Why Retail is a Bright Spot in Food Industry M & A March 21, 2019 Brian Todd President The Food Institute WWW.FOODINSTITUTE.COM MISSION The Food Institute (FI) is the single source for information, analysis and reporting for the food industry ‘from farm to fork’. FI provides balanced coverage of food trends through multiple channels so that industry professionals worldwide can tap in when and how they choose. Overall Food Industry M & A Slowed In 2018 591 527 503 505 410 316 311 2012 2013 2014 2015 2016 2017 2018 Source: Proprietary data from The Food Institute. Food Processors Account For 30% Of Deals Retailers Make Up 17%! 16% 30% Food Processors 3% Investment Firms & Banks 5% Foodservice & Restaurants Retailers Diversified Firms Wholesalers 17% Others 14% 15% Proprietary Information: Food Institute LLC, Upper Saddle River, NJ A Few Of The Findings • ConAgra acquired Pinnacle Brands • Ferrero acquired Nestles U.S. confections • General Mills and Smuckers invest in pets • Tyson buys lab-grown meat startups Supermarket M&A Rebounded In ’18… 36 36 36 29 28 22 19 1999 2012 2013 2014 2015 2016 2017 Proprietary Information: Food Institute LLC, Upper Saddle River, NJ On the Retail Side UNFI • SUPERVALU LIDL • Best Markets Walmart • Flipkart Spartan Nash • Martins Proprietary Information: Food Institute LLC, Upper Saddle River, NJ Available Soon at www.foodinstitute.com Contact Info Brian Todd [email protected] www.thefoodpartners.com Why Retail is a Bright Spot in M&A PRESENTED BY THE FOOD PARTNERS March 2019 MERGERS & ACQUISITIONS Retail Landscape • Amazon’s acquisition of Whole Foods was the catalyst for several major competitors radically altering their strategic plans • Amazon and Walmart are like two elephants wrestling and all of the other retailers in the U.S. are the grass • In May 2018, Kroger and Ocado partnered to build 20 fulfilment centers in the U.S. which will materially expand Kroger’s geographic market – improve efficiency – grow online business without any material investment in brick and mortar • In December 2018, Kroger announced it was offering autonomous vehicle grocery delivery in Scottsdale and announced the expansion to Houston in March 2019 • In January 2019, Trader Joe’s ended its home delivery service in Manhattan – “Instead of passing along unsustainable cost increases to our customers, removing delivery will allow us to continue to offer outstanding value” • In March 2019, the Wall Street Journal reported Amazon was expected to launch a new line of brick and mortar grocery stores in major U.S. cities • Ocado’s home delivery business in Great Britain for FY 2018 generated revenues of $1.9 billion – EBITDA was 5.6% of sales 2 MERGERS & ACQUISITIONS Retail Landscape • A number of players focusing on “the last mile” are losing money on every incremental dollar of business – the question will be whether these players can generate sufficient volume in a market to create a profitable business model • Consumer tastes and preferences continue to shift rapidly for what, when and where they buy food • Winn-Dixie CEO’s vision for the company is as a conventional store operator – not a recipe for success • Food retailers in the U.S can be separated into two categories – those that are “relevant” and have momentum and those that are operating “conventional” stores • Majority of supermarket chains in the U.S. are focusing on eliminating non-core stores to make material capital investments in the core business, including technology • In 2018, U.S. retail grocer store count declined by 2.5% - it can be expected that this trend will continue at the same level or increase the next five years 3 MERGERS & ACQUISITIONS Distribution Landscape • The number of grocery wholesalers has declined from 48 in 2003 to 28 in 2019 • During the same time period, 29 grocery distribution centers closed • UNFI’s acquisition of Supervalu is one of the most significant transactions in the grocery distribution space since Fleming’s liquidation in 2003 Business combination surprised the industry Caused a number of other grocery wholesalers to rethink their business model 4 MERGERS & ACQUISITIONS Transactions Mergers and Acquisitions Portfolio Versus Corporate Transactions • The number of stores sold annually since 100 90 2010 has fluctuated between 80 70 66 60 approximately 400 and 1,000 (excluding 60 50 46 24 48 50 43 17 44 the Albertson’s, Safeway and Delhaize 38 39 11 40 21 8 13 20 acquisitions in 2013, 2014 and 2015, 30 27 17 20 42 43 39 30 30 27 respectively) 10 19 22 24 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 Portfolio Corporate Stores Sold Average Stores per Transaction 4,500 4,170 80 70 4,000 70 3,500 60 3,000 50 47 2,500 2,253 2,069 3,400 40 31 2,000 30 877 21 1,500 1,335 25 907 991 20 13 15 1,000 651 19 582 6 18 8 384 10 230 1,192 13 500 918 770 0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018 Stores Sold Stores Sold Through Large Transactions[1] - Source: Company reports, news articles, The Food Partners - Includes announced but not yet closed transactions [1] Albertson’s, Safeway and Delhaize acquisitions in 2013, 2014 and 2015, respectively 5 MERGERS & ACQUISITIONS Bankruptcies Number of Supermarket Bankruptcies by Year Supermarket Bankruptcy Detail 16 No. of State 14 Company Date Filed Stores Filed Status 14 Seasons Kosher Supermarket 9/16/2018 8 NY Emerged 12 Schuette Stores 9/7/2018 2 IL Liquidated Southeastern Grocers 3/27/2018 582 DE Emerged 10 Tops Holding II 2/22/2018 169 NY Emerged 8 7 Marsh Supermarkets Holding 5/11/2017 44 DE Sold 6 Central Grocers 5/2/2017 n/a IL Sold 6 5 Thorne's Markets 1/20/2017 4 OH Closed 4 4 3 3 3 Fairway Group Holdings 5/3/2016 15 NY Emerged Fresh & Easy 10/30/2015 97 DE Liquidated 2 1 1 Haggen 9/9/2015 164 DE Sold The Great Atlantic & Pacific Tea 7/19/2015 297 NY Liquidated 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Dahl's Foods 11/10/2014 10 IA Sold Associated Wholesalers 9/9/2014 n/a DE Sold Farmers Foods (Highland Springs and Webb) 6/2/2014 2 VA Closed C&K Market 11/19/2013 60 OR Emerged • The number of supermarket bankruptcies Fresh & Easy Neighborhood Market 9/30/2013 167 DE Sold Midwest Gourmet Foods (Fox & Obel) 9/19/2013 1 IL Unknown has remained steady over the past several Mi Pueblo San Jose 7/22/2013 21 CA Emerged Belle Foods 7/1/2013 57 AL Sold years – although slightly up in 2018 Pro's Ranch Markets 5/29/2013 11 CA Sold Liborio Market 4/13/2012 8 CA Liquidated Michael’s Fresh Market 12/30/2011 7 IL Unknown • Since 2010, 5 companies with over 100 Associated Grocers of Maine 8/26/2011 n/a ME Dismissed Azteca Ranch Market 8/1/2011 n/a CO Liquidated stores have filed for bankruptcy Moo & Oink 8/24/2011 4 IL Liquidated Andronico's Market 8/22/2011 7 CA Sold A&P, Fresh & Easy, Haggen, Southeastern A.G. Ferrari Foods 3/30/2011 13 CA Sold Rizk-Co-Zann Foods Corporation 3/10/2011 1 PA Dismissed Grocers and Tops The Great Atlantic & Pacific Tea 12/12/2010 336 NY Emerged Empresas Cordero Badillo 11/12/2010 n/a PR Emerged • Average chain size is 18 stores (for Grand Mart International 10/19/2010 6 MD Sold Supermercado del Pueblo 4/1/2010 4 NV Unknown bankruptcies under 100 stores) Star Food International 1/5/2010 3 CA Unknown - Sources: The Food Partners, Capital IQ, news releases 6 MERGERS & ACQUISITIONS Looking Forward at Retail • Southeastern Grocers may be a repeat of A&P • At least one regional chain is currently for sale • In 2019, we anticipate 300 to 500 stores will be sold • Store closures continue at an accelerated pace • The rise in interest rates has had a minor impact on buyers’ appetite for the “right” stores • EBITDA multiples paid by buyers should remain stable • The consolidation of the retail grocery sector will strengthen the overall health of remaining retail base 7 MERGERS & ACQUISITIONS The Future: Defining a Strategy for Independent Retailers • In specific markets the increase in the minimum wage appears to have resulted in fewer people qualifying for government assistance resulting in a decline in same store sales – where did the sales go • Investing gross margin to maintain or grow top line sales did not prove to be successful strategy for most of 2018 • Price investment in the fourth quarter of 2018 and first quarter of 2019 had a positive impact on same store sales for many independents • Focus on fresh and local products • The difference between undertaking a minor or major store remodel is a balancing act to maximize value and the long-run viability of a store • Five year goal is to be the survivor in every market served 8 MERGERS & ACQUISITIONS Quotes of the Year • In 2019, meal solutions do not come in a box delivered to your house like last year They are now delivered by an Uber driver • Why do consumers pay a premium for a meal solution in a box that they can get at the grocery store when they could buy the ingredients and Google how to prepare it in a new and interesting way • We have two kinds of customers, those that shop at our stores and those that shop at our competitors’ stores • In the new world order, every supermarket in this country is a limited assortment store because on line shopping provides an endless aisle • The best quote for 2018 “I have two more sons in the business then I need” “How many sons do you have?” “Two!” 9 Food Institute M&A Webinar Topic: Retail a Bright Spot in M&A? Presenter: Karen Martin March 21, 2019 0 Presenter Biography KAREN MARTIN Karen specializes in mergers & acquisitions in the Food, Consumer & Retail sector.