Retail Overstock

No one's advertising a buy one/get one yet, but with the number of supermarkets up for sale these days, retailers that want to trim store counts or leave the business may find it more challenging than usual to get rid of unwanted real estate.

Expert observers say there's still strong demand for A-list properties, but the market is full of sites and stores that don't fit that description. Soon to be added are the 165 underperforming stores Boise, Idaho-based Albertson's plans to close or sell, and there's been speculation in the industry that the final number may go higher and that other profitable chains will contribute to the glut by weeding out their weaker locations.

"For many, particularly smaller, operators there are just not going to be that many avenues to sell some of their stores in the future," said Gregory O'Brien, principal in the Washington, D.C. office of The Food Partners, a national investment banking firm. Agreed Ronald C. Curhan, professor emeritus of the School of Management Marketing at Boston University, "It's certainly harder to move them."

George Dahlman, senior food processing and distribution analyst at U.S. Bancorp Piper Jaffray in Minneapolis, also saw the situation as anything but a seller's market. "There probably is a glut of retail capacity on the market," Dahlman said, "and it will be difficult to move these properties with any sense of premium-to-value or anything like that."

But Bob Gorland, vice president in the Harrisburg, Pa. office of Clark, N.J.-based Matthew P. Casey & Associates, cautioned that except when companies are in financial trouble, "There don't seem to be many fire sales out there." Casey is a real estate consulting firm for the supermarket industry that specializes in site selection and market feasibility studies. "Stores are being bought up because the chain is looking to increase market share, and in many cases pick up prime locations in areas where there are few sites or it may be difficult to develop additional sites," Gorland said.

Albertson's announcement this summer that it will unload 165 stores put the nation's second-largest grocery chain on the same page as many other supermarket companies. Among those that are or have been in the real estate market as sellers in recent months are:

?Fleming Cos., Lewisville, Texas. During the quarter ended July 14, the No. 2 wholesaler completed a year-long effort to divest its conventional supermarkets, having sold or closed 237 of them to focus on price-impact grocery formats.

?Homeland Holding Corp., Oklahoma City. The company, which filed for Chapter 11 bankruptcy protection August 1, last month said it will close eight of its most unsuccessful stores; that followed the closing of seven stores earlier in the year.

?Furrs Supermarkets, Inc., Albuquerque, N.M. The chain folded last month, selling 36 of its stores with Fleming's help and closing the other 30.

?Supervalu, Inc., Eden Prairie, Minn. As part of its plan to get out of non-core markets, the company this summer closed its 19-store Laneco group in Pennsylvania and New Jersey, and 11 Cub Foods stores in Indiana.

?Grand Union Co., Wayne, N.J. Brattleboro, Vt.-based C&S Wholesale Grocers bought the 187-store chain early this year and sold off about half the units to a number of retailers. C&S, which had been Grand Union's supplier, went into the retail business to keep some of the remaining stores open and protect the volume.

?Jitney-Jungle Stores of America, Inc., Jackson, Miss. The chain, which once had almost 200 stores, sold its last 117 supermarkets and went out of business last winter.

Less recently, Winn-Dixie, Jacksonville, Fla., closed 114 stores and A&P, Montvale, N.J., whittled its count by nearly 200.

No End in Sight

There are no indications that the steady stream of used supermarkets onto the market will stop or even slow down any time soon, or that the pool of potential buyers will get any larger.

On the supply side, the amount of retail square footage devoted to supermarket-type merchandise continues to grow far more rapidly than the population, constantly marginalizing weaker operators, and many profitable grocery chains are building new, larger stores to serve consumers who previously shopped at their smaller outlets. Often a superstore will replace several older supermarkets that are then put up for sale.

Dahlman was pessimistic about Albertson's chances of getting much out of the stores it plans to shed. "One of the reasons that these stores are probably not doing well is in fact the reason they probably won't sell well either, and that is they're not located in a good spot," he said.

Curhan said that like Albertson's, other chains are now applying more rigorous standards to their stores, both in terms of financial performance and in terms of their ability to convey the image the company wants to project. One example is Quincy, Mass.-based Stop & Shop, a unit of Ahold USA, which is aggressively upgrading its store base to the Super Stop & Shop format.

"I have seen Stop & Shop take really brave moves, in my opinion, to close three, four, five, six viable stores to put one supercenter in a location. They have closed stores which otherwise would make it," he said. "I don't think other companies have been as willing to bite the bullet because they look at the number of stores they have and they seem to be making a contribution to the bottom line, and so they tend to keep them. But I think they're getting bolder now with the economic situation, and they're exiting whole markets now as they look at those numbers. And key to all of this, it has nothing to do with sales, it only has to do with the contribution margin that the location can make."

O'Brien cited several reasons that a lot of supermarkets may go begging for buyers: Many of them are older stores in the 20,000-square-foot range and no longer meet the needs of most supermarket operators; chains like Furrs, Grand Union, and Homeland couldn't afford to keep up their stores because huge debt incurred during leveraged buyouts in the Eighties and early Nineties absorbed their cash flow; and when a chain decides to exit a market it often lets the stores and their sales deteriorate to the point where competitors will just take whatever share of sales migrate to them rather than trying to acquire them all by buying the stores. That was the situation in the Tidewater area of Virginia when A&P left that market, O'Brien said. "The vast, vast majority of those stores of A&P's were closed and not sold."

But he said it's important to factor in store size, condition, and demographics when trying to gauge marketability. "We're seeing very, very significant swings between, for instance, people that are selling 50,000-square-foot stores versus people that are selling 20,000-square-foot stores in rural areas or second-tier suburbs. The second market is highly illiquid, the first market is much more liquid."

Gorland also doubted the flow of stores onto the market will dry up soon, citing industry speculation that Albertson's may leave the Florida market and A&P may get out of New Orleans. "A lot of chains are evaluating the distance factor for distribution purposes or people issues?do we need to have that group that's 1,000 miles from our headquarters, these 30 or 50 stores?"

Gorland was quick to note that what's marginal for one player may be valuable to another with a larger market share that wants to grow quickly. The time and expense of developing new sites are helping to fuel demand for good existing locations. "There are many sites that are taking up to 10 years?that's not an exaggeration?from market analysis study to grand opening," he said. He said his firm is urging its clients to avoid going overboard when they build new stores. "Some chains are only interested in building 65,000 to 80,000 square feet, when in many markets 40,000 to 50,000 square feet will do the job at a more profitable level and lower real estate and development costs," Gorland said.



Independents' Cash Flow

While the supply of stores continues to flow, on the demand side market conditions are making it more difficult for independent operators, who have picked up many stores abandoned by chains, to finance such acquisitions.

"It's not necessarily the numerical amount of those operators but their financial strength and their ability in today's debt markets to raise the money to buy those stores," said O'Brien.

Closing stores rather than selling them can hit a chain in the bottom line. "When you read the fine print of a lot of the releases as people talk about exiting those types of markets, you'll see that there are substantial costs associated with future lease payments that they've capitalized at the time of the divestiture," said O'Brien.

Dahlman noted that in cases where companies own rather than lease stores the costs of closing down will be affected by whether they've been on the books long enough to be fully depreciated.

Although supermarket operators aren't lining up to buy small, old stores, many of those units do eventually sell. Wholesalers have sometimes picked them up in order to preserve their own sales volume, and drug, office-supply, and dollar-store chains have often found them attractive.

"I think a lot of these locations will go out of the supermarket business, obviously not every one of them," said Curhan. "But I do see an awful lot of these locations becoming CVS Consumer Value Stores."

Dahlman said Albertson's president Peter Lynch indicated to securities analysts that in some markets the chain would prefer to dispose of stores to other formats rather than to direct grocery competitors.

But in a retailing world where channel blurring has become a watchword, those outlets could wind up selling a lot of core supermarket products regardless of who buys them.