Dill, Donald W.

English

Research Papers in Economics

Observations on the Impact of Mergers on Independent Retailers
by
Donald W. Dill
Senior Vice President
Information Services & Planning
Certified Grocers of California, Ltd.
Los Angeles, CA 90040
First I would like to clarify a
point made by Bill. He said that when
I was asked to replace Carol I said I
would be happy to do so. In fact, I
approached this assignment with some
fear and trepidat.ion. It.is a very sensi-
tive area and I hope my remarks reflect
this sensit.ivity.
I am honored to replace Carol. I
would have liked very much to have heard
her. She is an independent operator who
can speak first-hand of the realities of
mergers and acquisitions as they have
affected her. Her title was to have been
“Merger Impacts on an Independent Gro-
cer.” My title would be “Observations
on the Impact of Mergers on Independent
Retailers.” Carol had some time to pre-
pare her remarks; my preparation time
has been limited to about 24 hours. I
hope my remarks do not appear too dis-
jointed.
Merger activities have occurred in
the manufacturing, wholesaling and retail
segments of the business. My primary
emphasis will be on the retail segment
with only a small comment on the whole-
salers.
By way of background, Certified
Grocers is a retailer-owned cooperative
with approximately 650 members, serving
4500 stores. In 1984, sales are in the
range of $1.9 billion. We have nine
divisions and seven subsidiaries. In the
twelve-month period between May, 1984 and
May, 1985, we will lose approximately
$300,000,000 in sales. Approximately
half of this is because of mergers and
acquisitions and the other half is be-
cause of retailers opening their own
warehouses.
There has been a significant change
in market share over the last 25 years.
While I did not bring with me the exact
data, the numbers I will quote are ap-
proximate in their order of magnitude.
Twenty-five years ago the top four
chains had an estimated 30 percent share
of market.. With the completion of the
Smith’s Food King acquisition by
Lucky’s, the top four chains’ share of
market should exceed 60 percent., While
Certified management is not happy about
this situation, we are pragmatic about
it in that we do not expect the current
administration to take action to slow
down mergers. We are also positive
about our own future.
A number of writers have their own
laws, Murphy and Parkinson among them.
I have two laws that I would like to
quote. One of them says, “For every
complex problem there is a simple an-
swer, and it. is wrong.” I say this in
conjunction with the discussion that
preceded the coffee break. The impact
of mergers and acquisitions and the
reasons for mergers and acquisitions are
very complex problems. They cannot be
dealt with by simple solutions. The
second law is from Mad Magazine, “You
don’t need faith to move mountains when
you’ve got the technology.” I’ll try to
Journal of Food Distribution Research February 85/page 99bring these two statement into perspec-
tive in regard to mergers’ impact on
independent retailers.
First, let me review some of the
things previous speakers have discussed
in light of the subject of mergers’ im-
pact on independents and add the impact
on chains of mergers. Or, in the complex
business of food retailing, what is the
relative impact of mergers on a number of
issues or characteristics?
Several of our speakers, starting
with Bill Boehm, discussed the concept of
consumer-driven decision making. The
concept of demographics also dealt with
the same thing. In my mind, independents
have an advantage by being close to the
consumer. They have an autocratic capa-
bility which allows them to respond much
quicker than chains. However, as a gener-
al rule they are not as sophisticated
as the chains in reading the marketplace,
but they do have great “gut” instincts.
Chains, on the other hand, have a
high level of sensing devices t.omeasure
the marketplace. Because of their struc-
ture, they typically are cumbersome and
bureaucratic in their execution of deci-
sions.
A summary in terms of merger and
acquisition impact would show some posi-
tives in each group. I’d rate it as a
draw or slight edge to the independent
who has good wholesaler support.
Some of our speakers talked about
change and ability to change. I would
put that in the same light as the previ-
ous discussion.
Many of our speakers talked about
the need for experimentation, particular-
ly as it relates t.o new formats. Inde-
pendents have little opportunity or re-
sources t.oexperiment.. They must depend
on the wholesaler. Chains, on the other
hand, can do it if they wish to. They
have greater ability to experiment and
thus have a better predictor of success
for the future.
Experimentation’s impact definitely
gives the advantage to the chains. Not
because of mergers and acquisitions but
because chains have greater resources.
The exception might. be where the chain
gains knowledge by acquisition rather
than by internal development.
Many of our speakers talked about
the concept of critical masa or the
concepts of economies of scale and simi-
lar thoughts. The goal for both chains
and independent.s is to maximize asset
utilization. Chains typically have
a higher per store average. my? I’m
not really sure, but.their greater media
clout would certainly be an influence.
In their distribution centers they have
a greater ability to control their des-
tiny and t.o operate at peak capacity
as they manage the expansion of their
distribution centers in tandem with
the development of their stores. There
is a trend on the part.of some retailers
to discontinue their distribution cen-
ters and move to wholesalers.
The adaptability and flexibility
of independent retailers allows them
to succeed in many chain discards.
Independent retailers, by and large,
depend on their wholesalers to get maxi-
mum utilization of the distribution
center. The independent, therefore,
has very little flexibility other than
to shift wholesalers.
What is the impact of mergers and
acquisitions with regard to critical
mass? On a store-by-store basis, per-
haps none. The chains do have a greater
opportunity to maximize the effective-
ness of their distribution centers
through mergers and acquisitions; how-
ever, I don’t know of any merger that
occurred because of the chain’s desire
to maximize the utilization of its dis-
tribution center. As a matter of fact,
two of the most recent acquisitions
in the Southern California market were
by chains whose distribution centers
were taxed to the limit prior to the
merger.
February 85/page 100 Journal of Food Distribution ResearchMedia costs are an area where the
chains have a significant advantage over
the independent. Typically, to get the
same coverage a chain can do it much
cheaper than an independent. Mergers
and acquisitions have a significant im-
pact on this in that a significant por-
tion of the incremental gross profit
goes directly to the bottom line because
here is no increase in media costs.
Promotional allowances is another
area where the chains have an advantage
over the independents. Because of their
size they have greater leverage. They
have greater monitoring and control capa-
bilities which benefit. both the retailer
and the manufacturer.
The independents, on the other hand,
are dependent to a great degree on the
wholesaler to develop programs. Manufac-
turers typically do not regard multiple
independents in the same light as a com-
parable number of stores in a chain.
The current structure of promotional
allowances gives a definite advantage
to the chains. With mergers and acquisi-
tions where allowances are determined
on a per-store basis, this increases
the moneys available to chains. Ten
years ago a Von’s and Ralph’s typically
would have two pages in the Los Angeles
Times. Today, they will have seven or
eight. pages. A significant. portion is
paid for by vendors’ promotional allow-
ances.
Many of our speakers have talked
about, the cost of entry. Bill Boehm
indicated he did not perceive there being
a significant barrier t.oentry. I dis-
agree with that.. The chains are far
better able to develop sites, to take
risks and wait for sites to develop.
They have greater resources for develop-
ment , including human resources and ac-
cess t.o the financial markets. Wherever
an independent developer develops a site
he is looking for a AAA tenant and in
markets today that is a chain store.
Independents depend on their whole-
saler. Where the wholesaler has a well
established site development program
the independents do not suffer much.
In areas where such a program does not
exist, the independents are definitely
at a disadvantage. Independents, in
many cases, are dependent on chain cast-
offs for their new sites.
Mergers and acquisitions are signi-
ficantly affected by the cost of entry.
Chains are using mergers and acquisi-
tions as an entry mechanism. They find
acquiring existing stores as cheaper
and faster than developing sites from
scratch. This is further affected by
the fact that chains are finding alterna-
tive uses for their cast-offs by leasing
them to non-food retailers and other
tenants who can pay higher rents than
can food retailers.
Demographics has been a subject
of discussion many times in the past
two days. Typically, it was spoken
of in light of the consumer. But the
same demographic characteristics that
are affecting the consumer are affecting
our employees. The chains with their
structured tendencies and thick person-
nel manuals are not as able to adapt
t.o the employees from the “me” genera-
tion as well as the independents with
their greater flexibility in structure.
While I have no empirical data on this,
my “gut” feeling says that the independ-
ents are going to be better able to
adapt. to the value systems of the new
employees.
There is one other factor that,
concerns me as a wholesaler and that
is that the “me” generation does not
have the same entrepreneurial bent as
their parents did. I suspect. that in
the next five years we will have more
difficulty identifying new store owners
than we have in the past.
The final characteristic I would
like to compare between chains and inde-
pendents is labor costs, most speci-
fically, union contracts. Virtually
Journal of Food Distribution Research February 85/page 101all chains are union members. In some
places they have two-tiered contracts
where new employees are hired at a lower
rate than are experienced employees.
Where chains are growing and independents
are stagnant, this gives a tremendous
advantage to the chains. Many cities
have two-tiered contracts; that is, one
contract for the chainu and another con-
tract for the independents. Forbes Maga-
zine recently had an article on the im-
~ of this particular approach on four
cities: Philadelphia, Pittsburgh, De-
troit and Cleveland. Where this condi-
tion existed, the chains have virtually
removed themselves from those markets
unless they were able also to get a lower
contract. Recently, in Southern Cali-
fornia, the industry-wide bargaining unit
signed an agreement with the Retail
Clerks. In this is a clause called the
“favored nations clause.” This clause
states that if the union signs a contract
with a retailer where the contract terms
are more favorable than the existing one
with the chains, then all employers in
the industry-wide bargaining unit would
get. the more favorable contract.. The
exceptions are for stores with less than
25 employees or companies with multiple
stores and less than 100 employees. This
particular clause gives us at. Certified
great concern.
What is the inner relationship be-
tween labor costs and mergers and acquis-
itions? Typically, the independent
would be at the advantage where he is
able to negotiate a lower contract or
become non-union. Where he must abide
by the same contract as the chains he is
at a definite disadvantage. The other
area where the independent is at a disad-
vantage is in his knowledge of labor
law. Whereas chains have staff experts
in this area, the independent must de-
pend upon expensive consultants or his
wholesaler for this service.
The final subject 1 would like to
cover today is the area of mergers among
wholesalers. The t.rend has been going
on for better than ten years where
strong wholesalers acquire other whole-
salers. They are typically looking for
wholesalers with good facilities, a good
sales base and a management team that is
willing to stay. The acquiring firm
usually brings to the merger a host.of
services which, when provided to inde-
pendents by the acquired wholesaler,
strengthens the independent and gives
him greater ability to compete in the
marketplace.
These are my random thoughts on
mergers and acquisitions and the
comparative advantages to chains and
independents.
Thank you.
February 85/page 102 Journal of Food Distribution Research

OBSERVATIONS ON THE IMPACT OF MERGERS ON INDEPENDENT RETAILERS

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