Food Retail Industry Insights 2016 PDF
Food Retail Industry Insights 2016 PDF
Food Retail Industry Insights 2016 PDF
Highlights
Traditional food retailers, facing increased pressure from alternative Merchandisers are changing assortment, providing more
channels, are testing new concepts to retain market share. shelf space to prepared foods for take away and home meal
replacements.
Natural and organic supermarkets, while continuing to trade at a
premium to traditional food retailers, are fighting to maintain traffic. Stiff competition, evolving consumer preferences and a
challenging organic growth environment are driving food
The U.S. Hispanic population is growing exponentially, which is retailers to consider strategic alternatives, including M&A, to
influencing national consumption patterns. optimize capital allocation and pursue growth opportunities.
Food Retail Industry Insights 2016
Table of Contents
Competition in the food retail market has increased in recent years. Traditional food
retailers have faced fierce pressure from alternative channels including warehouse clubs,
supercenters, drug stores, mass retailers and convenience stores, as well as online retailers
and grocery delivery services. As consumers distance themselves from the traditional
supermarket model, grocery retailers are attempting to stay competitive by creating more
intimate and innovative shopping experiences tailored to individual shoppers with an emphasis
on fresh, organic and prepared food options. As some large chains have actively pursued
relationships with smaller niche retailers, other grocery chains have failed to adapt.
Delivery with key insights and expertise in the online grocery business in
Even with continued innovation in global, regional and local supply hopes of developing an omni-channel offering. In 2014, Kroger
chain and delivery capabilities, the online-only grocery business finalized its merger with Harris Teeter, which included online
model remains challenging. However, consumer demand for online ordering platform Express Lane. Kroger has also initiated testing
food offerings has increased in recent years, providing an incentive of its own click-and-collect service, called Click List. For a fee
for traditional brick-and-mortar retailers to enter the online segment. of $4.95, Click List allows customers to buy groceries online,
Current online only incumbents include FreshDirect and Peapod, and then at an appointed time pay and collect goods at a pickup
a unit of Ahold USA. In addition, several other large traditional window. Finally, in 2014, Kroger purchased the nutrition and
supermarkets have entered into the space. Amazon.com has healthy living ecommerce business Vitacost.com.
launched AmazonFresh and recent press statements indicate they are Large Operator Advantage
in strategic discussions with the UK online grocery retailer, Ocado.
As large chains, such as Kroger and Albertsons, continue to grow,
Furthermore, in January 2015, Albertsons acquired Safeway, which
they have been able to leverage fixed infrastructure costs and
owns and operates Groceryworks.com. Albertstons is expected to
optimize capabilities. Krogers significant size and scale presents
grow this service materially. Additionally, Walmart has expanded both
an advantage over many peers, allowing for efficiencies within its
its online and store pickup platforms.
private label manufacturing, distribution network, and ability to
One company that is creating a buzz within the industry is Instacart. offer more competitive pricing given its purchasing power with
Instacart is an on-demand grocery delivery platform facilitating suppliers. In the most recent quarters investor call transcript,
doorstep deliveries of groceries and other home essentials in major Kroger CEO Rodney McMullen stated that they will continue
cities around the U.S. Founded in 2012, the company received to manage costs so that we can continue investing to grow our
approximately $275 million in a January 2015 funding round business for the future while delivering today.
led by Kleiner Perkins Caufield & Byers, which values Instacart
In recent years, Kroger has taken advantage of industry trends
at roughly $2 billion. The company offers a collection of over
by bringing certain business functions in-house, as opposed
300,000 items from several independent stores including Whole
to out-sourcing. Kroger has been aggressive with investments
Foods, Safeway and Costco, enabling customers to place orders
in the rapidly growing natural and organic food categories. The
on their smartphone from their favorite store or to mix items from
company has also invested in the in-store customer experience
different stores. Once an order is placed by the user, a shopper
by improving merchandising and enhancing its prepared food
is designated to purchase and deliver the groceries to the user.
offerings. These store enhancements position Kroger to capitalize
Instacarts model depends on consumers comfort level with
on the growing demand for fresh and prepared foods. Albertsons
independent individuals selecting and dropping off their groceries.
is another company leveraging its scale. The companys fresh fruit
Walter Robb, co-CEO of Whole Foods, evidently believes that this
and vegetable offerings are cut daily by members of their own
is a possibility, as customers today are interested in options and
produce department. When Albertsons acquired Safeway last
services outside the four walls of the store.
year, it announced that Safeway would be switching to Albertsons
Technology and Retail fresh-cut fruit and vegetables. Safeway is now able to in-source
Technology has had a widespread impact on commerce over fresh-cut produce, reducing cost and improving profitability.
the past ten years, and the food retail industry is no exception. In The industry is incredibly dynamic and there is constant pressure
2012 Kroger rolled out QueVision, a technology platform that uses to adapt formats to address evolving customer preferences.
sensors and predictive analytics to feed managers real time data. Larger players have been much more receptive to operating a
QueVision indicates in real-time when long lines will happen and broad portfolio of store formats, whether developed in house or
where cashiers are needed before a pileup begins, allowing for through acquisition. In doing so, these players have been able to
staff optimization. Prior to deployment, average wait time in Kroger leverage their infrastructures to drive higher sales, margins and
stores was four minutes; today, it is less than thirty seconds. investment returns.
Kroger has also spent the last few years investing in companies
(1%)
Dairy 5%
0% Center Store Depts.
Grocery 2%
(3%)
Frozen 1%
(2%)
Seafood 5%
(1%)
Meat 7% Perimeter Depts.
2%
Produce 4%
4%
Bakery 4%
6%
Deli 9%
2 The Impact of Consumer Trends on the Produce Industry. Source: Nielsen Perishables Group.
3 Jared Koerten, Euromonitor
they do so because the products are fresher and 44% indicate Smaller Households
these products taste better. While the increase of fresh and Consumption behavior in the U.S. has become less household-
local produce should support the growth of natural and organic oriented and more individualized than in previous generations. Today,
supermarkets, not all consumers purchase these items from large over 50% of eating occasions occur when consumers are alone.
retailers. Instead, many consumers prefer to buy directly from the Currently 27% of all households consist of just one person; this is the
grower. Farmers market count is up 35% since 2010, with almost highest level in U.S. history, according to the U.S. Census Bureau. The
8,000 farmers markets operating in the U.S., according to the U.S. number of solo eating occasions will have a wide range of implications
Department of Agriculture. Retailers are certainly catching on to for food retailers in terms of packaging, positioning and more.
this trend. Jason Ackerman of FreshDirect (U.S.) stated, We will
compete by our commitment to farm-to-table and fresh products. Demographic Shifts
Thats our position. The U.S. Hispanic population is growing exponentially compared to
non-Hispanic populations and as a result, in-home Hispanic dining
Consumer Trends
traditions are beginning to influence national consumption patterns.
Millennials As of 2015, approximately 17.7% of the total U.S. population was
Millennials will soon surpass the Baby Boomer generation as the of Hispanic descent. By the year 2040, Hispanics are projected to
nations largest living generation, making up roughly a quarter of the make up 24.1% of the total population.4 Hispanics provide a bright
total U.S. population. Millennials are driving changes in the countrys spot in the U.S. food retail market. On average, Hispanics cook
eating behaviors with their approach to food choice and preparation. more frequently at home, spend more on routine shopping trips and
According to The NPD Group, Millennials increased interest in fresh visit supermarkets more often. In 2014, overall ethnic supermarket
foods may be explained by their reactions to the Great Recession. revenue was $30.4 billion, and this number is expected to increase
Younger adults were hit hardest by unemployment, and although to $35.2 billion in 2018, representing a 3.7% cumulative annual
this age group is considered the heaviest user of restaurants, they growth rate.5
pulled back the most from going out to restaurants during the
One supermarket that identifies itself with the growth of the
downturn. It seems these adults still wanted many of the benefits
Hispanic population and ethnic supermarket industry is Vallarta
that restaurants provided among them, freshness and speed.
Supermarkets. Based in Sylmar, California, Vallarta operates
Baby Boomers supermarkets catering to a primarily Hispanic consumer base in the
The Baby Boomer generation is aging, considering retirement and Greater Los Angeles area. In 2015, the company added three new
developing health ailments, all of which are typically associated store locations bringing its total number up to 47, which helped
with major changes in the way a consumer approaches food and push it to number one on the Supermarket News Top 50 Small
beverage consumption. While shrinking in size, the generation is Chains and Independents 2016. The California market has been
still large enough to have a significant impact on food consumption especially active for Hispanic food retailers. To meet ever increasing
in the U.S. As the generation continues to age, it will be driven demand for Hispanic and other ethnic food, Unified Grocers,
less by the latest fad and more by what is needed to sustain health a wholesale cooperative partnering with independent grocers,
and lifestyles. Healthful foods, such as foods high in whole grains, now has an entire division devoted to supplying Latino and other
protein and calcium, or low in saturated fat, cholesterol and sodium, ethnicfoods.
will be of most interest to the Baby Boomer generation. There has also been a significant amount of strategic activity in the
Hispanic food retail sector in California. In January 2014, Cardenas
Millennials are driving changes in the Markets and Northgate Gonzalez Markets formed a special purpose
countrys eating behaviors with their vehicle to acquire Ontario, California based Pros Ranch Markets. In
February 2014, Victory Park Capital provided financing to Mi Pueblo in
approach to food choice and preparation.
connection with its emergence from bankruptcy. Mi Pueblo is the owner
and operator of 21 Latino supermarkets in Northern California that have
been performing quite well since completing itsrestructuring.
As the industry has continued to evolve in recent years there Food Retail M&A activity in 2015 has continued at a strong pace.
has been an incredible amount of mergers and acquisitions According to Pitchbook, private equity overhang totaled $395 billion
activity. Currently, moderate levels of inflation combined with an in 2015. Additionally, the increasingly competitive marketplace is
accommodating lending environment has driven well-capitalized pushing EBITDA multiples higher. Strategic acquirers are also in
retailers to pursue acquisitions and consolidation as they attempt to search of opportunities to consolidate the industry, as the operating
gain access to new markets, leverage sourcing and merchandising environment has become increasingly competitive. Several notable
capabilities and manufacture earnings growth. transactions have been completed or announced in the food retail
industry in 2015. Below is a list of transactions dating back to
2013, followed by descriptions of select recent transactions.
Selected Transaction Analysis
($ in millions) Enterprise Value as a Multiple of LTM:
Enterprise
Date Value
Announced Acquirer Name Target Name ($mm) Revenue EBITDA
7/19/15 Key Food Stores 23 Stores in New York and New Jersey - - -
7/19/15 Stop & Shop 25 Stores and Other Assets in Greater New York $146 - -
2/20/14 Victory Park Capital Mi Pueblo Food Center $51 0.13x 6.6x
1/31/14 Cardenas Markets; Northgate Gonzlez Markets Pro's Ranch Markets $55 0.29x 4.0x
7/8/13 The Kroger Co. Harris Teeter Supermarkets $2,497 0.53x 6.7x
5/28/13 BI-LO Delhaize America, Sweetbay, Harveys and Reid's $246 0.14x -
1/22/13 AUA Private Equity Partners Associated Food Holdings $155 0.33x 5.0x
Source: SEC filings, Capital IQ, MergerMarket, Company Press Releases, and various news sources (e.g. NY Times Dealbook, the Deal, Wall Street Journal, etc.)
$17,043 80
66 66 70
$15,000
60
60
52 52
51
50
$10,000
40
$7,998
30
$5,000 $4,266 20
$1,643 $1,444 10
$457
$0 0
2010 2011 2012 2013 2014 2015
Total Deal Value ($ in millions) Total Deal Volume
Source: S&P Capital IQ; Total U.S. Food Retail closed transactions from 2010 to 2015
*Source: SEC filings, Capital IQ, MergerMarket, Company Press Releases, and various news sources (e.g. NY Times Dealbook, the Deal, Wall Street Journal, etc.)
Trading multiples for food retail companies have fluctuated over February 3, 2015 to February 3, 2016. Large Cap supermarkets
the past year. Natural and Organic supermarket multiples are the multiples are trading at 7.1x 2015 EBITDA and 7.0x 2016 EBITDA.
strongest, trading at 9.8x 2015 EBITDA and 7.5x 2016 EBITDA. Small and mid-capitalized supermarkets trade in line with their larger
However, their stock prices are collectively down 52.2% from counterparts at 7.1x 2015 EBITDA and 6.6x 2016 EBITDA.
Revenue EBITDA
Stock % of
Price 52 Wk Market Enterprise Price/ EBITDA Revenue
Company 02/03/16 High Value Value LTM 2015E 2016E LTM 2015E 2016E EPS Margin Growth
Whole Foods Market, Inc. $28.93 50.3% $9,490 $9,163 0.60x 0.59x 0.56x 6.6x 6.7x 6.8x 19.5x 9.1% 8.4%
Sprouts Farmers Market, Inc. 23.74 61.7% 3,646 3,806 1.12x 1.06x 0.92x 13.5x 12.7x 11.2x 30.8x 8.3% 19.6%
The Fresh Market, Inc. 18.76 44.6% 882 877 0.48x 0.47x 0.45x 4.5x 4.5x 4.5x 14.4x 10.6% 7.0%
Natural Grocers by Vitamin Cottage, Inc. 17.66 50.5% 397 423 0.65x 0.55x 0.46x 8.2x 7.0x 5.9x 24.2x 7.9% 18.4%
Fairway Group Holdings Corp. 0.50 6.5% 22 250 0.32x 0.33x 0.31x 16.1x 6.7x 6.1x NM 2.0% (2.4%)
Median 50.3% 0.60x 0.55x 0.46x 8.2x 6.7x 6.1x 21.9x 8.3% 8.4%
Mean 42.7% 0.63x 0.60x 0.54x 9.8x 7.5x 6.9x 22.3x 7.6% 10.2%
Ingles Markets, Incorporated $37.22 64.5% $754 $1,642 0.43x 0.43x 0.43x 6.8x 6.7x 6.5x 12.7x 6.3% (1.5%)
Smart & Final Stores, Inc. 16.01 80.7% 1,181 1,652 0.43x 0.42x 0.37x 10.2x 8.8x 7.8x 32.5x 4.3% 10.9%
SpartanNash Company 20.19 59.6% 759 1,298 0.17x 0.17x 0.17x 5.8x 5.7x 5.5x 13.1x 2.8% 6.7%
Weis Markets, Inc. 40.12 77.3% 1,079 976 0.34x NA NA 6.3x NA NA 18.9x 5.5% 3.7%
Village Super Market Inc. 25.26 73.0% 357 347 0.22x NA NA 5.2x NA NA 11.5x 4.2% 3.4%
Median 73.0% 0.34x 0.42x 0.37x 6.3x 6.7x 6.5x 13.1x 4.3% 3.7%
Mean 71.0% 0.32x 0.34x 0.32x 6.9x 7.1x 6.6x 17.7x 4.6% 4.6%
Wal-Mart Stores Inc. $66.86 76.0% $2,14,079 $2,63,272 0.54x 0.55x 0.54x 7.6x 7.7x 8.2x 14.3x 7.2% 0.0%
The Kroger Co. 40.15 93.9% 39,135 50,094 0.46x 0.46x 0.43x 8.9x 8.8x 8.3x 19.9x 5.1% 2.2%
SUPERVALU Inc. 4.34 36.2% 1,154 3,742 0.21x 0.21x 0.21x 4.7x 4.8x 4.6x 7.5x 4.5% 2.2%
Median 76.0% 0.46x 0.46x 0.43x 7.6x 7.7x 8.2x 14.3x 5.1% 2.2%
Mean 68.7% 0.40x 0.40x 0.39x 7.1x 7.1x 7.0x 13.9x 5.6% 1.5%
Source: Capital IQ and SEC filings; Firms represent actively traded U.S. supermarket companies
60%
40%
20%
0%
(20%)
(40%)
(60%)
Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16
Large Cap Supermarkets Small / Mid Cap Supermarkets Natural / Organic Supermarkets
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