By - Jeremiah Grant
Last Updated - May 28th, 2024 3:31 PM
May 28
Did you know that the grocery industry in the United States is valued at over $880 billion? If you wish to sell, invest in, or grow your grocery store (or maybe even buy one), getting business evaluation services to know how much it is worth will definitely enable you to make wise decisions. This blog will help you understand everything you must know about valuing a grocery store: the main elements that affect the valuation, the methods used in the valuation, and much more. Let’s get started.
The U.S. grocery industry is large: it consists of nearly 62,383 supermarkets and grocery stores, on average achieving an even increased total annual revenue of $829.9 billion. The average size of a grocery store is 46,000 square feet and offers an average of 39,000 products. Over 73% of industry sales are from edible groceries and food products for home consumption. The remainder is from pharmacy products (10%), alcoholic beverages (3%), paper products (2%), cleaning supplies (2%), and various other general merchandise items (9%). Meat, seafood, poultry, and deli products encompass the largest category from this channel.
Each year, it boasts significant volumes but slim selling margins between 1% and 3%. It depends heavily on supply chain efficiency as a cost control. Walmart, Kroger, Costco, and Target are all powerhouses in the business and use their large stature to gain advantageous inventory purchasing terms that can be passed along to the consumer in the form of lower prices. The top four companies compose about 38% of the industry’s revenue, which can be defined as a moderate level of concentration.
Changes in the retail environment have resulted in store types that are considered traditional supermarkets, superstores, fresh format groceries, warehouse clubs, and hybrid supercentre’s, as retailers position themselves in different ways with consumers.
Grocery Store Valuation: Different Methods You Can Use
Method
Comparable Sales Approach
Income Approach
Earnings Multiple Approach
Principle
Compares subject store to recent sales of similar stores in the market.
Estimates the store’s future cash flows and discounts them to present value.
Applies a multiple to the store’s earnings to estimate its value.
Data Requirement
Requires data on recent sales of comparable stores.
Relies on forecasts of the store’s future earnings and cash flows.
Needs information on the store’s historical and projected earnings.
Complexity
Relatively straightforward and easy to understand.
More complex due to forecasting future cash flows and discounting them.
Moderately complex, involving the calculation and application of earnings multiples.
Sensitivity to Market Changes
Reflects current market conditions as it relies on recent sales data.
Less sensitive to short-term market fluctuations due to long-term cash flow projections.
Sensitive to changes in earnings and industry multiples.
Suitable for
Effective for valuing properties with recent comparable sales data.
Suitable for stores with stable and predictable cash flows.
Quick and useful for valuing stores based on profitability and industry norms.
Consideration of Risk
Considers market risk through comparable sales data.
Incorporates risk through cash flow forecasts and discount rates.
Assumes risk through the choice of earnings multiple.
Strengths
Utilizes real-world data for accurate valuation.
Offers a detailed and forward-looking assessment of value.
Provides a quick and relatively simple valuation method.
Limitations
Relies on the availability of recent comparable sales data.
Requires accurate forecasting and discounting, which can be challenging.
May not capture the full complexity of the store’s operations and future prospects.
Comparable Sales Method
This method is based on substitution, which, in simple terms, means that a buyer wouldn’t pay more for a store than he/she would for a similar one. This allows us to understand what propels a buyer to make a purchase and consider market value based on real transactions. The first step is to identify recent grocery stores with similar characteristics as the store under study in terms of size, location, age and more. Ideally, these comparables should be recent, say from the past one to two years, and should be from the same geographical location as the subject store. Subsequently, we obtain comprehensive information on each one, such as the sales price, revenue, store plan, etc. This puts a good groundwork for the analysis that is to be done. Then, we go into the specifics. You see, no two stores are the same. So, the comparison should be made based on some of the store’s attributes, such as location desirability, parking facilities, and brand reputation, with regard to the value of the store in question. Adjustments are fine-tuned to match the comparables to the subject store more appropriately. This may involve some quantitative analysis or, qualitative analysis, relying on the professional judgment that comes from the appraiser’s experience and market knowledge. This method is considered to be efficient as it involves actual transactions and characteristics of specific properties. However, like any other system, it is not without its challenges. It might be difficult to find truly comparable data, and so such changes have to be very much store-specific and market-oriented. It will not, for example, encompass certain characteristics or future possibilities of a particular store. However, when done properly, it gives you a useful way to look at the grocery store’s value, making it a reliable tool.
Imagine a grocery store in a suburban area with 10,000 sq. ft of space and focuses on organic produce. A valuation using the comparable sales method would involve finding recently sold grocery stores with similar sizes, locations, and product mix. Let’s say a comparable store of 12,000 sq ft in a neighboring town with a slightly less organic focus sold for $3 million six months ago. The appraiser would then adjust for the size difference (potentially a discount for the subject store) and the organic focus (potentially a premium). This analysis might suggest a valuation range of $2.7 million to $3.2 million for the subject store.
Income Approach (Discounted Cash Flow)
Here, I’d look at its potential to generate future cash flows. This is helpful because it’s not only illustrative of what the grocery store can earn, but it factors in the possibility of losing money and the time value of money in order to bring the potential earnings down to the present value. Here’s how I would go about it:
First, I analyze the historical financial data, which includes income statements, balance sheets, and cash flow statements, to determine the store’s past financial performance.
Next, I estimate the future revenues based on past growth, the state of the market, and your vision for the future.
Then, I would assess expected future operating costs based on historical activity data and industry averages. This will help me in forecasting your net cash flows by determining the future EBITDA and making some adjustments for Capex, WCC, and taxes.
It’s crucial to find the correct discount rate, which is often derived from the weighted average cost of capital for the grocery industry, with additional adjustments for certain store risks. This rate reduces the projected cash flow of each period to its present value.
But the real challenge of the income approach is in the assumptions. For instance, the expectations regarding future revenues and operating expenses can have a great impact on the result. Also, the decision-making process of which discount rate to use depends on certain risks as well.
This method is rather effective at identifying the opportunities and risks related to the grocery business through understanding the store’s ability to generate cash flows. It also assumes values for these parameters, which can sometimes be arbitrary, although the model is not overly sensitive to them. This presents the idea that alterations in the discount rate or growth expectations can substantially affect your business’s valuation.
Example
Assume that:
Projected cash flows for the next 5 years: $200,000, $220,000, $240,000, $260,000, $280,000
When it comes to grocery stores, the Earnings Multiple Approach is used often and is the simplest of all methods. This method involves making comparisons between the amount of earnings of the store under consideration and its counterparts. First, by using similar or referent transactions or public firms in the grocery industry, I’d obtain the financial data particularly earnings multiples including EV/EBITDA or P/E ratio. In the second step, I define the appropriate multiples, which I then use to value the particular store, taking into account the size and growth rate of the store location. This adjustment is important as it enables the development of estimates that are reflective of the specific traits of the store. I then use these adjusted multiples to come up with an estimated value of the store based on its earnings, whether it be EBITDA or net income. However, as it might have been observed, the Earnings Multiple Approach is simple in its truest form, and it does go hand in hand with the general market perception. It is good, provided that the data available in the market is also comparable. However, this may be a limitation in some cases. This approach might also fail to capture the strengths or prospects of the store, can leave the store exposed to changes in market conditions, and may also fail to reveal differences in risk/return characteristics between the store and its comparable. However, when accurate market information is presented, this technique gives a realistic picture of what the grocery store may be worth.
Example
This method would involve looking at recent sales of similar grocery stores or publicly traded grocery chains. Let’s say the average EV/EBITDA (Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization) multiple for comparable stores is 4.5x. If the subject store’s EBITDA is $1 million, the valuation using this approach would be $4.5 million (EV = EBITDA x Multiple). However, the appraiser might adjust this based on the subject store’s specific situation. For example, a stronger brand name or a more established customer base could justify a higher multiple.
The location is known to play a more critical role in determining the value of a grocery store. For example, a Manhattan store with 3000 pedestrians each hour will be worth more than a suburban store with 500 pedestrians each hour. Now, if the store is located near transport hubs, say near a subway station by 0.4 miles, the sales would likely increase by 30%. Retail stores in localities that have a higher median household income of above $75000 are likely to record better sales attributed to high purchasing power.
Store Size and Layout
Larger grocery stores say 20,000 sq. ft. and more, can support a wide range of products and provide a comprehensive and superior shopping experience, thereby increasing sales. A wide aisle space and clear and logical arrangement make it convenient for the customers to shop around, thus increasing the amount of time the customers spend in the store and boosting sales per unit area by 15-20%. In the stores, the product categories that are known to generate the most profitability, such as prepared foods, are recorded to be more dominant.
Financial Performance
Other important aspects of the financial analysis for valuations include the growth in revenues, the profitability and the ability to manage costs of the store. A grocery store that has a 10 percent growth in annual revenue and grossing 30 percent gross profit margin is most probably worth more than a grocery selling flat and diminishing gross profit margin. The analysis of the companies’ financial statements should focus on gross margin, operating margin, and ROI.
Customer Base and Loyalty
Companies with low customer turnover, high customer retention rates, and a strong customer base have more predictable revenue sources and are considered more valuable. This is good news for all kinds of businesses because, as a rule, customer loyalty programs can boost overall customer retention rates by 25%, at least, especially if the programs include material incentives or gift awards. The large, loyal customer base should also be mentioned – it helps to maintain stable sales during fluctuations in the economy, thus increasing the store’s worth.
Brand and reputation can boost consumer loyalty and increase the value of grocery stores. It is a fact that stores with high-quality goods, better service, and, most importantly, active participation in community events take the leading positions. As we have discussed, positive recommendations can lead to higher recognition and perceived value of the store, while negative events, such as product refunds, can reduce the value of the store.
Operational Efficiency
Some key operations elements, such as supply chain management, waste minimisation, and inventory turnover, all have their reflection on the shop’s profit and its value. Computer applications such as inventory tracking and automatic replenishment; well-trained personnel can increase organizational efficiency and positively affect the quality of service provided to customers, which, in turn, adds value to the store.
Find Out Your Grocery Store’s Value Today!
Our detailed grocery store valuation services offer insights crucial for expansion, investment decisions, or preparing for the future.
Common Challenges While Understanding How to Value a Grocery Store
Overlooking Hidden Costs
Revenue and profit margins are important for evaluating the store’s financial performance, but you must look at all the costs that the store incurs – ones that are often either unnoticed or hidden sometimes. These may include operational expenses such as maintenance and repair, fluctuating demand, especially during a particular period of the year, and other expenses incurred from time to time, such as compliance to certain legal requirements or litigation expenses. These costs should form part of the valuation of the asset to avoid unforeseen costs that may result in losses for buyers or investors.
Misjudging Market Conditions
The grocery industry is a highly competitive field and has inherent risks and challenges that relate to consumer preferences, the macroeconomic environment, and legal constraints. Since market conditions can be volatile, it becomes easy to overvalue or undervalue a store when a wrong estimate is made. For example, if we appraise a store just based on the sales made in previous years without considering other factors like new competitors or the latest trends emerging in the market, the value we determine will be incorrect. To minimize this risk, we perform a market study that involves these factors and market forecasts to have a realistic view of the market conditions.
Not having complete financial information leads to errors in the valuation process and even reduces its credibility. This may lead to common issues like discrepancies in financial statements, unreliable or outdated information, inconsistencies in practices, and more. To combat this, you need to work closely with the financial professional and perform in-depth due diligence to verify the accuracy of the data. Use information from audited financial statements, tax records, and industry benchmarks to have a comprehensive analysis of the store’s financial performance.
Conclusion
Valuing a grocery store demands a keen understanding of its unique dynamics and market influences. Our journey through this guide has shed light on the crucial factors shaping valuation, from location and financial performance to brand reputation and operational efficiency.
As we navigate the complexities of the grocery store industry, seeking expert guidance becomes paramount. Arrowfish Consulting stands ready with over 200 years of combined experience and a steadfast commitment to integrity and reliability. With our comprehensive services, including business valuation and appraisal, for industries like groceries/retail, construction, hair salon, consulting, and many more, we empower you to make confident, informed decisions for your grocery store venture.
If you’d like to get your grocery business valued, simply fill out a small form here, and someone from the team should contact you soon.
Jeremiah Grant is the Managing Partner of Arrowfish Consulting. In addition to acting as a primary liaison for many of the firm’s engagements, He primarily focuses on business valuation and economic damages expert witness assignments, in addition to forensic accounting and insurance claims analysis.
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