Private equity prompts new tools for measuring success

Using market share and gross margin percentages as a measurement of success will no longer “cut the mustard.” The influx of private equity groups into grocery retailing is changing the rules of engagement. In the private equity world the only things that matter are return on capital and EBITDA growth.

Historically, top-line growth and market share have been sufficient performance metrics. Not because they provided a glimpse into the banner’s (or store’s) actual execution — but because these metrics were readily available. Plus, most operators were classically trained to believe volume cures all evils. The financial gut shot in 2008 placed even more emphasis on revenue as operators were forced to beef up their focus on cash flow.

Private equity groups, seeing value in the stability of cash flow provided by supermarkets, have a growing interest in the industry despite its low margin. Ironically, the industry’s growing instability may also be fueling investor interest. New channels and formats, ecommerce, M&A activities, shifts in shopper behaviors, waning brand loyalty, and the like, may create new opportunities for private equity companies. Capital market players typically have diverse portfolios and holdings. And with this diversity comes an expanded knowledge base — one that could prove fruitful in a mature industry undergoing sweeping changes.

In addition to an expanded knowledge base, private equity is changing the tools of engagement. These companies are typically masters of measurement, and have a relentless focus on profits. This means there are no safety nets or masks to hide operational inefficiencies.

Understanding true costs for increasing net profit

Private equity groups are already reshaping the landscape of food retailing by expanding their performance metrics beyond average costing methods. Maximizing net profit requires a keen understanding of actual costs. This requires new tools, as well as new operational disciplines, to measure and improve ROI. New financial models and operational scrutiny will be required to measure every activity including replenishment systems, reward systems, resets and category management, just to name a few. In addition to cost visibility, the equity parent companies will require a better understanding of how strategic and tactical decisions are made.

What do you think are the biggest barriers preventing operators from quantifying their true costs?