For many investors, the assumption has been that grocery stores are a safe investment because people will always need to buy food. Also, they often have emphyteutic leases and usually don’t move, and other grocery stores don’t tend to set up nearby, so the catchment is consistent.
But here are some things to think about. There are big differences between different assets and business models, which need to be considered and understood if an investor is to successfully acquire in the sector – especially in today’s challenging world.
If we look at Tesco and Sainsbury’s, these businesses are run by retailers themselves who use their experience and insight to adapt easily to market conditions. In periods of market volatility, they lower their prices, modify their ranges and adapt to the needs and desires of consumers.
On the other hand, you have retailers owned by private equity firms. For example, Asda is now run by PE, which has some experience in retail, but not in grocery stores. Since the ownership changed, it doesn’t have the same retail brains powering it, and it’s lost its core USP: that products cost the same in every store, regardless of location.
Additionally, it appears Asda owners are increasingly turning their attention to expanding the business despite rising construction costs, while putting unnecessary pressure on distribution assets and creating smaller convenience stores. of area. Asda never had a chain of convenience stores, so it could be a good sub-brand, but it’s a gamble because of that lack of experience.
That would be a red flag for us. It puts extra pressure on a struggling business, and the focus on development tells me the group is here to make a profit through non-traditional retail methods. But Asda has a number of freeholds in excellent locations, and these could be hugely valuable if repurposed or treated as a sale and leaseback. This may all be part of a short-term strategy to unlock value from the business. This may appeal to some buyers, of course, but they should consider their risk and reward strategy with this in mind.
Morrisons is in the same boat, with private equity backing and a number of freehold assets that could be developed to free up cash. In fact, over the years PE has acquired many retail assets. We have to remember that PE is in this game to pay themselves – their primary focus is not retail itself. We very rarely see private equity-backed retail adapting to market conditions, for example, or brands making their own decisions for their local catchment areas.
If we were an investor looking to truly invest in grocery store-leased assets, we would first ask ourselves: are we investing in an alliance that grows stronger, adapts to consumer wants and needs, or is at the request of a non-retail focused entity?
Next, we would look at the individual store itself. Where is its catchment area, what competition is there nearby, what range of products does it sell? This last question is important because if it has a fresh bakery, for example, or uses independent local produce, it provides an attractive offer for people who want to both buy for convenience and support local. It also means the store is refining its offering to support local customers, which means it will be more successful and therefore more valuable to any investor.
Then there’s navigating the smoke and mirrors of various brands that impose “requirements” for smaller store formats to appear active, thriving and expansionary, while shedding behind-the-scenes assets. It’s also important to understand how some brands work better as franchises in some places or structural arrangements in others, versus those that rely on the company’s brand nationally.
Add to that the complexity of energy bills and business rates, and it’s a tough world to navigate. But one thing is certain: opportunities remain for savvy investors.