Food Retailing: Mergers, Leveraged Buyouts, and Performance

This research report provides a comprehensive description of the organization and performance of the food retailing industry. During the 1980s, the industry's operations and financial structure were dramatically altered by mergers and leveraged buyouts. Thus, it provides an excellent case for the study of "market for corporate control" theories that expect "good" management to take over "bad" management, thereby increasing the economic efficiency of an industry. The merger and leveraged buyout (LBO) wave in food retailing undoubtedly did benefit stock holders; however, a more efficient allocation of resources was not the primary source of these gains. Mergers and LBOs contributed to the trend towards fewer, larger supermarkets owned by large chains. The industry has split into strategic groups based upon store formats. The superstore and warehouse supermarket groups are most prominent, and have offered consumers a wide array of price service mixes. Entry barriers have, if anything, become more substantial as sunk costs in very large retail complexes and start up promotional expenses have increased. Also, as market concentration and segmentation have increased, the ability of leading firms to engage in strategic games that deter entry has increased. Given the industry's immediate need for cash flow to service the large amounts of debt that came with the mergers and LBOs, this industry has accelerated its adoption of cost reducing technology, most notably in store computers and check out scanners. The industry has also used its bargaining power against input suppliers to obtain lower prices and it has exercised market power in retail markets to increase revenues and net cash flow. Although 15 of the top 20 supermarket chains merged or underwent a buyout and, subsequently, were highly leveraged with debt, unlike highly leveraged firms in other industries, non of these firms has failed. The industry leaders have survived due to their ability to reduce costs and raise prices to generated higher cash flows to service debt.