New Hampshire’s C&S Wholesale Grocers holds the key to supermarket megamerger

With this deal, C&S has arrived at a critical moment. The company has evolved from a family-owned supplier serving small New England grocery stores into one of the country’s largest privately owned firms, with $30 billion in annual revenue. And by buying Kroger’s stores, C&S appears willing to wade deeper into the retail grocery business, where it could find itself in bruising competition with industry leviathan Walmart.

C&S already is the largest grocery wholesaler in America, admired by ally and foe alike. But its aggressive move into retail also has some in the industry scratching their heads. The company is risking its reputation — and balance sheet — operating stores in a segment in which many of its current clients are already struggling to compete with Walmart.

“It’s simply impossible,” Brittain Ladd, a retail consultant and former strategist with Amazon, said of C&S’s prospects as a competitor to the biggest players in the field. “There are not enough stores for C&S to own.”

The ongoing realignment comes at a time of upheaval for the grocery industry. Both corporate-owned chains and independent grocers have been steadily losing ground to Walmart in recent years, and many are looking for ways to claw back market share.

In public statements and conversations with analysts, Kroger has argued that the merger would create a large-scale retail alternative that would help increase selection and push down prices especially during an era of inflation.

Strong competition, at least in theory, boosts innovation and helps keep prices low by preventing any one player, like Walmart, from controlling too much of the market. (Walmart did not respond to a request for comment.) The discount giant currently owns 21 percent of the industry, more than the next three largest companies combined.

To compete with Walmart, supermarkets need size and scale, which is why Kroger wants to buy Albertsons, the parent company of Shaw’s and Star Market in Massachusetts. But C&S’s motives are less clear, because its retail business, even with 400 additional stores, is still too small to challenge Walmart.

C&S declined interview requests for this story. But one thing’s for sure: the company is highly opportunistic, especially when it comes to buying distressed but still valuable assets at fire sale prices. C&S wants to expand but only on its terms, industry observers say.

“They are very, very well managed,” said Gerald Storch, a former top board director at Target and Supervalu. “They have the discipline to grow.”

Founded in 1918 in Worcester by Israel Cohen and Abraham Siegel, C&S for much of its history supplied food to small independent stores and military commissaries in the Northeast, mostly New England.

Starting in the late 1950s, C&S started to land big supermarket accounts like Big D and A&P, allowing it to rapidly expand.

Under Rick Cohen, the son of the founder, the company in 2003 paid $400 million to purchase rival Fleming Co.’s distribution business out of bankruptcy, making C&S a truly national wholesaler.

“They did one of the most brilliant acquisition deals in any type of commercial retail, wholesale history,” said Burt Flickinger, managing director of Strategic Resources Group consulting firm in New York.

In 2014, C&S struck again, paying $288 million to purchase assets of Associated Wholesalers out of bankruptcy. The company’s size and scale has endeared it to increasingly large grocery retailers, most notably Target, where groceries now represent its second-largest business line.

However, supermarket chains, the core of C&S’s wholesale business, have been struggling of late. Not only has Walmart continued to dominate the industry but newer formats like dollar stores and ultra discount chains (Aldi, Save-A-Lot) have been stealing market share.

Faced with higher prices on everyday items, inflation-wary consumers have been flocking to retailers searching for the lowest price, which doesn’t bode well for traditional supermarkets, including regional players like Star Market, Shaw’s, and Quincy-based Stop & Shop, which is owned by Dutch grocery firm Ahold.

That’s a trend that won’t go away anytime soon, analysts say.

“We believe the lingering impact of higher food prices will continue to shape consumer spending … with many shoppers continuing to favor money-saving opportunities over quality and convenience,” according to a report by Coresight Research.

Flickinger says a Kroger-Albertsons union will help it compete better with Walmart by creating the country’s first true national supermarket chain.

But Kroger faces a good deal of skepticism from the FTC. Under its chair, Lina Khan, the agency has taken a hard line against big mergers. The FTC also recently filed a lawsuit against Amazon, accusing the tech giant for using its market power to stifle competition.

At first glance, Kroger has a strong case, some analysts say. The US grocery market is still highly fragmented. Even a combined Kroger-Albertsons would only control 13.4 percent of the market, far less than Walmart.

But the FTC doesn’t just only look at overall market share, said Jeff Jacobovitz, who previously served as an attorney with the agency’s Bureau of Competition.

To win FTC approval, Kroger needs to find a strategic buyer for hundreds of stores who will operate them for a long time and not just flip them for profits, said Jacobovitz, who now works as a senior counsel to the law firm Arnall Golden Gregory.

Flickinger believes that C&S fits that criteria. The company, which currently owns the Piggly Wiggly and Grand Union chains, has been hiring experienced executives who know how to run retail, including Mark McGowan, a former top executive at Ahold who oversaw Stop & Shop for four years.

Besides, C&S has proven that it knows a good deal when it sees one. The $1.9 billion it will pay for Kroger’s stores is relatively cheap, experts say.

C&S ultimately knows it can’t solely rely on its wholesale business for growth, Flickinger said. If Walmart continues to crush supermarkets, there won’t be any supermarket left for C&S to supply. Therefore, C&S has every reason to make sure supermarkets and independent grocers survive, even if that means owning some of them, Flickinger said.

“C&S correctly sees that the future is going to be a lot of privately held independent stores, either single stores and/or groups,” Flickinger said. “C&S wants to have the size and scale of independent chains and groups to go with its buying and operating skills.”

“C&S wants to control its own destiny,” he said.

Thomas Lee can be reached at thomas.lee@globe.com.