Fast-changing food industry poses challenges for financial lenders
From the rise of farmers markets and organic-only “foodies” to the attacks on sugar and trans-fat, the food industry is changing along with consumers’ tastes and preferences. This means those who appraise assets for lenders in the food manufacturing, retail and foodservice sectors need to be sure their analytics are in step with the times, write Tiger Group experts in the July/August issue of ABF Journal.
In the article “Order Up!," food industry assets are increasingly on the menu for asset-based lenders. Tiger’s Christopher Huber and Kevin Boland cite multiple examples of appraisal-related considerations that can be overlooked to the detriment of lenders issuing loans against food-related collateral. Huber, a Los Angeles-based managing director at Tiger Group, is a veteran retail appraiser with extensive experience in the grocery sector; Boland, ASA, is a New York-based assistant vice president with the firm whose broad experience includes appraisals of food-industry plants, machinery and equipment (M&E).
Given the super-thin margins in today’s food industry, Huber and Boland write that it’s more important than ever for appraisers, liquidators and asset-based lenders to be on the same page about food-related businesses—whether the asset in question is a 100-ft.-long oven inside a food-processing plant, high-tech countertop equipment in a fast-food restaurant or aisles of prepackaged goods offered to consumers in a supermarket liquidation sale.
On the retail side, for example, the intensified competition now includes chain drugstores and dollar stores that are rapidly blanketing the country with units that include perishable and non-perishable foods. “Indeed, the so-called ‘channel blurring’ that has occurred in the food industry sometimes means recovery values for the same food products can vary across different retail formats,” the authors explain to readers of the publication focused on trends in asset-based lending. “For example, grocery products tend to have higher recovery values in big-box (discount department store) retail liquidations, thanks to the more robust customer traffic that flows through these stores. During a big-box GOB, after all, shoppers angling for bargains on bigger-ticket items often end up buying groceries, too.”
“One of the biggest factors in a supermarket appraisal, for example, is the difference between the perimeter of the store, which is dominated by fast-turning perishables, and the middle, with its long rows of prepackaged goods,” they note. And “given today’s cornucopia of retail food formats and locations … food retailing recovery values certainly do vary widely from store to store.” In particular, they point out that supermarkets with pharmacies tend to retain more value, as nearby competitors are bound to bid on the store’s prescription drug files.
The authors also describe how appraisals in other areas of the food industry involve unique, context-dependent considerations. “For any appraisal of food-processing equipment it’s critical to understand the ways in which multivariate factors can affect collateral values,” they write. “Imagine a 100-ft. oven in a soon-to-be-closed food-processing plant. In some cases, that piece of equipment will have a ready market, and the experienced appraisal team is able to take one look at it and think of several prospective buyers. In other cases, the appraiser asks questions that might not have occurred to the company, such as ‘What will it take to get this oven out of the building?’”
Indeed, certain pieces of equipment might cost $100,000 to appropriately remove from a plant and put to use at another site, they note. “It is the M&E appraiser’s job, in other words, to first identify value during inspection, and later to document that value by diligent market research. All factors must be weighed in proper analysis, but equally important is the consideration of current market opportunity: What is the availability of comparable equipment, and how actively is it traded?”
Whenever evolution happens, winners and losers emerge, and this is bound to have implications for asset-based lenders working with borrowers in the food industry, Boland and Huber conclude. “‘People have to eat,’ but what they’re eating, where, why and how has massive ripple effects on the secondary markets and the U.S. economy as a whole,” they note. “For any food-related appraisal, then, the recipe calls for more than a pinch or two of information and experience.”
To read the full article, visit: http://www.tigergroupllc.com/feature-articles or http://www.abfjournal-digital.com/abfjournal/20120708#pg1.