Buying A Grocery Store - Top Tips

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Posted on January 12, 2009 by Peter Siegel, MBA

Buying A Grocery Store - Top Tips

Ideal as a family business in which parents and teenaged children can be involved, the grocery store is a model for the way that people in America, sometimes lacking advanced education or financial sophistication--and perhaps not quite fluent in the English Language--still can achieve some security and independence through hard work, usually accompanied by a modest style of living. They can take over a grocery enterprise with only basic business skills, and will learn--along the way--some fundamental lessons about buying, merchandising, promotion, pricing, spoilage control, customer relations, and about how to conduct an efficiently run, cost-managed enterprise.

POSITION IN THE MARKETPLACE

A good location or a special product offering, such as ethnic foods of a specific type, or a focus on fresh produce, can insure a niche position in the market area. With enough demand from people in the neighborhood, the store will generate the level of business needed to support its owners. Another way for a food retailer to carve a slice out of the market is to remain open during hours when competitors in the neighborhood are closed.

There is a danger, as some grocery operators have learned, in becoming so successful that other operators want to share in the market demand created by that initial entrepreneur, and proceed to open competitive businesses in the area. Another risk is that the lease expires, and cannot be renewed, forcing the owner to go out of business.

Changing demographics of the area is a problem encountered by some grocery store operators. A growing area often provides the lure for a grocery chain, which almost invariably will take most of the business previously enjoyed by the smaller operators. And a declining area plagued by an increase in crime and abandoned residences, will almost certainly cause local grocery store owners to discontinue their businesses.

EVALUATION CRITERIA

So a prospective buyer of a grocery store should make it a point, first of all, to evaluate the area where any purchase candidate is located. Is it likely that the neighborhood will change? Are there other, similar businesses in close proximity? Do they pose a threat to the future livelihood of the store being examined? Are customers coming to the targeted business for its particular offerings, such as a deli counter, a wide selection of fresh pastries, a large fresh produce section, or a video rental service?

The financial criteria used to evaluate a prospective purchase in this business should include the industry's standard cost factors. If the cost of goods, for example, is below 70% of the gross revenue figure, the storeowner is either very smart about purchasing, is able to collect above-average markups, or both. Another reason for a gross profit above 30% might be that some of the revenue represents sales of, for example, sandwiches and soups made to order, with cost of goods factors in the 30% to 40% range.

Occupancy cost--rent, utilities, maintenance, and insurance--should not exceed 7% of gross sales, if the company is to be profitable. And if payroll costs are more than 20% of gross revenues, it may be a sign the owner is not putting in the long hours commonly worked by most operators in this business. That also might suggest that he, or she is not collecting earnings of 10% or more--the minimum figure that many operators hope to achieve.

Another important figure to know is the pricing rule of thumb for independent grocery businesses. While a buyer should expect to pay--and the seller expect to receive--a figure equal to twice the seller's discretionary annual earnings, that multiplier may be adjusted upward, or down, based on length of lease, whether a substantial (30% or more) portion of the price is financed by the seller, and the condition of the premises.

Since everyone needs to buy food, a neighborhood grocery store--if it is selected carefully and purchased at the right price and terms--can be a secure, rewarding opportunity in which to invest.