Sluggish economy? Frugal shoppers? Then merge to boost economies of scale and lower prices. It's a proven formula in the grocery sector, one of retail's lowest profit margin arenas. As we contemplate Safeway-Albertsons as a combined entity, we see unfolding the uncertain future of the entire mid-market grocery business. 

The challenge with managing large, national grocery chains is the diversity of their operating zip codes. Many of them grew through opportunistic real estate transactions, putting their stores in a broad array of neighborhood types. Each type has its own local food culture that is a combination of regional food cultures and local residence patterns. For example, nearly 1 in 5 Safeway stores operates in a zip code with twice the national average of college-educated adults, a group strongly correlated to above-average grocery spending and a desire for fresh, less processed and local foods. Trying to satisfy these shoppers along with those in more-distressed zip codes under a unified operating strategy is a serious challenge.

Yet as the Safeway-Albertsons deal was announced last week, the rationale was macro-economic: The merger would facilitate both retailers winning as a combined entity on price. This is a bold aim, given the rise of Walmart in food retailing and of Aldi, WinCo and other hard discounters with more-innovative operating models not beholden to either wholesalers or the slotting and promotional fees from consumer packaged goods suppliers. 

A strict price leadership strategy to revamp a mid-market national grocery chain ignores the shoppers in zip codes who are hungry for modern, contemporary fresh grocers and cements corporate strategy around a race to the bottom. In the case of a combined Safeway-Albertsons chain, it could easily accelerate the underperformance of former Safeway stores in upmarket/educated zip codes and eventually lead to store closures that are not anticipated right now. 

Why? Because stores whose management culture and operational priorities revolve around price leadership have trouble addressing the needs of shoppers who flock to the likes of Whole Foods and Mariano's Fresh Market. The latter kind of store needs phenomenal staff who are passionate about high-quality food and connected to urban food trends. Albertsons' decentralized management model may be an asset in this regard, allowing a new entity to tailor its operations more effectively than an independent Safeway has been willing to do in the past. 

Albertsons faces an enormous market opportunity by acquiring this many high-value store locations. But if it doubles down on price leadership, it will sacrifice the chance to compete for much larger growth opportunities that have significantly less competition. We believe that maximizing long-term returns on all Safeway-Albertsons store locations requires a more creative, innovative approach. To secure profit at the neighborhood level in today's heavily bifurcated landscape will require multiple strategically run banners and dedicated operational cultures. 

Harvey Hartman is founder and chairman of The Hartman Group. James Richardson, Ph.D., leads Hartman Strategy, which works with the largest and most respected global food and beverage companies to identify, create and seize growth opportunities that align with constantly evolving food culture. 

Questions or comments? Contact Blaine Becker, Senior Director of Marketing, at: blaine@hartman-group.com