Warning Signs
3 September 1984(1984 Sep) – News is coming through that the banks are tightening up on their lending to Asian buyers for grocery businesses. Asians tend to treat their business interests as family concerns, injecting sizeable capital funds from consortium or family sources, with bank loans over 5-10 years, in exchange for an income level which would seem derisory to most people for the amount of work involved.
The only reason that the formula works is because there are numerous unsatisfied buyers in the market place with continuing facilities and the entire business transfer market has probably been underpinned by immigrant buyers. Without this underlying demand, there would be little market for secondary shops and the post-war decline in secondary shopping positions would not have been (temporarily) halted.
If the banks start to examine the viability for grocery businesses, they will discover that the real profit comes not from trading income, but from re-sale of the business, once toil has been converted into turnover. The independent grocer has seen his share of the grocery market drop to below 10% of the total, with the balance dominated by the few major groups and the Co-operative movement, operating purpose-built supermarkets and out-of-town superstores. These groups trade in clean, modern environments with an extensive stock range, proper parking facilities and attract the real spending power.
There will always be scope for the independent retailer, providing a specialist service with, for example, longer opening hours or for pure convenience shopping, but unless the trader’s buying power carries sufficient clout to maintain competitive prices, turnover is likely to be relatively static, once local potential has been established and may not keep pace with inflation.
The problem is rubbing off into the investment market where supermarkets let to substantial ‘plc’ covenants are fetching fancy prices reflecting review expectations. Whereas ‘household name plc’ will obviously trade profitably on an historic rent level, any increase to current market value is likely to hit below the line as economies of scale react. To most efficient retailers, the level of rental is usually a nominal percentage of turnover but combined with the annual increase in the other running costs, a rent increase, albeit to proper levels, can kill viability. Under the present system of financing, assignment to the ubiquitous ‘Mr Patel’ will be possible, but if the survival of the business depends totally upon anti-social trading hours and an uneconomic business approach, geared to capital profit only, then the major companies who are committed to long term leases may find that their continuing liability, under the rules relating to privity of contract, will rebound on their balance sheets.
It is anomalous that the grocery trade operators are obliged to take long leases so as to ensure that potential assignees will be able to finance the purchase, while other national multiples, such as Associated British Foods, Boots and GUS can renew marginal premises in 5 year tranches only so assignment. It is re-think otherwise of their own rigid as to limit their liability (editing required) in the event of now time for financial institutions to have a they will create bankrupticies as a direct result lending policies
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