How to Value: Supermarkets

Industry Description

The Supermarkets and Grocery stores industry contain establishments retailing general lines of food products, including fresh and prepared meats, poultry and seafood, canned and frozen foods, fresh fruits and vegetables, and various dairy products. (NAICS 445110). These establishments account for the largest food retail channel in the U.S. While the primary activity is retailing general food, health and beauty products, these establishments can also have bakeries, delicatessens units, and other services. 

The following are some basic characteristics of the Grocery Stores industry:

  • Grocery Stores industry have a combined revenue of $756 billion, with a growth rate of 1.5% in 2021-2026
  • There are approximately 65 thousand companies as of 2022
  • Grocery Stores industry employs approximately 2.7 million people

Not included in the scope of this article are Convenience Stores, Gas Stations with Convenience Stores, and Meat Markets.  These are the potentially subject of other guides in the How To Value series.

Industry Trends

The Grocery Store industry is in the mature stage of its lifecycle.  It is highly fragmented, with the top four operators expected to account for 30.3% of industry revenue, while the remaining market is composed of small- and medium- size operators that cater to local and regional markets. An estimated one-third of enterprises employ fewer than five workers.  While traditional Grocery stores service a significant portion of the market, there is growing competition from mass retailers, dollar stores and convenience stores that also offer food retailing services, in addition to their traditional nonfood items.

Some key external forces influencing the Grocery Store industry are (i) increased demand for prepared meal selections, (ii) technology automation and innovation and (iii) expansion of online and instant delivery services. Each of these is described in further detail below.

In an analysis of shopping behaviors, there has been a rise in demand for prepared meal selections according to The Food Industry Association7. Whether spurred by individuals eating more at home due to restaurant closures during the COVID-19 pandemic, or to compete with meal delivery services, consumers are interested in convenient ready-to-eat, -heat, and -cook meals. As a result, operators are investing in more culinary talent to prepare meals on premises.

Labor shortages and high inflation persist in 2022 post-pandemic. Many operators are using this as an opportunity to further invest in automation: mechanize a range of essential tasks that historically have been handled by humans. This includes adding self-checkout kiosks, aisle-scanning robots to automate inventory tracking, and warehouse robots to build product pallets.

While physical stores remain the key channel for most grocers, online and instant delivery grew dramatically during the pandemic. Grocers shifted 20-30% of business shifted online during peak-pandemic, and by the end of 2020, online penetration in grocery has settled at 9-12%, a 3x increase from pre-pandemic levels. The online groceries segment is evolving to a mix of instant, same-day delivery and click & collect. Grocers are partnering with third-party providers such as Instacart to build their e-commerce value proposition.  Food-delivery platforms such as DoorDash and Uber Eats have entered grocery delivery.

Key Performance Metrics

In evaluating Grocery Stores, the following metrics can provide useful information in comparing a subject company to guideline companies and transactions.

  • Average volume per store by day/week/year
  • Sales per square foot
  • Gross margins return on investment by specific products/categories
  • Expenses by percentages: store labor, rent, advertising
  • Inventory turnover
  • Average transaction price/ value
  • Foot traffic and digital traffic
  • Food waste level

Industry Organizations & Publications

The following organizations publish useful information:

  • Grocery Dive
  • FMI – The Food Industry Association
  • Winsight Grocery Business
  • National Grocers Association

Guideline Information: Private Purchase Transactions

There are small grocery stores, as well as several grocery stores chains such as Trader Joes, that are privately owned. Data regarding the sale of 100% of closely held grocery stores is generally a good source of information to appraise a subject company. The following are typical appraisal multiples from sale of grocery stores:

  • Revenue multiples between 0.18 and 0.39 times
  • Gross Profit multiples between 0.56 and 1.2 times
  • EBITDA multiples between 2.1 and 7.4 times

In selecting guideline transactions, it is of critical importance to select transactions that are similar to the subject company. Unique factors for any subject company must be considered to yield credible results. Additionally, industry economic conditions also vary over time, which must also be considered.   

Guideline Information: Publicly Traded Companies

Most Grocery Stores are privately owned; however, there are a few that are publicly traded, meaning it is possible to compare a subject company based on industry metrics and appraise using industry multiples. However, as with the guideline transactions described above, it is of critical importance to select publicly traded companies that are similar to the subject company. Also be aware that multiples of certain publicly traded companies may not accurately reflect a subject company.  

The five largest publicly traded U.S Supermarket and Grocery Stores, which include retailing general foods, ranked by market capitalization are:

  • The Kroger Co. (KR) – $33.8 billion market capitalization
  • Albertsons Companies Inc. (ACI) – $14.2 billion market capitalization
  • Casey’s General Stores, Inc. (CASY) = $7.2 billion market capitalization
  • Grocery Outlet Holding Corp. (GO) – $4.3 billion market capitalization
  • Sprout’s Farmers Market, Inc. (SFM) – $2.9 billion market capitalization

 The Price-to-Earnings (P/E) ratios of these five companies range between 10.3 times to 21.6 times.

Appraisal Rules of Thumb

Please note you should never use a Rule of Thumb in place of a professional appraisal. You will never see a competent professional appraiser do their work using a Rule of Thumb. The professional standards that govern professional appraisal practice, which all professional appraisers should follow, specifically prohibit the use of Rules of Thumb.

Groceries stores are businesses sold based on sound economics. These economic considerations can be measured using the key performance indicators described above, but such economics cannot be accurately summarized in these simple formulae.