NEW YORK — Although buyers are still proceeding with caution, the conditions to effect more industry consolidation should be ripe this year, according to a panel of experts speaking on a conference call last week.
Sellers can maximize their opportunities in this wave of consolidation by better managing their real estate, leading to less “cherry picking” and more meaningful deals, they added.
The call, sponsored by DJM Realty and moderated by David Orgel, SN's editor in chief, focused on the real estate impacts of consolidation. Meredith Adler, an equity analyst following supermarkets for Barclays Capital, said consolidation historically follows expansion of new formats, noting such formats have been growing steadily for the past decade, while conventional supermarkets saw shares decline.
Conventional retailers in the past 10 years saw their share of the food retailing market shrink from 67% to 60%, while economy formats including supercenters, warehouse clubs and limited-assortment stores zoomed from 13% of the market to 30% in the same period. Natural and organic retailers and independents command about 5% of the market today, although independents have plummeted from a 20% share 10 years ago.
The losing formats will likely look to exit unprofitable markets, close underperforming stores or sell, Adler said, but have to rely on buyers to make it happen. Many buyers, she noted, remain circumspect.
“A new wave of consolidation seems to be coming, though the list of successful retailers who could be buyers is short, and we believe those few have been trying to learn from their past mistakes,” Adler said.
“Nonetheless the conditions seem right, which for the unlucky retailer could mean the closing of many stores and the absorption of the remaining handful into another chain. To be one of the lucky ones, a chain either has to be growing, or to position itself to be bought at a good price.”
Retailers who better understand their real estate are likely be more effective buyers and sellers, said Andy Graiser, co-president of DJM Realty. Sellers, for example, should consider “cleansing” their portfolios through a combination of closures and tweaks such as lease extensions to make their properties more attractive.
“From a seller's perspective, the first thing is to understand what they have and to ‘cleanse’ the portfolio before they go to market,” Graiser said. “Look at the portfolio and say, ‘I have some short-term leases that could be a problem for a buyer.’ Maybe there's blend and extend opportunity where you can extend the lease, get a better rent and make it a better asset. If there's a time to do that it's certainly now.”
Closing underperforming stores that are likely to be a drain on a buyer is likely to be more effective than trying to sell a portfolio with a mix of good and bad locations, he added. “The odds are that you are going to get rid of it at a better price than what you're going to be discounted for on the actual sale,” he said.
Buyers as well can benefit from a better knowledge of the real estate they are considering, including identifying potential hidden values like exclusivity clauses. He also advocated partnering with real estate specialists that can provide an “exit strategy” for properties they don't want, which could speed expansion and slow the “cherry-picking” typical of the M&A market today.
“A lot of companies out there would like to do acquisitions, but they've got such a poor taste in their mouths from prior acquisitions they don't want to try deal with the distractions and headaches,” he said. “The best opportunity is to do the whole acquisition but have an exit strategy in place to get rid of that which you don't want.”
Bill Bishop, chairman of Willard Bishop LLC, said overcapacity as measured by declining sales per square foot should also drive consolidation. He suggested there was opportunity in retailers looking toward small formats with limited assortments that can drive productive sales, but can integrate an Internet sales capability to keep customers from shopping elsewhere for particular items.
“The economic pressure is strong enough to push us in this direction,” Bishop said. “Technology is racing along to a point that certainly, within the next year, we will see someone make a breakthrough in the economics of the smaller store, and that will have an effect on real estate.”