We have years of experience in this industry for the valuation of the business, equipment and real estate. Let us help you with our valuation consultation in all areas of the valuation of grocery store businesses. Below is a brief synopsis of the industry.
Description of Business
This category, commonly known as supermarkets, food stores, and grocery stores, are primarily engaged in the retail sale of canned foods and dry goods, such as tea, coffee, spices, sugar, and flour; fresh fruits and vegetables; and fresh and prepared meats, fish, and poultry.
General Industry Information
The grocer’s industry is associated with flat sales margins due to increased competition. Higher expenses have effectively minimized profit margins to razor-thin levels, particularly amongst smaller independent stores. The minimal profitability amongst smaller and medium-sized stores spurred a recent wave of merger and acquisition activity. Openings of store chains and discount food retailers, including the Wal-Mart super centers and Target’s food products expansions, have applied further pricing pressure.
According to the Encyclopedia of American Industries, approximately 15% of market share is attributed to independent stores. Markets that cater to ethnic food customers are gaining in terms of market share, as are warehouse-style stores that carry food items (namely Costco, Price Club). Gourmet shops are often able to justify higher prices for high quality merchandise, although sales for these shops tend to be more cyclical.
Large stores are better able to negotiate pricing terms from wholesalers, and may require exclusive distribution contracts with food manufacturers. Firms that are not vertically integrated may face challenges from supply interruptions. Generally speaking, steady patronage coupled with a favorable lease and in-place liquor licenses make for a marketable grocery business.
Red Flags and Risks
Above all else, it is important for a grocery store to have a solid long-term lease. Considering the slim profitability in this business, it is conceivable that an unfavorable lease could single handedly deteriorate an operation. Operating expenses that tend to slim margins for this business include worker’s compensation, fluctuating wholesale prices for goods, and salary increases for employees. Union activity is present in this industry, primarily by the United Food and Commercial Workers International. Utilities expenses are considerable, given the large quantity of refrigeration equipment. By virtue of the fact that grocers retail food products, there are many different regulatory agencies that certify and permit grocery stores. In addition to the FDA, grocery stores need to be in compliance with the Department of Agriculture, Department of Commerce’s National Oceanic & Atmospheric Administration (seafood retail), and the Bureau of Alcohol, Tobacco, and Firearms (alcohol permitting). Depending on the products sold, it is likely that additional permits are necessary.
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