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Are ethnic supermarkets the next Sprouts?

Private equity firms investing with eyes on growth

Some private investors are betting that ethnic grocery stores could be the next frontier for industry growth, seeking to unleash the same kind of value from them they’d previously found in natural and organic specialty formats.

That opportunity has attracted private equity buyers to Hispanic-focused retailers like Mi Pueblo, Cardenas Markets and Fiesta Mart recently, sources said. From the seller’s perspective, private investment promises advantages of scale, buying power and financial strength to achieve that potential amid a competitive and fragmented market.

“Latino-focused grocers face many of the same [pricing and competitive] challenges today that farmers market operators Sprouts, Henry’s and Sunflower did about a decade ago,” said Scott Moses, managing director and head of food retail and restaurant investment banking for Peter J. Solomon, New York.

The latter chains were combined under Apollo Global Management’s ownership, steered toward greater efficiency and scale and subsequently spun off to the public markets in 2013 — resulting in a spectacularly lucrative investment for Apollo, which realized about $2 billion in profits beginning from a $166 million acquisition of Henry’s in 2007.

Moses, who advised Sprouts on its 2011 combination with Henry’s, as well as Sunflower on its sale to Sprouts a year later, more recently represented Mi Pueblo Food Centers as the Bay Area Latino grocer accepted new investment from private firms Victory Park Capital and KKR, which concurrently invested in Southern California-based counterpart Cardenas Markets.

Photo: Cardenas Markets

The firms did not disclose the size of the investment. Victory Park previously invested $56 million in Mi Pueblo as it emerged from Chapter 11 bankruptcy protection in 2014.

KKR in a statement acknowledging the investment last month said it expected its support would “create positive momentum and allow us to better service their communities and valued customers, while also growing Mi Pueblo and Cardenas Markets, creating new jobs, and offering long and rewarding career paths for executives and employees.”

Broadly speaking, those were the same goals of Acon Investments, the Washington, D.C.-based investment firm which acquired the Houston-based Hispanic chain Fiesta Mart in the spring of 2015. Fiesta since then has grown its store base from 60 stores to 71, mainly through acquisitions including a deal for 11 former Minyard Sun Fresh stores in the Dallas area and three Bravo stores in Houston. Fiesta also closed two stores and remodeled five since Acon took over.

Fiesta CEO Mike Byars. Photo: Fiesta Mart

Fiesta CEO Mike Byars, the industry veteran engaged by Acon to investigate the Fiesta chain for possible investment, said his strategy involves both initiatives to address pricing, store conditions and customer service but also growth through new stores. He emphasized that was built upon a brand with a strong heritage and equity not only serving Hispanic shoppers but also a range international shoppers in the locations that support it.

“We saw not only a lot of opportunity to improve the operations and profitability itself, we saw a huge opportunity to be a growth vehicle considering the forecast for the growth of Hispanics,” said Byars who noted that Fiesta was the largest U.S. Hispanic chain by volume.

The U.S. Hispanic population is expected to double by 2050, according to Acosta Sales and Marketing, augmenting a market that already has about $1.4 trillion in buying power. Moreover, Hispanic shoppers tend to spend more on groceries and shop more often than the average U.S. consumer. 

According to Moses, this population will not only support new stores for specialty ethnic chains, but could pressure conventional chains to seek specialists to better serve their customers.

“There are already hundreds of Latino-focused specialty grocery stores in the U.S., but there should be many more over time as population dynamics continue to change across the country,” Moses said. “Many currently traditional grocers’ stores would better serve their evolving local customer base with the truly authentic Latino destination experience and merchandise that Latino-focused grocers offer their customers.”

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