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LONDON -- So what happened to consolidation?Two years ago food industry executives were predicting a global industry shakeout with companies like Wal-Mart Stores, Carrefour, Ahold and Delhaize gobbling up one retailer after another. Analysts predicted the industry would rapidly shrink down into a handful of major players, which would be able to leverage their strengths in buying and logistics to cut

LONDON -- So what happened to consolidation?

Two years ago food industry executives were predicting a global industry shakeout with companies like Wal-Mart Stores, Carrefour, Ahold and Delhaize gobbling up one retailer after another. Analysts predicted the industry would rapidly shrink down into a handful of major players, which would be able to leverage their strengths in buying and logistics to cut consumer prices. Medium-sized and small companies would find it almost impossible to compete.

It didn't happen.

There certainly have been big mergers and acquisitions in that time -- Wal-Mart's $10.8 billion purchase of Asda, Leeds, England, in June 1999 created shockwaves among European food retailers and was a catalyst for the merger two months later between Carrefour and Promodes in France. But, despite earlier expectations, these deals weren't quickly followed by others. In the United States, the flurry of activity set off by Kroger Co.'s acquisition of Fred Meyer Inc. and the agreement made by Albertson's to merge with American Stores Co. has subsided. Meanwhile, large European retailers like Auchan and Leclerc in France, Tesco in the United Kingdom, and Metro and Tengelmann in Germany have remained independent. And it looks like they'll stay that way for some time yet.

Now, instead of harking on the urgency of industry consolidation, executives and analysts are questioning whether it makes sense at all. There is no doubt food retailers will increasingly become global operators, executives say. But size is no longer an issue.

"After Wal-Mart moved into Europe and the Promodes/Carrefour deal, there was a clamor for consolidation for defensive reasons," Terry Leahy, chief executive of Tesco, Cheshunt, England, said at a London press conference in April. "I think there is less of that now. The cross-border synergies in retailing are not that great, although they are growing."

Far from lauding globalization, some industry executives and analysts believe the far more important issue is one of local dominance. It's no longer vital for food retailers to be represented on every continent. The better strategy for a retailer is to be strong in each market it enters.

"So far, global consolidation in food retailing is unproven," said David McCarthy, a food retail analyst at Schroders Salomon Smith Barney here. "What has become far more important now is local scale."

Some observers point out that global consolidation was more talk than reality anyway. There actually were very few cross-border deals, apart from Wal-Mart's purchase of Asda, the occasional purchase of a small retailer in the Far East by a Western chain and the continued growth in the United States of such companies as Ahold, Zaandam, Netherlands, and Delhaize "Le Lion," Brussels.

But even Ahold and Delhaize have begun subtly adjusting their strategies. While Ahold continues to snap up companies left and right -- from building a multibillion-dollar food-service business in the United States to fill-in acquisitions in food retailing in Portugal -- it insists that organic growth has become the priority. Delhaize has a similar view.

"We are simply continuing on track," Guy Elewaut, investor and financial public relations manager at Delhaize, said. "Our strategy is based first on internal growth, which is the same strategy we had two years ago."

The change in sentiment stems from a variety of factors. Probably a key issue is the problems Wal-Mart continues to have establishing itself in Germany. The world's largest retailer entered the market in 1997 with the acquisition of 21 stores from Wertkauf, which it followed a year later with the purchase of 74 stores from Interspar.

But the company still lacks sufficient scale to have a major impact on German retailing and still is having problems with logistics and systems, analysts said. It recently said it will open three stores in Germany this year, despite earlier goals of opening up to 50.

"A foreign retailer needs to differentiate itself from the local companies when it enters a new market," one analyst said. "Wal-Mart entered Germany preaching low prices, but that's what German retailing is all about already. So what does it have to offer the consumer? You almost feel they didn't do their homework before they entered the market."

Wal-Mart's purchase of Asda has been more successful. The company continues to roll out its Asda/Wal-Mart superstores, is developing a new, smaller store format focusing on fresh foods, and is moving rapidly to build a strong position in the nonfood area. But analysts now dismiss Wal-Mart's initial goal of turning Asda into the U.K.'s leading food retailer.

"Tesco continues to pull further and further away from the other British food retailers," an analyst said. "And its superstores continue to outperform Asda's."

Coupled with Wal-Mart's problems in Germany have been the difficulties Carrefour in Paris has had digesting Promodes. The merger between the two French giants created the world's second-largest retailer after Wal-Mart and one with significantly greater international operations than the U.S. company. But Carrefour has had difficulties rebranding the Promodes stores, integrating the different information systems at the two companies, and competing in France, where its hypermarkets are losing market share to Leclerc. As a result, it has had to abandon its goal of doubling its 1999 earnings by the year 2002.

Daniel Bernard, Carrefour's chairman, continues to insist on the logic of the deal, pointing to the company's presence in 28 countries and range of different formats. "Others will follow us in this direction," he said in an interview with the Financial Times earlier this year. "By the middle of this year, the difficulties of the merger will be behind us."

Following the deal, there had been predictions that Auchan and Leclerc would rush into the arms of a global food retailer, either Wal-Mart or Ahold, and that such U.K. retailers as Tesco and J. Sainsbury here were targets for possible takeover. Now it's clear there is little need for these companies to do a mega-deal.

"The last year has been characterized by wave after wave of problems in the performance of many leading global retailers," said Richard Hyman, chairman of the consultants Verdict Research here. "It's not just in food retailing -- look at The Gap, Marks & Spencer and Hennes & Mauritz. But there has been a bit of a time-out in the whole idea of international retailing.

"Many of the deals two years ago were reactive, not pro-active. Wal-Mart's purchase of Asda was a reaction to its poor performance in Germany -- and to the Kingfisher bid for Asda. The Carrefour-Promodes merger was a reaction to Wal-Mart. The problems they've had have set alarm bells off. Now executives are sitting around thinking, 'Consolidate? Why?"'

These questions have coincided with a decline in global stock markets, with a particular downgrading of food retailers. In addition, many of the leading food retailers have major debt loads, especially in the U.S., which makes it impossible for them to embark on further acquisitions. Such companies as Ahold, Delhaize and Carrefour also have encountered antitrust considerations with attempted purchases. Ahold had to abandon its acquisition of Pathmark in the United States after the Federal Trade Commission objected to the deal. Meanwhile, Carrefour was told by the European Commission to sell its hypermarket business in Spain if it wanted to merge with Promodes.

"The FTC situation isn't a blocking of any future deals, but it is an issue," Elewaut of Delhaize said.

It's these problems that have led many retailers to question the overall logic of global scale and to focus on local strength. The leading practitioner of this strategy is Tesco. The U.K.'s largest food retailer is investing heavily in stores in Central Europe, Thailand, South Korea and Taiwan to build up its international strength.

McCarthy of Schroders Salomon Smith Barney is one of the unabashed advocates of Tesco's strategy. He believes the U.K. retailer eventually will prove more successful internationally than Carrefour, even though Tesco started its international expansion 20 years later. His prediction also is based on the fact that Tesco has faced significantly stiffer competition in its home market of the U.K. than Carrefour has in France, which means it has deeper and more widespread retailing skills than the French giant.

The industry's new viewpoint doesn't mean the death of the large international merger or acquisition. Wal-Mart remains on the prowl, with the need to further boost its presence in such key European markets as France while also building up its operations in Germany and the United Kingdom. While the family owners of Auchan and Leclerc seem happy at the moment, they could eventually succumb to an offer once the world's stock markets recover. Tesco might at some stage have to make a significant acquisition -- either in continental Europe or the United States -- if it wants to finally eliminate itself as a possible takeover target. And Ahold and Delhaize remain acquisition hungry.

"We do believe the consolidation process will not stop," Hans Gobes, Ahold's senior vice president of communications, said. "We have always been a catalyst player. This is an endgame and in an endgame you take your time. It's probably what all the major players are doing."

The only relative certainty is that large American food retailers like Kroger, Safeway and Albertson's are unlikely to engage in international consolidation, preferring to focus on the large North American market instead. Analysts said North America has the advantages over Europe of lower costs and higher growth rates, which is why American companies are unlikely to want to branch out into Europe or even the Far East.

"We don't hear anything that would indicate the U.S. retailers want to participate in the industry's [global] consolidation," said David Shriver, a European food retail analyst at Credit Suisse First Boston here. "We wouldn't be surprised if Tesco and Carrefour are in the U.S. in five years' time but would be if Safeway or Kroger were in Europe."

But Shriver, like others, is confident global consolidation will pick up again at some point. "It's a bit like a teenager when you go to a school dance. Everyone sits around on the edges at first because no one wants to be the first to get up and dance. But then once one does, everyone does.

"Right now the industry is simply lacking that catalyst. It's difficult to say how long the lull will last; it could start again tomorrow or take another year. But all it takes is one deal to start everyone dancing again."