Supermarket Roll-Up Strategy
The supermarket industry in the United States is, and has been for many
years, a very fragmented industry. In the last 20 years or so, there have
been many changes, with Wal-Mart, Kroger, and, most recently,
Cerberus/Albertson’s dominating the space. This has led to,
unfortunately, many independent grocers shuttering their operations
amid the increased competition, often without a fight. At the same time,
however, a number of small-to-mid-sized chains have actually grown
and prospered, mainly by emphasizing their far superior customer
service, the quality of their perishable products (produce, meat deli,
bakery, and seafood), their community involvement, and their familyowned roots.
There are literally hundreds of small grocery store chains across the
United States, companies with 2 to 40 stores, which still exist, and are
thriving today. Most of these chains are very successful in their own
right, as evidenced by their survival of the Wal-Mart – Kroger
domination discussed above, as well as tougher economic conditions
and additional increased competition from other retail channels such as
dollar stores, drug stores, warehouse clubs, etc. There are others that
have been in business for many years, and are in their second or third
generation, yet have no future direction nor exit strategy, should they
decide to exit their business. These smaller, regional chains are
generally not sold to the larger chains (strategic buyers), as the larger
chains tend to grow more organically. Plus, even if they could sell to a
larger chain, there is a mentality in the business that most smaller
grocers have absolutely no desire to sell to their larger rivals, who have
been trying to put their chain out of business for, in some cases,
decades. The owners, especially those whose family has owned the
business for multiple generations, do not want to see their chain sold off
in piecemeal. This is usually the case with bigger buyers due to both FTC
concerns and their disinterest in deep market saturation beyond their
own organic growth. The owners want to leave behind a legacy for their
family, and so they usually are unwilling to sell to anyone not willing to
keep a majority of their stores, and in some cases keep their long lasting
name on the stores.
There have been a number of private equity-led buyouts of supermarket
chains, principally over the last 25 years, some very successful, and
some not as successful. The majority of those buyouts have focused on
either well-documented turnaround situations (Marsh Supermarkets,
BI-LO/Winn-Dixie) or fairly large chains that have an opportunity to
grow even larger by acquiring other large chains (Tops Markets,
Cerberus/Albertson’s). There have been a few smaller chains acquired
by private equity owners (Kings Supermarkets, Sprout’s), but those
have been very rare, and in almost every case, have a very defined niche.
Most of the privately-held chains mentioned above, therefore, have no
exit strategy. Unless they can somehow continue to grow organically, or
by merger with or acquisition of one of their peers, they have no ready
outlet by which they can exit their business. Even though, in most cases
they are and have been very successful, they have no way to cash out on
their life’s work, unless their wholesaler has an interest in acquiring
some of its retail customers. This has happened on numerous
occasions; however, most of those deals have not been successful in the
long term for the wholesaler acquirer for a variety of reasons, not the
least of which is the fact that wholesalers are generally not retailers in
any sense of the word. It is a totally different mindset running retail
outlets versus running a wholesale business. For those reasons, this
activity has slowed greatly in the last several years, with most activity
related to a last-ditch effort by a particular wholesaler to continue
supplying a retailer, not due to any real interest in owning retail.
WPX Capital and its principals have researched the supermarket
industry extensively, and believe strongly that there is a niche for an
investor to roll up a number of the aforementioned mid-sized grocery
chains over the next 5-7 years. This strategy has been done successfully
in a number of different industries, but never in the grocery industry.
Why not? We think the main reason is that no one understands that the
supermarket industry is still very fragmented; most think that the
“independent grocer” is a thing of the past. Quite to the contrary, the
independent grocer is alive and well in most parts of the country,
contributing greatly to the communities in which they operate stores.
Others might not understand how a centralized back office can be
beneficial, and how the back office functions do not have to be located in
the markets the stores are actually located in. Many of the retailers
would grow, but for the lack of capital or age of their owners, and are
passing up growth opportunities daily. Many of them would sell, but do
not know who to sell to or how to go about the process. Our current
database contains information on 400+ such retailers, most familyowned, with combined sales in excess of $40 billion. Also, many of these
retailers not only own their very successful retail grocery business, but
also own some or all of their real estate as well, which creates another
opportunity for us as we acquire these chains over the next several
years.
We propose to partner with an investor to acquire 10-15 such chains
over the next 5-7 years. We would provide a constant source of quality
opportunities, work with our investor partner to acquire the individual
chains, provide the necessary research to enable the individual chains to
grow where viable opportunities present themselves, and to refresh and
remodel their existing units to enable them to better compete in their
markets.
This strategy should result in an increasing value for each chain and the
value of the whole over the next 5-7 years prior to an exit. We will put a
General Manager in place at each acquired chain, whose pay would be
highly incented, and whose job it would be to run that chain for
maximum sales and profitability. WPX Capital and our affiliated
partners would provide the ongoing strategic direction for the
individual chains, constant additional deal flow to our investor partner,
and our affiliate White Phoenix Advisors will provide centralized back
office administrative services to all acquired chains (IT, accounting,
payroll, human resources, marketing, real estate, etc.) for less than they
are currently paying to provide these services in-house. White Phoenix
Advisors was formed specifically to provide strategic consulting and
back office services to retail companies, principally small-to-midsize
grocery companies, and specializes in advising organizations on the
future direction of their company.
We bring to the table relationships with a number of the large wholesale
grocers across the country, which would be vital to the roll-up strategy,
as we don’t feel that geography plays an important part in the strategy,
as long as the acquired chains are serviced by wholesalers that support
and service independent grocers, and are focused on making their
independent grocers successful. We also know many of the retailers
personally that would be potential targets in this effort in the years to
come. Those that do not know us will trust us over other investment
bankers or brokers (the grocery industry is a tight community) as we
have owned stores like they currently do. We know the struggles and
successes they are enduring.
We feel that a rollup strategy as discussed above could, over a 5-7 year
time horizon, grow to an entity well in excess of $1 billion in sales, and
at that size, could then be a very attractive entity for a number of
potential exit strategies for the investor sponsor. Again, we don’t feel
that geography is a huge issue in this strategy, but do feel that it is
extremely important that each individual chain acquired continue to be
locally run and managed (from an operations stand point), so as to
maintain the many positive characteristics and goodwill in its
communities that has made the chain successful for many years. It is
also imperative that each chain maintain its own identity on a postacquisition basis, that most employees be retained going forward, etc.,
while at the same time taking advantage of the back office synergies
discussed above.
WPX Capital is well suited to lead this project, in conjunction with an
investor partner. Our principals have worked at all levels in, and have
actually owned, independent retail supermarkets, and have had both
successes and failures in this industry, which experiences will lead to
future successes based on the knowledge gained from the past. We
welcome an opportunity to discuss this exciting project with you at your
convenience. We are confident that you will be as excited as we are at
its prospects for great success and excellent returns for your group.