Outlook on the Grocery M&A Wave: Opportunities and Challenges Amid Industry Consolidation Trends

Even as Kroger and Albertsons face ongoing uncertainty in seeking federal approval for their merger, the high-profile battle between the two supermarket giants, in the view of industry analysts, signals that the U.S. grocery industry has entered an inevitable phase of consolidation. Arun Sundaram, vice president of equity research at CFRA Research, noted that the U.S. grocery market is dominated by a few retailers, with numerous small and mid-sized players competing for the remaining market share, and the industry has reached a point where supermarket operators, in order to grow, are likely to feel strong pressure to join forces.

Sundaram added that he was initially surprised that Kroger chose to acquire its biggest competitor in the traditional supermarket space rather than absorb smaller rivals, but this complex merger plan still serves as a reminder that the U.S. grocery industry has evolved to a stage where food retailers can only grow by joining forces. "The Kroger-Albertsons announcement was a wake-up call to all other grocers: times are changing, and they need to adapt quickly or be left behind," Sundaram said. "Even if the deal doesn't go through, every CEO now knows in their mind that this industry is consolidating and clearly wants to consolidate."

Will regional and mid-sized chains accelerate mergers?

In recent years, regional grocers have joined forces to expand scale, improve operational efficiency, and strengthen bargaining power with suppliers, among other goals. This includes Raley's acquisition of Arizona-based Bashas', the merger of Tops and Price Chopper, and Brookshire Grocery Company's acquisition of Oklahoma-based Reasor's.

Retail consulting firm McMillanDoolittle expects independent and regional grocers to accelerate consolidation to better compete with industry giants such as Walmart, Amazon, and Kroger. Amanda Lai, who leads the firm's food retail practice, said in a recent company blog post that grocers can expand their retail footprint by acquiring brands consumers already know, rather than creating new brands or introducing unfamiliar ones to new markets. "M&A is an excellent strategy for entering adjacent or new markets," Lai said in an interview.

However, Bobby Gibbs, a partner in Oliver Wyman's retail and consumer goods practice, is skeptical about whether mid-sized grocers will choose to expand their store footprints through mergers. Gibbs advises food retailers and pointed out that store growth for mid-sized grocers currently relies mainly on new openings rather than acquisitions. He noted that when mid-sized grocers merge, the integration process can be cumbersome, with the blending of IT, human resources, merchandising, and procurement systems being particularly tricky, and the merger could consume significant executive attention, slowing other business initiatives. "If you're going to merge two grocers, you have to find cost synergies," Gibbs said, noting that retailers with different pricing or marketing strategies need to decide whether to continue operating with two different merchandising approaches.

Sundaram, however, believes conditions are ripe for larger chains to acquire smaller ones, partly because retailers with fewer resources struggle to withstand pressure from larger competitors. "Smaller grocery chains now face greater pressure to grow, and the fastest way to grow is to be acquired," Sundaram said.

Scott Mushkin, CEO of R5 Capital, noted that while a Kroger-Albertsons merger could enable them to compete more effectively with other large grocers, the complexity of the deal also serves as a cautionary tale for other retailers evaluating potential M&A opportunities. "A Kroger and Albertsons merger could generate significant synergies, but they might exhaust those gains by upgrading systems to compete on price with Walmart and Amazon," Mushkin said. "So, if I were to give M&A advice to people in the traditional space, it would be to keep it simple. You want the deal to be relatively easy to complete."

Will more wholesalers venture into grocery retail?

If the Kroger-Albertsons divestiture plan is approved, C&S Wholesale Grocers will acquire the divested stores, more than tripling the size of its retail network. Gibbs said other wholesalers may also look to grow their retail store operations through acquisitions. "As a wholesaler, it's very difficult to be profitable because you're squeezed by both retailers and suppliers," Gibbs said. Wholesalers could acquire independent operators or very small regional chains, especially those already connected to their existing logistics networks. By building a retail business, wholesalers can drive more volume through their wholesale networks, create more stable demand for products, and get closer to end consumers to gain richer customer data, thereby enhancing sales capabilities. However, expanding store operations could also alienate existing retail customers and distract executives.

Sundaram said that while vertical integration between grocery retailers and wholesalers could offer certain benefits, he does not expect such combinations to become a trend. "I think you'll see more grocery chain merging with grocery chain rather than wholesaler merging with grocery chain," Sundaram said.

What about adjacent areas like ancillary revenue streams and digital innovation?

Gibbs believes grocers may look at ancillary revenue opportunities beyond their core retail operations and then seek acquisitions that can enhance these financial flows and build scale. He pointed out that ongoing partnerships between grocers and third parties provide learning opportunities for retailers to assess whether there is a business case to support larger-scale investment and in-house services. For example, grocers may seek to acquire companies related to health and wellness, technology solutions, and monetization of customer insights—industries that all offer valuable adjacent revenue.

McMillanDoolittle's Lai also believes retail media in particular could become an M&A opportunity for retailers. "Retailers will increasingly need to find ways to diversify revenue streams, expand their influence beyond core retail operations, and create competitive advantages," Lai said. While some grocers have acquired third-party e-commerce companies in recent years—such as H-E-B's acquisition of Favor in 2018 and Target's acquisition of Shipt in 2017—Gibbs noted that the remaining e-commerce logistics companies have operations extending beyond grocery delivery, making it difficult for grocers to justify acquisitions. "I think many e-commerce companies are too large, and for grocers, their prices are higher than what other buyers with access to lower capital costs could pay," Gibbs said.

Is it a highlight moment for specialty retailers?

Mushkin believes the most promising opportunities in future grocery M&A will involve ethnic and specialty grocers, as these retailers are typically smaller and operate in market corners not dominated by giants like Amazon and Walmart. "There are many small independent ethnic grocers, and you could see consolidation activity," Mushkin said. "We're already starting to see this happen, and I suspect there will be more, because that's an area with real growth potential." A typical example of ethnic grocer M&A is Heritage Grocers Group's acquisition of Texas-based supermarket chain El Rancho Supermercado earlier this year. Heritage was formed from the merger of California-based Hispanic grocery chain Cardenas Markets and Tony's Fresh Market.

Mushkin noted that specialty grocers like Sprouts Farmers Market and The Fresh Market are expanding their store networks—which could make them merger partners for grocers seeking growth avenues. He suggested that Amazon, which already owns Whole Foods Market, might consider acquiring a specialty retailer to expand its footprint in the grocery space. "I think it's an interesting opportunity for them, given the challenges they face in retail. They're a logistics and distribution company, not a retailer, and integrating these operations into one entity, achieving economies of scale in distribution and procurement while potentially operating different brands, would be interesting," Mushkin said.