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Podcast #2: M&A as strategy in the grocery industry

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Mercatus Radio presents the Digital Grocer - Episode #2

Welcome to the Digital Grocer, a show about all things related to online and in-store digital commerce. Join host Sylvain Perrier, president and CEO of Mercatus Technologies, as he explores the players, the issues and trends disrupting and re-shaping the grocery retail marketplace.

In this episode, Sylvain continues his conversation with Brittain Ladd, a globally recognized expert in supply chain management, strategy and operations. Sylvain and Brittain consider how critical it is for grocery retailers to make the “Big Moves” essential for long-term business success. Specifically, grocery retailers should leverage M&A (mergers and acquisitions) as a strategy to better prepare for future battles against Amazon, Walmart, and others invading traditional grocers’ markets.


Sylvain Perrier:              Welcome to Mercatus radio episode two. I’m your host Sylvain Perrier. President and CEO. And joining me in the studio today is Mark Fairhurst, Mercatus’ own senior director of marketing.

Mark Fairhurst:             Welcome everyone. It’s great to be back.

Sylvain Perrier:              And at the board, as always, is Kevin Glenn. So Mark, today we have a subject that I am just super excited to talk about. And it’s the big moves and the importance of M and A in grocery industry. And I think, you know, from, from our experience looking at what’s happening in the market, the space has just changing at such a rapid pace.

Mark Fairhurst:             Yeah.

Sylvain Perrier:              Right? You have-

Mark Fairhurst:             That’s true. Yeah.

Sylvain Perrier:              The new entrants.

Mark Fairhurst:             Yeah.

Sylvain Perrier:              Uh. They could be technology companies. They can be kind of hybrid scenario. We have companies that are just fighting over the share of a wallet. Share a basket. So there’s these kind of food delivery start ups. Just Eat, Uber Eats, Ritual.

Mark Fairhurst:             Yeah.

Sylvain Perrier:              I think every city in every state has kind of their own flavor of such organizations. And I can tell you. You know? My own experience. Just like an M and A, I wouldn’t call it a direct process. But just seeing it happen from afar, I can remember back in I think it was 2013. I was working at Giant Eagle in Pittsburgh. A great company to work for and to do stuff with. Uh. We were helping them out on their digital strategy.

Sylvain Perrier:              And I remember the phone call coming in. Direct to the office. To, uh, the former chief operating officer, whose last name is Luco. And there’s two brothers who work there. Joe and John. And I think it was John. John’s probably one of the strongest operators I’ve ever had the opportunity to work with. And he rushes into, to my little cubicle that they had given me and goes, “Did you hear the news?” And I’m like, “Hear what news?” I’m like, this has got to be dramatic if the chief operating officer is coming down to see me. (laughs).

Mark Fairhurst:             (laughs).

Sylvain Perrier:              And I can hear our guest laughing, which is even better because he knows what this is like.

Mark Fairhurst:             (laughs).

Sylvain Perrier:              John’s like, “Well, Kroger just bought Harris Teeter.” And I’m like, “What? Kroger just bought Harris Teeter. Why, why would a large tier one grocery retailer want to buy …” I will tell you, a great regional retailer. Right? For, for those of you listening who don’t know who Harris Teeter, who they are. They’re headquartered in Matthews, North Carolina. I think at the time they had over 200 stores. And they’re phenomenal. And they bought them. And I’m like, “Well, that’s odd.”

Sylvain Perrier:              Now, you know, you start to wonder is it to grow revenue? Is it to get expertise? Is it to block Publix who was slowly punching through, uh, the state of Georgia. They were contemplating opening up a distribution center I think in the Carolinas at the time. And they had opened up a store in, uh, Greenville, South Carolina.

Sylvain Perrier:              But nonetheless, it was an experience and when I look at what’s happening today, it’s a little bit of the same. But it’s a lot new. It’s a lot different. And I think a lot of it because this, this is being driven by customer demand. Being driven by people wanting to survive. Thrive. And so there’s a whole host of reasons.

Sylvain Perrier:              So to help us really explore this subject, we have on the phone a reoccurring guest on Mercatus radio. Britain Ladd. Who, for those of you who don’t know him, this guy is just brilliant. He gets it. He’s an independent consultant. Amazing strategist. Gets all things retail. All things technology. And all things e commerce. So welcome to the show.

Brittain Lad:                  Thank you. It’s great to be back.

Sylvain Perrier:              Excellent. Now I always say when it, when I think of this subject, there’s these two dividing lines in the sand. And, and, and it’s odd. You know? There’s normally only one line in the sand. But I think in this case here, there’s two. There is in fact Kroger acquiring Harris Teeter in 2013.

Sylvain Perrier:              And you could get a sense that the tide was shifting. So it was more or so less about revenue growth. Maybe about something entirely different. My experience with Harris Teeter at the time, and most people don’t know this, but I actually lived for over a year in Charlotte, North Carolina. In a beautiful part of the city called South Park. Not like the cartoon.

Brittain Lad:                  (laughs).

Sylvain Perrier:              Completely different. And as the Canadian in, in the area, I didn’t have that head that just kind of, you know, split in between at the mouth level. Just bobbing up and down. Great area. And we had, we had a Harris Teeter not far from us. From our, uh, gated community.

Sylvain Perrier:              And it had a nickname. They called it the Taj Mahal of Harris Teeter. So on site, they had a sommelier. So you could go in, buy a bottle of wine, and the sommelier would recommend to you the wine. He had a recipe book. He had the recipe cards. If you want to get a cut of meat, you could talk to the butcher. And the experience was very different.

Sylvain Perrier:              Also from an e commerce perspective, they were doing I think well. They seemed operationally far ahead of the game of most. Produce was amazing. So you kind of wondered, maybe that’s why they got bought.

Sylvain Perrier:              That second line in the sand is the news that was announced in the December of 2017, with Target making the decision to acquire Shipt for 550 million US dollars. Astonishing. For a company, I think it’s reported on crunchbase.com that they, I think they raised only 20 million. That’s an a amazing return if you were an early stage investor.

Sylvain Perrier:              So I want to ask our expert, you know, prior to these lines in the sand, why, why was there M and A activity in this space? Why would one retailer buy another retailer?

Brittain Lad:                  Well, you know, it’s interesting. Again, we kind of touched on this in the last podcast. But the reason why retailers were avoiding each other is there really was a belief that if you operated regionally, you actually had the advantage because Walmart was looked at as being the 800 pound gorilla that was going to be a nationwide grocery retailer. And so to avoid being swept up and losing market share to Walmart, focus on the customer at the regional level. Find a way to personalize that experience more at the regional level.

Brittain Lad:                  The challenge was those were words to most of those executives at the regional level at that time. And although they would say, “We’re really working hard to please the customer.” They really weren’t innovating. They really weren’t backing up those words with action.

Brittain Lad:                  And so for that period of time where you didn’t see a lot of M and A activity, not a lot of innovative things were taking place within the grocery industry.

Sylvain Perrier:              And so, when you look in the space today, and you’ve seen the changes. What are some of these changing that it’s just now driving the M and A activity through the roof?

Brittain Lad:                  Well, you can’t talk about M and A activity today without saying the word Amazon. And I can state for a fact, with no hesitation, that when Amazon announced they were acquiring Whole Foods, executives at every grocery retailer … as a matter of fact, executives at most retailers went behind closed doors and they asked this question. How did we miss this? How did we not see this coming?

Brittain Lad:                  And what I, I always like to do when I talk about M and a is touch upon that subject to begin with. The question that needs to be asked is why was it so many executives were surprised by Amazon acquiring Whole Foods? And when I mean surprised, there are executives at very well known grocery retailers who are on the record as stating, “I would have never thought, or I never thought Amazon would ever acquire a grocery retail. I though Amazon would focus on online grocery retail.”

Brittain Lad:                  So what Amazon did was disrupt. They disrupted the equilibrium that had been in place within the grocery industry. And now that Amazon acquired Whole Foods, grocery retailers are looking to the left and right and saying, “My gosh. I really can’t just be concerned with the competitors I work with on a daily basis or I compete against on a daily basis. There are companies completely outside of my industry who have an opportunity to come in and make an acquisition.

Brittain Lad:                  So what these retailers are doing today is doing everything they can to improve their competitive position. And right or wrong, what these executives believe is that if they can make the right acquisition, they increase their ability to compete.

Brittain Lad:                  What I actually see happening is that there are executives who are making acquisitions but they’re really not acquisitions that I think are going to help them that much. And then there are other retailers out there who are still on the sidelines because what they’ve done is said, “Yes. Amazon acquired Whole Foods. But we’re not convinced Amazon is going to be able to make Whole Foods as big as a competitor as they say.” And I think that is just a terrible mistake.

Sylvain Perrier:              That’s interesting you say that. So, I, I will tell you from experience, through my business partner and through our acquaintances out there in the market, that it really takes a special type of executive committee, board of directors, to make an acquisition. Right? It’s not so much just about an all cash transaction. Chair swap. Kind of all those types of things that you can do.

Sylvain Perrier:              There needs to be a very strict process of how you merge an organization operationally, culturally, and to have them sing from the same strategic song sheet. Really. So in your estimation, who is out there today that knows how to do this? And is likely, I would hope, executing flawlessly?

Brittain Lad:                  I tell you, I really look at Target. And I think Target does, and has done, a fabulous job. In terms of their acquisition strategy. I think they do a great job. I certainly think Amazon does a wonderful job in terms of acquisitions. I think Walmart does an excellent job in terms of acquisitions.

Brittain Lad:                  And the reason why I call out those companies is this. They understand where they have gaps. And when they make an acquisition, it’s to close a gap. Why did Walmart acquire jet.com? Well, Walmart just wasn’t happy with their e commerce digital capability. And they acquired expertise, Mark Laurie and his team. They acquired technology through the jet.com platform.

Brittain Lad:                  Then today, Walmart looks at, at India and says, “We’re really not competitive there. We need a better strategy.” So that’s why they’re investing heavily to acquire a majority stake in Flip Car.

Brittain Lad:                  So those are the companies that I think are doing very well. Amazon, I won’t be surprised to see them make an additional acquisition. I’m on the record as stating I think Car Four would be a great acquisition for Amazon to make in Europe. I actually think Walmart should have made a play. Just a few months ago I wrote an article where I recommended that Walmart should divest ASDA and make a play for Car Four.

Brittain Lad:                  Now, I don’t see any movement on the part of Walmart going to Car Four and because now Walmart is actually looking to make an acquisition of Flip Card, I, I believe the best strategy for Walmart, in all honesty, is just to withdraw from Europe completely. And put their focus on India, China, Mexico, and the United States. I think they should withdraw from Brazil as well.

Brittain Lad:                  And so you could have a conversation like that with the executives at Walmart, because as you state, they get it. They can align to a strategy. Kroger is the company that continues to amaze me that they’ve yet to make an acquisition. And I believe there are several out there that they should make. And I’m on the record. And everyone knows this. I’m the person who recommended that Kroger go after Boxed Wholesale. And I’m also on the record as stating that Kroger should have gone after Overstock.com.

Brittain Lad:                  Now, Kroger did make an attempt to acquire Boxed Wholesale, but they didn’t bid anywhere near as high as I recommended. And I’ve yet to see Kroger make a play fro Overstock. Although I think that’d be a great fit for them.

Brittain Lad:                  So I agree with everything that you said. In terms of making acquisitions requires a strategy. But making acquisitions requires having an executive team with the courage and the vision to be able to make such a decision.

Sylvain Perrier:              Perfect. You know? The one thing that’s always frustrated me about being in this space is, you know, you’re visit, visiting a prospective client. And you, you have a group that says to you, “We’re never going to be the first at this.” And I have to ask, what’s going to happen to those retailers that continue to say that?

Brittain Lad:                  They’re going to close their doors. Or they’re going to be acquired. If you look at the graphic that’s used for this article M and A activity, it’s a big fish swallowing a small fish. And big fish grow big because they learned survival. They learned to understand where are they competing, where do they fit into the food chain, and they make wise decisions to get bigger. To survive.

Brittain Lad:                  These companies that say, “We’re not going to be first at this.” I can think of no worse attitude to have than that. I just can’t imagine being someone who can look in the mirror and say, “I really wouldn’t want to be the first to climb Mount Everest. But, you know what? If I was the second or third person, that would be okay.”

Brittain Lad:                  The glory goes to those individuals, to those companies who have the courage and who have the vision to do something big. And one of the tenants, one of the leadership principles at Amazon, is “Think Big.” And another one is, “Have backbone and commit.” And that’s what it takes. You have to have executives with a backbone. And with vision. And for these boards of directors who sit in a room and they have a, a CEO who says, “We don’t really want to move first. We really want to sit back and wait and see what happens.”

Brittain Lad:                  Uh. I have advice for those boards of directors, and it’s called firing that CEO.

Sylvain Perrier:              Excellent. Now, from my perspective, when I look at some of the companies today that are not necessarily participating and call it the flurry of activity that we’re seeing in this space. Right? Between target, Walmart, and Amazon. I’m wondering are those that are on the sidelines hoping and anticipating that these companies are going to trip up? Are they trying to learn from them? Or are they eventually going to resurface and jockey for a position? Or maybe they’re just hoping that they will deplete their cash position and not be able to execute. Right?

Sylvain Perrier:              I’m interested in hearing your thoughts on that.

Brittain Lad:                  So let’s take a look at an example. If we look at Kroger. Kroger signed an agreement with Instacart. Kroger has, is leveraging several other third parties for grocery delivery. So Kroger didn’t acquire Shipt for example. And I actually made the recommendation in June of 2017 that either Target or Kroger should acquire Shipt. I thought Kroger absolutely should have gone after Shipt. They didn’t.

Brittain Lad:                  Kroger chose what I call the path of least resistance. And that’s not a criticism of the executives at Kroger. But it wasn’t he best decision in terms of a strategy. So I think what Kroger is doing is saying, “Let’s tip toe. Let’s tip toe in the waters. Let us have an ability to make deliveries for our customers. But let us not really be the company that goes out and creates our own capability by partnering with someone. And let us not be someone who says, ‘Well, we’re going to go make an acquisition.’ Because we’re not 100 percent sure what’s this really going to do? What’s this, how is this going to turn out in the end?”

Brittain Lad:                  I see Wegmans. I see Albertson’s. I see other companies leveraging Instacart. And leveraging other third parties to basically give them an ability to compete today. Now that’s today. That isn’t a long term strategy. So what I continue to see with these grocery retailers on the periphery is that they’re doing just enough to keep the train moving forward. But I’ve yet to see any of them do anything where I look at it and say, “Yes. They’re going to be here five years from now. Or 10 years from now.”

Brittain Lad:                  I still see that level of hesitation and I can assure you that’s just not how I would operate these grocery retailers. I just think they’re doing the least possible thing they can do. And they’re incredibly risk averse. And I just don’t operate that way. And when you look at the successful retailers, the Amazons, the Targets, the Walmart’s, and so forth, they go for it. They are not risk averse.

Sylvain Perrier:              In my world, I’ve, I’ve always seen that as this is the difference of doing acquisition strategy against a really well crafted process to understand, well, strategically we need to go here. Let’s go get the talent and the expertise to do it versus us doing it on our own. Versus what you’re so well explaining is bridging the gap at a tactical level. And let’s just put a bunch of pieces of the puzzle together and hope it works. And at some point someone is going to buy that piece of puzzle. And then we’re going to be left with that gap again. And have to make good on it.

Sylvain Perrier:              And that’s very dangerous to try to, uh, run a business on this way. And this, this reminds me in my years in the electronics industry and my years in supporting the banking industry that we’ve seen this not work. Out in the long run.

Brittain Lad:                  Oh. And, and I agree. One of the, the more popular articles I wrote for LinkedIn is called The Trojan Horse. Instacart’s covert operation against grocery retailers. And it was amazing to me the feedback I received when I wrote that article. And my argument is this. Grocery retailers that signed an agreement with Instacart are doing nothing more than teaching Instacart their business. And they’re giving Instacart access to their strengths and weaknesses.

Brittain Lad:                  And if all Instacart wanted to do was maintain their business model and be happy delivering groceries, there’s nothing wrong with that strategy. But I am convinced that Instacart absolutely is going to move into wholesale grocery distribution. I think Instacart is going to move into private label manufacturing. I think Instacart absolutely can open up their own stores. And as Instacart grows, their market increases. And their evaluation increases. They really look like a target for someone to acquire.

Brittain Lad:                  So imagine someone, a third party, a private equity firm says, “Let’s acquire Instacart. And let’s leverage all the strengths and weaknesses they know of the top grocery retailers in the United States. And let us come to market with our own vision of grocery retailing.”

Brittain Lad:                  Now, right out of the gate, they’re going to know, well, this is how you beat Kroger. This is how you beat Albertson’s. This is how you beat this customer. This is how you beat that, that company. And so I really believe that grocery retailers need to bring these things in house. Or grocery retailers need to do a better job of choosing who they partner with.

Brittain Lad:                  What you don’t want to do is partner with someone who can learn your strengths and weaknesses and eventually use it against you. I just think that’s a very bad strategy.

Brittain Lad:                  And for the response I’ve received in the article. I had CEO’s, I had boards of director’s reach out to me and say, “Had I read this prior to us signing that agreement, we would never have signed that agreement with Instacart.” So I know what I wrote had a lot of truth to it.

Sylvain Perrier:              Yeah. And I can add to your story. I can remember like it was back in 2016, being in the LA market. With, uh, a retailer that’s no longer a part of the retailer community. I was on my way to an afternoon meeting at their head office. And what I typically do when I’m traveling to, and eventually have a meeting with a retailer, I like to go visit the stores. And I tend to go alone. I don’t like to go with the marketing team, or the IT team because the store staff just know. Oh. Head office is here. So you don’t get a good sense of how the business operates at that point.

Sylvain Perrier:              And I was blown away when I walked in and I saw a bunch of Amazon employees. Taking and packing orders. And when I made my way to head office, and I said, “No. You, my understanding you’re looking at implementing your own e commerce solution. Prepared orders. And click and collect. And curbside. I think that’s great. But, you didn’t disclose to me that you were working with Amazon. Are you concerned about that?”

Sylvain Perrier:              And they, you know? Everyone in the room kind of looked at me, like, “Well, why should we be concerned? Amazon sells books.”

Brittain Lad:                  (laughs).

Sylvain Perrier:              And I, and I, and I, and I looked at them and I kind of like, “No. They don’t. Your margin is their opportunity.” Right? “You have to understand that Amazon’s goal in the world is to sell more products. And grocery has the highest household penetration rate in the United States. I think it sits at north of 95 percent. And if they can learn from the data harvested from selling groceries to their customers, they will learn how to sell more and how to do more.”

Sylvain Perrier:              Everyone kind of looked at me like I was right out of it. And I said, “You’re teaching them your space. You’re literally teaching them how to be good at this.” The moment, uh, Whole Foods, uh, was acquired, I think it was a space within, uh, a week or two that this retailer had to file a chapter seven. And that was it.

Sylvain Perrier:              And, uh-

Brittain Lad:                  Wow.

Sylvain Perrier:              The demise didn’t come because of the acquisition of Whole Foods. Or, or Amazon learning. But it came from the executives not really wanting to be truthful with themselves and introspective and so on and so on. All those things that go on.

Sylvain Perrier:              Now Brittain, if you could look at your crystal ball … because I suspect at this point you have one.

Brittain Lad:                  (laughs).

Sylvain Perrier:              What do you see? And what are you anticipating for the future?

Brittain Lad:                  Well, what I really see is massively increased M and A. And I see certainly more partnerships forming. Some good. Some bad. And what I really look at is Amazon is going to do wondrous things with Whole Foods. And I’ve been on the record for several years. And for the audience members who don’t know this, I first recommended Amazon acquire Whole Foods in 2013. When I wrote a research paper on the topic.

Brittain Lad:                  And so I look at Amazon and I say, by 2030, Amazon Whole Foods absolutely will surpass Kroger. And be the second largest grocery retailer in the United States. Between 2030 and 2035, Amazon absolutely can surpass Walmart in terms of total market share for grocery.

Brittain Lad:                  Amazon has that capability. Now. Does that mean no one can stop them? Uh. No. Actually there are some very interesting things that can take place. The wild card is Ali Baba. And last year there was a lot of press on this because I had written that I believe Ali Baba should acquire Kroger. And if Ali Baba acquired Kroger, there’s many things that, that Ali Baba could do to re engineer, to reimagine grocery retailing as we know it. And that certainly could have an impact on Amazon’s ability to succeed.

Brittain Lad:                  I look out there and I say, well, what if Costco decided they wanted to get more in to groceries? And they say, “We’re going to acquire Kroger.” I’ve been on the record as stating if Target and Kroger merged, or if Target acquired Kroger, that absolutely would have an impact on Amazon’s ability to achieve the goal.

Brittain Lad:                  And of all those recommendations, not one time did I have anyone ever reach out to me and say, “That’s crazy. That’s a bad idea.” They always reach out to me, especially executives of Wal street firms, and they ask me why hasn’t this already been done? Why hasn’t Kroger and Target already merged? Why hasn’t Costco already reached out and acquired Kroger?

Brittain Lad:                  So what I believe we’ll see is that there will be more acquisitions along the way. And I don’t anticipate Amazon having a major impact that will be felt by most retailers until around 2020, 2021. So there still may be a period of one or two more years where there just aren’t the big acquisitions that I think are going to happen.

Brittain Lad:                  But when it becomes a reality that Amazon is not just good at grocery retailing, but they’re actually becoming a leader at it, that is absolutely going to put the fear in many executives and that’s when you’re going to see these big acquisitions.

Brittain Lad:                  Also today, for example, I see that Starbucks has signed an agreement with Nestle. And to sell their coffee. And that’s something that I’ve written about in the past. I’ve also written that I believe Starbucks should acquire Blue Apron and sell meal kits within their stores. And so again, when you look at acquisition, where are there gaps? If you look at Starbucks, they don’t do a good job at selling food in their stores. So acquiring Blue Apron could actually help them solve that problem.

Brittain Lad:                  So I believe you’re going to see many more retailers out there be aggressive and say, “We are willing to be acquired.” Or “We are willing to partner with, uh, a proven winner.” Or “We’re going to find that company that can have some disruptive capability. But I look out there and I think Target. Absolutely will continue what they’re doing. I think they’re doing a great job. I think Kroger needs to ramp up what they should be doing. But Walmart and Amazon for the US, absolutely. They’re going to be very strong players for the years to come.

Sylvain Perrier:              Yeah. And I would add to that, you know, strong brands have the best opportunity to go global. And I think we’ve seen that historically with the Pepsi’s and the Coke’s of the world. And the McDonald’s. And certainly the Starbucks brand is a global brand. For sure. And I think the grocery retail industry needs to understand that to become good and to survive in this space means you have to acquire the experts. And those experts are not always going to be domiciled in your backyard.

Brittain Lad:                  You’re right.

Sylvain Perrier:              And you have to become culturally adept in learning how to transact and do businesses in other parts of the world. And without that knowledge, I don’t know how, how you proceed to move forward in this space.

Brittain Lad:                  Oh. I agree 100 percent. I agree 100 percent.

Sylvain Perrier:              Well, I wish I had a peek in that crystal ball a little bit more often. Brittain, always a joy talking to you. Can you share with our audience how do they get ahold of you?

Brittain Lad:                  The easiest thing to do is simply look me up on LinkedIn and reach out to me. I’m always responsive to anyone who reaches out.

Sylvain Perrier:              Perfect. Ladies and gentlemen, don’t forget to tune in to our next podcast where we’re going to be tackling a very interesting subject mark, and it’s called the infinite gain in grocery retail. Mark, can you share with our listeners, how do they get ahold of us on Twitter, on Instagram, and on Facebook?

Mark Fairhurst:             Great. Yeah. Absolutely. Um. The best way to reach out to Mercatus is via our website: www.mercatus.com. Where all of our social channels and handles are, uh, listed.

Sylvain Perrier:              Ladies and gentlemen, thank you

Participants

Sylvain-Perrier-Headshot

Sylvain Perrier

Sylvain is president and CEO of Mercatus Technologies, and the driving force behind the leading digital commerce platform in grocery retail today.

Brittain Ladd, Retail Operations and Strategy

Brittain Ladd

Brittain Ladd is a globally recognized expert in supply chain management, strategy and operations. He was most recently with Amazon where he was the leader for the worldwide expansion of Amazon Fresh and Pantry.


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