MERGERS WITH C-STORES, FOOD SERVICE ARE FORECAST

CHICAGO -- Supermarket companies will increasingly seek to acquire companies in related fields, such as convenience stores and food-service companies, according to Tim Carroll, managing director of the corporate finance group at the accounting/consulting firm of Arthur Andersen here."Supermarkets are going to become multichannel food providers," Carroll told SN. He has analyzed this emerging trend

CHICAGO -- Supermarket companies will increasingly seek to acquire companies in related fields, such as convenience stores and food-service companies, according to Tim Carroll, managing director of the corporate finance group at the accounting/consulting firm of Arthur Andersen here.

"Supermarkets are going to become multichannel food providers," Carroll told SN. He has analyzed this emerging trend in "Channel Surfing," a report on "the 'cross-channelization' of the food retail industry" issued this month by Arthur Andersen.

While the report focuses on the potential of convenience stores as a means of cross-channeling, Carroll cited the purchase earlier this month by Ahold, Zaandam, Netherlands, of U.S. Foodservice, Columbia, Md., the nation's second-largest food-service distributor, as an example of the trend.

"What Ahold just did validates what we talk about in the report," he said. "They are the first company to do it in a really big way. And what Ahold does, the other big boys tend to emulate."

Carroll said the convenience store field is likely to be the arena where much of this emulation will take place. "If you look at where they are right now," he noted, "convenience stores have not been consolidated yet."

Supermarket companies could find both operating synergies and skills overlap in the convenience-store industry, according to Carroll.

"While there are some different factors involved" in managing convenience stores and supermarkets, Carroll said, "you are still managing categories and merchandise in a single box, and supermarket guys are much more astute at merchandising than convenience-store guys."

A key factor, he added, is the increasing role supermarket companies are playing in the sales of gasoline, a move that puts them in direct competition with C-stores. "As the sale of gasoline at supermarkets becomes more prevalent, the ability of the C-stores to realize profits is going to deteriorate," he said.

Carroll predicted supermarket companies will penetrate the C-store industry through acquisitions. "You need to get to critical mass quickly," he said. "And the conditions are right."

He also said the Federal Trade Commission, which has been giving supermarket acquisitions much closer scrutiny in recent years, according to many industry observers, is unlikely to block supermarket purchases of C-store companies. "The FTC is not going to be an issue," he said, noting that the regulator does not currently consider supermarkets and C-stores are competitors.

Carroll, however, said he sees supermarkets and C-stores becoming more similar, leading to the emergence of a new type of store halfway between the two, the superette. "The superette will be larger than a typical C-store but smaller than a supermarket," he said. "It will be a large C-store with a small produce center. It will be for fill-in shopping, but will offer more than Twinkies and cigarettes."

In the report, cross-channelization is described as a three-phase process.

Broadening the product selection.

Opening a few stores to test the concept.

Making large-scale acquisitions.

The broadening-the-product-selection stage began when mass merchandisers started carrying more grocery items, such as milk, diapers and laundry detergents, and supermarkets responded by expanding into such general-merchandise items as pet supplies and car accessories. With mass merchandisers now fully established in the supermarket business, this phase is virtually over, according to the report.

"Although the first phase involves the least amount of risk and investment," the report said, "it does not offer the growth prospects available through a more developed multichannel strategy."

In the second phase, companies move beyond merely offering more products to offering a greater variety of stores, according to the report.

"Although this is occurring on a limited basis today," the report noted, "it is the exception in today's marketplace and does not account for significant portion of most companies' operations. Cross-channel holdings are still viewed primarily as experiments."

The move by Ahold into the food-service business could be the first sign of the start of phase three, in which companies look to make acquisitions across fields, Carroll said. "Companies will look to acquire targets with quality operations and strong brand recognition in areas of the country that complement their existing business," the report said, noting that this entails considerable investment and risk. "Retailers will only enter this phase after they have defined a focused multichannel strategy and implementation plan."

While supermarket companies and mass merchandisers will probably move into a variety of retail channels, the report gave a variety of reasons for them to turn to C-stores early in the process.

These include:

The desire to capture all of a consumer's purchases, including fill-in shopping.

The increased importance of gasoline in building store traffic.

The current state of the supermarket industry, offering few additional opportunities for megamergers, leading companies to look elsewhere for continued growth.

Convenience stores, because they have largely not been acquisition targets, being less expensive to acquire.

The possibility of synergies similar to those in supermarket mergers.

The opportunity of learning management techniques from acquired companies.

The need for blocking competitors from acquiring the stores.