Giant and Food Lion Might Be Merging: Shoppers Should Shrug

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Stephan Savoia/APStop & Shop is one of the supermarket brands operated by Royal Ahold.
Don't look now, but America's grocers are merging again.

Two years after Kroger's (KR) purchase of Harris Teeter, and a year after Safeway sold out to Albertson's, the parent companies of the Giant and Food Lion supermarket chains (Netherlands-based Ahold and Belgium's Delhaize, respectively) have recently began discussing a merger.

Ahold also owns the Stop & Shop brand, while Delhaize has Hannaford in its pocket. Through these chains, the two foreign-owned holding companies collect the majority of their revenues in the U.S. And by merging all four chains, these firms would leapfrog U.S. rivals Publix and H-E-B. Together, they'd be America's fourth-largest grocer, operating roughly 2,000 stores, and controlling 4.6 percent of the supermarket ... er, market, in the United States. They'd lag only the aforementioned Kroger, Albertson's and also Walmart (WMT) in size.

So Is This Good News or Bad News for Shoppers?

Well, it might not be "bad" news necessarily. After all, this is a simple change of ownership of chains that are already here. But it's also not good news.

Multiple reports have emerged in recent months regarding the state of the supermarket market in the U.S. -- who's hot, and who's not, in the opinion of consumers. Unfortunately, none of the supermarket brands that would merge and get bigger as a result of an Ahold/Delhaize deal make it onto the "hot" list.

Nationally, shoppers tend to prefer supermarketeering giant Kroger. Regionally, consumers give top marks to Publix and Walmart in America's South, to Hy-Vee and Meijer in the Midwest, and to Costco (COST) and Trader Joe's in the West. In the Northeast, Wegmans and Trader Joe's (again) reign supreme. But nowhere in the country do any of the chains managed by Ahold or Delhaize rank in even the top three.

At this point, it's probably worth reminding you that one of these grocery stores recently won the top spot for highest "corporate reputation" out of America's "100 most visible companies," in a survey conducted by Harris Poll. That would be Wegmans, a Rochester, New York-based grocer whose 85 stores make it less than 5 percent the size of this new Europe-owned "Giant Lion" that will soon prowl our supermarket aisles. So once again, we see that just because Giant's and Food Lion's parent companies may get bigger as a result of this deal, there's no reason to expect this will make them better.

Caveats and Provisos

Granted, both Ahold and Delhaize are somewhat hobbled by the fact that they don't compete in either the Midwest or West, and so can't "rank" there at all. But both companies are present in the Northeast and South. In the Northeast, here's how they rank, according to Harris:
  • Stop and Shop ranks 5th (out of nine grocery store chains rated) in the Northeast.
  • Hannaford is one rung lower in 6th place.
  • And Giant didn't even make it onto the list.
Food Lion, with only a limited presence in the Northeast, wasn't evaluated in that region. However, in the South, where both Giant and Food Lion do operate, neither company made it onto Harris Interactive's list of the top 9 stores in that region.

The Upshot for Consumers

Analysts who've taken a good look at the proposed merger between Ahold and Delhaize argue that it has "strategic merits" (Jefferies). As a bigger business, the merged supermarket holding company would enjoy "scale advantages in purchasing power," and could also save money by "combining headquarters, management structures and logistics" (Citigroup).

Stock market investors like these kinds of moves because they enable the companies to grow their profits by cutting their costs. From a consumer's perspective, however, we'd much prefer that the companies pass along any cost savings they gain to consumers.

In an ideal world, that's what would happen after this merger. But recall that, when reporting on Wegmans' top marks for "reputation" earlier this year, Harris Poll noted that Wegmans earned its ranking only after "years building a sterling reputation in the communities they serve, through its employees, one shopping experience at a time."

Conversely, merging supermarket chains Giant, Food Lion and all the rest have spent years ... not building up a reputation equal to Wegmans'. That suggests that even in an ideal world, where Ahold and Delhaize use their cost savings to benefit consumers rather than pad their profits, improvements might be a long time in coming.

Moral of the story: Don't hold your breath.

As a long-time East Coast resident, Motley Fool contributor Rich Smith had many opportunities to shop at both Giant and Food Lion. At the time, neither one seemed remarkably bad ... but now that he lives in the Midwest and can shop at Kroger, Rich knows better. He owns none of the stocks mentioned above.

The Motley Fool recommends and owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days, and check out The Motley Fool's one great stock to buy for 2015 and beyond.
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