There is over 65 thousand Grocery Store in America employing over three million people and selling $700 billion dollars of groceries annually.
Most people visit such stores on a weekly basis and don’t think much about it. But have you ever considered what it takes to bring those products to you daily, fresh, and in a presentable way?
I am not talking about the superstores like Safeways, or Costcos, or Krogers. I’m talking about your local Grocery Store owned and operated by families and businessmen.
Let us see what a grocery store is worth…
Major trends within the grocery industry are –
- Sublease and add on services – many grocery stores are subleasing space to banks, coffee shops like Starbucks, video libraries, in-store dining, etc. this enables them to enjoy stable cash flow, and provides their customers well-rounded shopping experience.
- Self-checkouts – to curb the value of labor, many grocery stores have installed self-checkout counters.
- Private label food – many grocery stores have begun to develop their private labels for popular items to scale back dependence on suppliers and improve margins. Plus, it allows them to develop their own brands like Costco’s Kirkland, which we discussed in Episode 3 is worth $75 billion by itself.
Factors that affect the valuation of a grocery store –
- If the location is leased or owned
- What is that the duration of the lease
- Location of the store – what quite demographics frequent the store and who are its biggest competitors
- Is it a franchise operation
- Does it’s a history of strong operations and financials
Many times you’ll hear things like my corner grocery store, you know the one owned by Jimmy, made ten million dollars last year! At this time I’m sure you’re thinking, Jimmy, is rich, why the heck does he ought to run a grocery store?
Well… let’s run the numbers, shall we….
Grocery stores are a low margin and high volume business. The average grocery store’s net income is often 1-5%. Yeah, only 1-5%! Closer to five if they’re all organic. So if Jimmy’s store is doing $10 million in sales, Jimmy’s pretax profit could also be between $100-200k!
That is it!
Don’t forget a grocery store comes with plenty of problems including – theft (by employees and customers); wastage and loss.
But the trick to running a successful grocery store may be a stable customer base. Keep them returning for more and more, sort of a casino. And eventually, you’ll begin ahead. Don’t forget even the casinos have only a small advantage over the player. But once a player is hooked, and keeps playing, casinos win. Why does one think they provide the freebies like room comps, and buffet coupons, or for personal jets for whales!
Grocery stores can sell between 0.1 – 0.30x on revenue. Average between 0.15-0.25x, plus the value of inventory in hand. The swing between 0.15-0.25x depends on the systems and processes in place to have the operations run smoothly. Which include proper inventory and POS; strong relationships with suppliers and community leaders. All eventually leading to a loyal customer base.
One trick to build a loyal customer base is to keep some cherished but ‘hard to get items’ which customers get used to and can keep them returning for more.
What those items are? Well…as a grocery store owner you ought to know your customer well enough to know….
Bharat Kanodia – Founder and Chief Appraiser
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