For many investors, the assumption has been that food stores are a safe investment because people will always need to buy food. In addition, they are often on long leases and don’t generally move about, and other food stores don’t tend to set up next door, so catchments are consistent.
But here’s some food for thought. There are vast differences between different assets and business models, which need to be examined and understood if an investor is going to acquire successfully in the sector – particularly 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 to market conditions easily. During periods of market volatility, they put their prices down, change their ranges and adapt to what consumers need and want.
On the other hand, you have retailers owned by private equity firms. For example, Asda is now run by PE, which has some retail experience but not in food stores. Since the ownership changed, it does not have the same retail brains powering it and it has lost its core USP: that products cost the same in every store no matter the location.
What’s more, it appears Asda’s owners are increasingly looking into the development side of the business despite rising construction costs, while putting unnecessary pressure on the distribution assets and setting up smaller neighbourhood convenience stores. Asda has never had a convenience chain so it could be a good sub-brand, but it’s a gamble because of that lack of experience.
This to us would be a red flag. It puts further pressure on a business that is struggling, and the development focus tells me the group is there to make profits via non-traditional retail methods. But Asda has a number of freeholds in excellent locations, and these could be extremely valuable if repurposed or transacted as a sale and leaseback. Perhaps this is all part of a short-term strategy to release value out of the business. This may appeal to some buyers, of course, but they need to examine their risk and reward strategy with this in mind.
Morrisons is in the same boat, with PE backing and a number of freehold assets that could be developed to release cash. In fact, over the years, PE has taken on a lot of retail assets. We must remember PE is in this game to pay themselves – their core focus is not retail itself. We very rarely see PE-backed retail adapting to market conditions, for example, or brands making their own decisions for their local catchments.
If we were an investor looking to genuinely invest in food store leased assets, we would ask ourselves first: are we investing in a covenant that is going from strength to strength, adapting to consumer wants and needs, or is it at the behest of a non-retail-focused entity?
Then we would look at the individual store itself. Where is its catchment, what competition is there nearby, what range of goods does it sell? This latter question is important, because if it has a fresh bakery, for example, or uses local independent produce, this provides a compelling offer to people who want to both shop for convenience and support local. It also means the store is refining its offer to support local customers, which will mean it performs better and thus be more valuable to any investor.
Then there is navigating the smoke and mirrors of various brands putting out ‘requirements’ for smaller store formats to seem active, successful and expansionist, while actually disposing of assets behind the scenes. It’s also important to understand how some brands work better as franchises in some locations or structural agreements in others, versus those which rely on the corporate brand nationwide.
Add in the complexities of energy bills and business rates, and it’s a tough world to navigate. But one thing is certain: opportunities remain for savvy investors.
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