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As Independent Grocery Stores Wane and Amazon Looms, Wholesale Middlemen Merge
Last week, organic and natural foods distributor, United Natural Foods Inc. (UNFI) announced plans to buy the largest publicly traded grocery wholesaler, Supervalu, for just under $3 billion. The deal is largely a defensive move by UNFI after Amazon bought their largest customer, Whole Foods.
The takeover is the latest step in a larger trend of grocery consolidation that has greatly reduced the ranks of independent regional groceries and the wholesalers that supply them. As supermarkets and wholesalers try to “get big or get out,” producers at the end of the supply chain feel the squeeze from fewer and bigger buyers.
Between 1992 and 2013, the market share of America’s top twenty grocery stores increased from 39 percent to 64 percent, while the share of just the top four chains more than doubled, from 17 percent to 36 percent. This shifted the majority of the grocery business from smaller regional chains to increasingly large national brands. Today, independent grocers represent only 25 percent of all grocery sales.
The larger a grocer becomes, the more likely they are to cut out the middleman. “Once you get to a certain level it’s easier to have your own warehouses and be self-supplied,” explains grocery analyst David Livingston of DJL Research. WalMart, Kroger, Costco, and Publix are among the chains that increasingly rely on in-house distribution networks.
“There are fewer big wholesalers left today,” says Neil Stern, Senior Partner for retail analysts, McMillan Doolittle. Indeed, between 1997 and 2000 alone, there were 105 grocery wholesaler mergers and acquisitions. In ten years, the market share of the four largest independent grocery wholesalers went from 52 percent in 1997 to 87 percent in 2007. This consolidation has continued. In just the past two years, Supervalu acquired regional wholesalers Central Grocers, Associated Grocers of Florida, and Unified Grocers.
Even though Supervalu bought many of its rivals, the wholesaler’s customer base continued to shrink. “Supervalu’s customers include small- to mid-sized supermarket chains,” Stern says. These are precisely the grocers that have lost the most market share over the past three decades.
To compensate, Supervalu began to vertically integrate into retail in the 1970s, through the buying of regional grocery chains. In 2006, Supervalu briefly became the third largest grocery retailer in the US, when it bought national grocery leader, Albertson’s, taking in their network of 2,150 stores.
But this takeover strategy left Supervalu heavily burdened by debt, and after just seven years the wholesaler sold Albertson’s and started divesting the rest of its retail business. The company ended up with over $1.5 billion in debt and lost 90 percent of its stock value in the process.
UNFI, meanwhile, since 2000 has acquired 19 distributors, manufacturers, and private label suppliers, and their sales have grown at a compounded rate of 12.9 percent each year. They primarily supply organic and natural foods to conventional supermarkets and independent natural chains. But, like Supervalu, in recent years UNFI has come under more pressure as their customer base has consolidated.
In the case of UNFI’s largest customer, Whole Foods, the corporation started to consolidate the organic grocery market in 1988, acquiring thirteen natural grocery chains in 20 years. Today, Whole Foods has 487 locations and accounts for a third of UNFI’s revenue. UNFI’s reliance on Whole Foods was not a major liability until the e-commerce goliath, Amazon, absorbed the chain. Some analysts believe Amazon may soon move to cut UNFI out of the business, much the way other major grocery chains have done.
“They’ve gotten a huge threat from Amazon,” explains Livingston. “They’re probably going to develop their own ways of distribution and kick UNFI to the curb.”
As UNFI and Supervalu combine their supply chains some suppliers, from packaged food companies to produce aggregators, stand to lose. “There might be some overlap in suppliers,” Stern explains, and redundant suppliers could lose contracts. But because UNFI and Supervalu generally fill different niches, Stern argues that many suppliers may benefit from access to new markets. “More scale and size…, could allow suppliers to expand their business,” Stern says.
In general, studies show that as the number of food buyers shrinks, suppliers face greater price pressure. As early as 2000, agricultural economists at UC Davis reported that growing concentration in grocery retail and wholesale created “fewer but larger buyers” for produce growers and shippers, and argued that such big “buyers may enjoy an unfair advantage in bargaining with suppliers.”
If UNFI’s big bet fails, the playing field could shrink further still. “What they’re taking on is risky,” says Livingston, “it’s not a simple acquisition.”
What We’re Reading
· A recent profile in Fast Company highlighted the work of California Harvesters, a worker-owned labor trust that aims to increase farmworkers’ wages, improve working conditions, and bring workers into the decision-making process to create a more stable and respected farm labor force.
· This summer, the Trump administration has consistently sided with national corporate interests over global public health consensus – derailing the UN World Health Organization’s efforts to endorse taxes on sugary drinks, limit baby formula marketing, and the latest, set new guidelines for antibiotic use in livestock.
· The organic cereal and snack company, Nature’s Path, recently resigned from the Organic Trade Association on the grounds that the group increasingly represents large corporate interests, including members who dabble in both organic and agrichemical-based business, such as Cargill and BASF.
About the Open Markets Institute
The Open Markets Institute promotes political, industrial, economic, and environmental resilience. We do so by documenting and clarifying the dangers of extreme consolidation, and by fostering discussions of ways to reestablish America’s political economy on a more stable and fair foundation.
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