Sounding Board: A Family Affair

I want to buy Wegmans.

Now, we all know that is not going to happen. I will just have to be satisfied with those specialty sandwiches in the deli and the coconut custard pastries, which are better than… well, you know.

However that is the fantasy, or at least the sentiment expressed in a lot of retail boardrooms and financial enclaves. Which may come true over the next three to five years if management of super-regionals like Wegmans, H.E. Butt and Meijer decide it is time move on to different, if not greener, pastures.

Now you are going to ask who is interested. Kroger? Maybe. Alberstons? Possibly. Private equity firms? Probably. Maybe the question to ask is—who is not?

Truly, what is not to like? We are talking about established names with impeccable reputations, creative management, dedicated employees, growth-minded but not overly so, highly profitable with sales per square foot far ahead of most in the industry. Cost structures may be a little high but that goes with the territory.

But this really is not about Wegmans or others as much as it is about the future of some family businesses and what the outlook might be when they change hands. 

According to a study by PWC, nearly three quarters of family businesses do not have a succession plan in place, strengthening the possibility of outside interests taking over. Then we have the “sticky baton syndrome” where senior management cannot quite give things up to the next generation, even those wanting to carry on in their footsteps.

A family business is about more than just longevity, as we see with Wegmans.  It is about being able to grow in the face of intensifying pressure from all manner of competitors. That is going to put an increasing strain on any family business that may lose its taste for innovation as the price of doing business escalates. 

We have spent a lot of time vilifying venture capitalists and private equity firms by characterizing them as raiders, pillaging hordes that look for quick gains with little interest in building viable long-term businesses.

Clearly, vampires are out there in the shadows, but bringing in outsiders is not always a bad idea and may indeed save a business from extinction. We may be seeing more of this benevolent outside intervention. Merger and acquisition activity in general is expected to be brisk this year and there is considerable interest in the grocery sector, which equity firms see as a profitable investment. As Brian Todd, president of the Food Institute told me recently: “Grocery is seen as a lot sexier business than it used to be.” 

This alone is creating a seller’s market, giving strong retailers the upper hand in negotiations. Demand could crest at any time. But it seems strong for the foreseeable future—whatever that is these days. 

Basically, equity firms are looking for a relatively safe place to park some cash or a modest return, which means they are less likely to be among the ranks of activist investors looking to make massive changes in already healthy companies. In fact, their presence may be less destructive than dissention in the family ranks. We have all seen what can happen when familial disagreements create an untenable work environment or worse—devolve into lawsuits. 

However, private equity’s involvement should be more than just passive in some cases. Their experience in grocery may be at the 30,000-foot level, but they also know what levers to pull to make companies work. Their strength lies in the basic “blocking and tackling” including inventory management, distribution and general efficiencies. The fact that they are not merchants is not that important if they can see ways to improve operations without disrupting the customer proposition.

Whoever the buyer may be, now is the time to develop an exit strategy, but everyone has to be on board with the plan. This can be difficult when multiple generations are involved in the business or the next generation does not have the skills or financial wherewithal to continue the legacy. This is why a sellout or even partial liquidity might be best to insure the company’s future. This not only provides funding but the opportunity to bring in fresh, out of the family box talent capable of strategic thinking.    

Len Lewis is a regular Grocery Headquarters columnist and veteran industry journalist.