It’s Only Going to Get Worse for America’s Grocers
As price wars loom, chains come under pressure in debt markets
Apollo Global makes unusual $50 million loan to Fresh Market
By Jodi Xu Klein, Craig Giammona, and Eliza Ronalds-Hannon, Bloomberg
October 11, 2017
Just over a month after Amazon.com Inc. ate Whole Foods, the shakeout in the American grocery aisle keeps getting uglier.
The latest sign of trouble: Private-equity giant Apollo Global Management recently tossed a $50 million lifeline to Fresh Market, the struggling high-end chain it took private only 17 months ago.
It will only get worse from here, analysts say. Under Amazon, Whole Foods has been cutting prices of marquee products including organic kale and avocados -- a harbinger of the price wars to come. Among the most vulnerable are small regional chains that were facing fierce competition even before Amazon showed up.
“The amount of pressure the Amazon and Whole Foods deal puts on the grocery sector is going to be very significant, and the full ramifications will only be seen over time,” said Antony Karabus, chief executive officer at HRC Retail Advisory, a retail turnaround and performance-improvement consulting firm.
That’s because Amazon founder Jeff Bezos has never really cared much about profit margins, while old-school grocery stores live or die by them. Expect Amazon to keep squeezing and squeezing.
Fresh Market looks like a case study in the troubled economics of the grocery business. When Apollo bought the chain, for about $1.4 billion, the private-equity firm was coming off successes in the industry. Apollo made about $2 billion turning around Sprouts Farmers Market, and before that, made a profit on its stake in Smart & Final Stores Inc., a warehouse grocery chain.
That was then. Nowadays the business confronts the deepest round of food-price deflation in 60 years. Low prices are great for consumers -- but bad for grocers. Nationwide, food prices rose in July for the first time in 19 months, according to the U.S. Department of Agriculture, but the increase, of just 0.3 percent, is hardly enough to make up lost ground.
Adding to the pressure, Kroger Co. and Wal-Mart Stores Inc., two of the largest sellers of groceries in the U.S., are trying to keep prices low to fend off German discounters Aldi and Lidl. Fresh Market is particularly exposed to the increased competition because it shares Whole Foods’ sweet spot: organic produce and gourmet products.
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