Private equity loves supermarkets, but do retailers benefit?

FoodDive – While they gravitate to the steady cash flow grocers produce, a focus on quick turnarounds and return on investment isn’t always the best for retailers in a competitive market.

In a grocery retail market chock-full of competition, chains are increasingly finding that in order to make money, they have to spend it, too— and oftentimes lots of it. Loyalty programs, systems updates, price promotions, store remodels and other initiatives all drive differentiation in the marketplace.

For private equity firms, which thrive on a low-investment, efficiency-driven management, these programs are in sharp contrast to their philosophy. This has turned supermarkets into a prime target of private equity firms, which have increased their ownership and investment activity in the space. With a goal of buying low and selling high, many enterprises look to improve a retailer’s balance sheet and then make a quick exit, often within three to five years.

According to Walter Deacon, principal at Boston Retail Partners, hiring strong leaders and letting them set company strategy is a key to success for private equity firms like Cerberus.

“In most cases, the private equity firm will help put the pieces in place, but relies on the retailer’s management team’s decision-making to achieve financial success,” he told Food Dive.

Amazon’s foray into grocery retail through Whole Foods has already devalued many retailers, and could have even more of an impact once the e-commerce giant tinkers more with the stores. Combined with the downward price pressure exerted by discounters Aldi and Lidl, as well as Walmart, the fallout could be a collection of attractive pickups for private equity, according to Deacon.

“With more under-performing grocers, private equity firms will have their eye on this market, and it is very likely acquisition activity will heat up,” he said.

But will private equity be able to navigate an increasingly disruptive industry? While sources said it depends on the firm, they note that private equity generally has adjusted to the nuances of operating in the grocery space. This insight, along with a keener focus on operational efficiency and controlling costs, could benefit struggling retailers.

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