four households currently orders some portion of their groceries through an online channel.17

Large, established consumer packaged goods manufacturers or new entrants are pursuing direct-to-consumer strategies, eroding sales at traditional grocery stores. In 2016, Unilever acquired Dollar Shave Club for $1 billion and Walmart acquired Jet.com for $3.3 billion. Launched in July 2017, Brandless, a Silicon Valley startup, sells $3 essential nonperishable basics using a private label strategy. 

Another possible threat to traditional supermarkets is FTC regulatory constraints restricting traditional supermarkets’ ability to grow through acquisitions of rivals. The Albertsons acquisition of Safeway and the Whole Foods acquisition of Wild Oats are two examples of FTC challenges to proposed mergers in the industry. In 2007, the FTC sought to unwind the Whole Foods acquisition of Wild Oats Markets, commencing two years of litigation to protect competition in the natural and organic market. The action ultimately resulted in a settlement approving the merger and requiring Wild Oats to separately divest 13 stores.18 E-commerce companies may be better positioned to grow into new markets without such regulatory constraints.

Trends in Turnaround/Profit Improvement Areas

Supermarkets are currently pursuing profit improvement strategies focused on supply chain management, store remodeling, new store development, and online infrastructure/partnering. Naturally in turnaround situations, evaluating execution risk and the time horizon for payback/return on investment remain critical.

Supply Chain Management, Supplier Pricing. Grocers are honing strategies to control inventory levels more precisely. One method requiring less capital up front is fine-tuning traditional just-in-time strategies to provide vendors with store replenishment data. This enables right-sized case packs to be shipped to the grocer’s distribution centers, resulting in labor cost savings and reducing inventory investment. 

Grocers are also evaluating the effectiveness of supplier pricing models, comparing high-low pricing, in which prices fluctuate during supplier-funded promotional periods, versus everyday low price (EDLP) models with lower prices over an extended period. In March 2017, Walmart CEO Doug McMillon discussed moving away from a pure EDLP model and focusing more on creating operational efficiencies through better alignment of supplier shipments to promotional advertising periods, reducing stock-outs and inventory management costs.19

Store Remodeling. Some grocers are directing store remodeling budgets toward developing quick meal/prepared foods sections and in-store dining areas to capture a greater share of the food services/restaurant market. Examples include Whole Foods’ wide array of prepared foods and Kroger’s deployment of a section in certain stores dedicated to fresh prepared takeout meals as well as a separate section with salad, sushi, and fresh-juice bars. 

New Store Trends. Driven by major U.S. cities experiencing population gains, grocers are focusing new store build-outs in urban areas but with smaller store formats offering a more limited assortment of best-selling merchandise. Recent examples include 365 by Whole Foods and Target’s planned openings of 20,000- to 50,000-square-foot stores. This trend in increasing urbanization will also likely accelerate the progression of consumer preferences for fresh offerings, online ordering, and home delivery options.

Online/E-commerce Strategies. Grocers are also evaluating options to pursue development on a stand-alone basis and/or through partnerships with established e-commerce companies, such as Amazon and Jet. The largest operator of supermarket chains, Kroger, developed Clicklist for online shopping and pick up at the store. Similarly, Stop & Shop’s Peapod online service offers both home delivery and store pickup options. Other competitors, such as Sprouts, have partnered with Amazon to offer online ordering and two-hour delivery. 20

Grocers are measuring their ROI on such digital investments based on current online grocery sales and expected growth rates. Online grocery sales now account for approximately 1 to 3 percent of total industry sales of $600 billion.21,22

Grocers are also investing capital to leverage technology in digital consumer engagement. Digital engagement allows grocers to target couponing and promote customer loyalty programs. Grocers continue to develop and improve existing mobile apps to enhance online and in-store shopping experiences.

Looking Ahead 

Underperforming supermarket chains will likely need to craft turnaround plans mindful of recent supermarket restructuring efforts, as well as increasing competitive dynamics and new technology disruptions. Ultimately, this likely equates to additional funding requirements and longer time horizons to effectively execute successful turnaround plans.

National chains with greater access to capital will likely have a competitive advantage to invest in digital consumer engagement strategies and in new store formats to retain/increase store foot traffic. Regional chains may face greater capital constraints and execution risks in developing and deploying new online/digital technology and may choose to pursue strategic partnership strategies.

This content is for general information purposes only and should not be used as a substitute for consultation with professional advisors.  


  1. Eisen, Ben. “Retailer Stocks Make Easy Prey,” Wall Street Journal, July 14, 2017.
  2. Based on analyses using S&P Capital IQ.
  3. Hodson, Nicholas, “Amazon Whole Foods Talking Points”, PwC publication 8912.
  4. IBIS, Supermarkets & Grocery Stores in the U.S. Industry Report 2017 - #44511.
  5. Coolidge, Alexander. “How Kroger Can Combat Competitor Amazon,” Detroit Free Press, July 6, 2017.
  6. First Day Bankruptcy Declaration of Christopher McGarry, The Great Atlantic & Pacific Tea Company, Inc., SDNY, Case 15-23007 (RDD).
  7. Declaration of Blake Barnett in Support of Chapter 11 Petitions and First Day Motions, Haggen Holdings, LLC, District of Delaware, Case 15-11874 (KG).
  8. Gonzalez, Angel. “Judge Approves Sale of Haggen to Albertsons,” The Seattle Times, March 29, 2016.
  9. Lansner, Jonathan. “5 Reasons Why Amazon-Whole Foods Won’t Win Grocery Wars,” The Orange County Register, June 25, 2017.
  10. Declaration of Dennis Stogsdill Pursuant to Rule 1007-2. Southern District of New York (Case number 16-11241).
  11. Briggs, James. “Marsh plans to open up to 13 stores by 2018 amid intense competition,” IndyStar.com, December 17, 2015.
  12. Springer, Jon. “High debts, competitive investments sent Marsh to bankruptcy,” Supermarket News, May 13, 2017.
  13. Gleason, Stephanie. “Marsh sells stores to two purchasers, including Kroger,” TheDeal.com, June 20, 2017.
  14. Gleason, Stephanie. “Supermarket Tops Launches Exchange Offer,” TheDeal.com, July 11, 2017.
  15. Nassauer, Sarah and Haddon, Heather. “Wal-Mart Faces New Grocery Rival—Germany’s Lidl takes market-winning ways to the U.S. at fraught time for food retailers,” The Wall Street Journal (European Edition), May 17, 2017.
  16. Coolidge, Alexander. “How Kroger can combat competitor Amazon,” Detroit Free Press, July 6, 2017.
  17. Loosemore, Bailey. “Grocery shoppers have more home delivery options,” USA Today, July 30 2017.
  18. Finley, Allysia. “How Myopic Antitrust Policy Helped Amazon Gain Dominance,” The Wall Street Journal, June 29, 2017.
  19. Ohmes, Robby. Bank of America Retail Technology Conference, CQ-Roll Call, March 14, 2017.
  20. Hodson, Nicholas. “Amazon Whole Foods Talking Points,” PwC publication 8912.
  21. Coolidge, Alexander. “How Kroger can combat competitor Amazon,” Detroit Free Press, July 6, 2017.
  22. Smith, Cooper. “E-Commerce Disrupting Huge Grocery Market,” Business Insider, January 20, 2015.
James Horgan

James Horgan, CTP

PwC

James Horgan, CTP, is a director with PwC and has more than 25 years of experience providing accounting and financial management services to companies undergoing significant transition in turnaround, restructuring, and sale transactions. A CPA, he advises on accounting and reporting for restructurings, fresh-start and purchase accounting, business plan reviews, cash flow projections and liquidity analysis, collateral assessments, corporate finance transactions, distressed valuations, forensic accounting, and financial institution resolution plans. Horgan participates on the New York City Chapter’s Academic Relations Committee. He can be reached at James.Horgan@PwC.com.

Brian Koluch

Brian Koluch

PwC

Brian Koluch is a director in PwC’s Business Recovery Services practice and in based in the firm’s New York office. He has extensive experience in assisting distressed companies in the analysis of strategic alternatives, cash flow and working capital management, and liquidity enhancing activities. Koluch can be reached at brian.koluch@pwc.com or 646-471-2672.

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