ANALYSTS EXPECT MORE INDUSTRY CONSOLIDATION

NEW YORK -- Financial analysts fully expect the supermarket industry to continue on its course toward greater consolidation in the second half of 1998.In addition, they envision more rational pricing strategies and increased rollout of technology in the second half."Consolidation will definitely continue in 1998 -- I don't think there's any doubt about it," said Ted Bernstein, a high-yield analyst

NEW YORK -- Financial analysts fully expect the supermarket industry to continue on its course toward greater consolidation in the second half of 1998.

In addition, they envision more rational pricing strategies and increased rollout of technology in the second half.

"Consolidation will definitely continue in 1998 -- I don't think there's any doubt about it," said Ted Bernstein, a high-yield analyst with Grantchester Securities here, a division of Wasserstein Perella Securities.

"Supermarkets as an industry trail the rest of retail in terms of consolidating. And we're going to see a lot more deals to come. The opportunities for cost savings and reducing expenses are significant."

Analysts contacted by SN pointed to drug stores and discount stores as examples of highly consolidated retail sectors.

"If you look at the top drug store chains, they've got about 65% of the prescription market," said Mark Husson, retail analyst with J.P. Morgan here. "If a similar level of consolidation happened in the food-retail business, you'd see five players in the $40 billion to $50 billion sales range."

Earlier this year, Fred Meyer Inc., Portland, Ore., wrapped a landmark merger of Quality Food Centers, Bellevue, Wash., and Ralphs Grocery Co., Compton, Calif. At the time, QFC had only recently concluded its own acquisition of a California operator, Hughes Family Markets.

"No question about it, the theme in the supermarket industry is consolidation," commented Debra Levin, a financial analyst with Morgan Stanley Dean Witter here. "I think all of the major companies have recognized that the benefits from consolidation can be substantial, and how tough it is to enter a new market by internal growth."

She said that was the case earlier this year with Albertson's acquisitions of Seessel's, a 10-store operator based in Memphis, Tenn., and Smitty's, a 10-store operator in the southwest Missouri market. Albertson's is also pursuing a merger with Buttrey Food & Drug Stores Co., Great Falls, Mont., that would extend the chain into a contiguous market.

"They are going into areas they had targeted for growth," Levin said. "But through acquisitions, they can start with a good base of stores upon which they can build.

"I would not rule out large mergers," Levin said. "There is such focus on the part of all the management that it certainly could happen."

However, she said, "The more likely mergers are going to be the smaller ones, because the smaller companies are realizing the importance of having deep pockets. With the competitive pressures remaining as intense as they've been, it may become increasingly attractive for small operators to sell out to larger ones."

Jonathan Ziegler, a San Francisco-based financial analyst at Salomon Smith Barney here, said supermarket acquisition could take two forms in the months to come -- the Fred Meyer megadeal approach or what he calls "the piranha approach."

"Albertson's is taking the piranha approach, buying the little companies, taking one bite at a time," he said. "They're not upsetting the industry, but they are building their own square footage pretty dramatically."

Ziegler said Safeway, Pleasanton, Calif., and Ahold, Zaandam, Netherlands, are likely candidates to make a large acquisition.

"I do not think Safeway is going to buy Kroger," Ziegler said. "But we could see someone acquire American Stores Co. Perhaps the various divisions of American Stores Co. could be very attractive to various other players in the business."

"Fred Meyer's purchase of Ralphs and QFC simultaneously, that was the last big deal -- but this industry is still in the consolidating mode," he noted.

Husson said if a merger of the Fred Meyer magnitude occurred every year, the supermarket industry in five or six years at most would be dominated by five leading operators.

"Maybe in 2010, there might be three major players," Husson said. "But for the time being, five major players are entirely feasible."

Husson said supermarket chains are feeling the pressure from low food-price inflation, and lower earnings, plus the increasing competition from large multichain operators that are coordinating various aspects of procurement and/or promotions.

"They are behaving as if they are one company, instead of behaving like a collection of different regionals," Husson said. "It's very easy to compete against a collection of regionals, but it's very difficult to compete against a $26 billion behemoth, which is what Kroger is becoming."