Omar Jorge's family started Compare Foods Supermarkets in 1989. The international grocer is focused on importing products from Latin America, offering patrons products they usually can't get out of a traditional grocery store. The company has seven stores in Charlotte and 37 around the country from Massachusetts to North Carolina under different brands.
When inflation hits, supermarkets and gas stations are where people feel it the most. So, Jorge was on the forefront of consumers' recent economic pain.
"When your pump bill goes up in your car, and your grocery bill goes up, that's when you really feel it hitting your pocketbook," Jorge said at last year's Charlotte Smart Business Dealmakers Conference. "For us, obviously, the cost has gone up drastically — the price of flour went through the roof just under the threat of a Ukraine invasion. So a lot of these macroeconomic things that are happening that we have zero control over are affecting us on a day-to-day basis."
In this environment, he says the easy thing to do is to increase prices and pass that along to the consumer. However, he doesn't want to raise prices until much larger grocery chains do it first, because the customers' perception is so important with price sensitivity. If they pass that full increase on to the consumer, they're going to have lots of customers that are never going to come back into his stores again.
"We have to wait for larger competitors to make that decision," he says. "And when they bring up the prices, then we can draft in behind them and say, Look, Walmart had to do it first. And now we're coming in behind them with a smaller increase than they had just to keep that price perception in the market. So, you're still going to feel it because the prices are going up. But at least the perception of our customers doesn't get damaged by it."
The grocer is also challenged in this market by the rising cost of wages. The solution, he says, is paying employees more. However, that poses its own challenges.
"When you have someone like Amazon come in and say, We're building a warehouse and we're going to start off at $18 an hour, I can't pay a cashier $18 an hour," Jorge says. "But we already have the rising cost of our goods. If we increase our labor up to $18 and hour starting salary, then we're not going to have any customers buying groceries in our stores."
To compete, he says they worked to improve their benefit packages. The other side of that, he says, is COVID showed that the stores needed to automate. While he was against self-checkout for a long time, he's now added those to stores.
"Wherever we can start automating in the store to become less reliant on manual labor, we are trying to make those investments because we've really seen the return on investment long-term," he says. "And it makes us less reliant on a lot of factors that are outside of our control."
When it comes to expansion, Jorge says real estate is not an afterthought for the business, real estate is the business.
“Location, location, location is one, two and three," Jorge says. "And a lot of our growth has been where the demographics of the neighborhood has changed and the existing grocery store can no longer be profitable there, we’ll go in and take over the lease, re-merchandise the store, do new types of advertising and really build up the business from there.”
The growth strategy, which has been deployed as several grocers have left the area, is to look at where customers are not being served and follow them there because another grocer is no longer doing the job.
In looking at acquisitions, Jorge says they go very deep into the analytics, much deeper than just sales and the balance sheet and the financials.
“We want to know what's the average cart transaction," he says. "How many customers do you have coming in every single week? What are the percentages in your departments? If you're in a heavily Hispanic area and your meat and your produce departments are below where they should be, we know that’s a growth opportunity for us. When we look at multiples, there's different ways to calculate multiples but there's so many variables that go into it. How long is the lease? What are the terms of the lease? Is there a percentage rent in the lease? Is this a landlord that we've worked with in the past and is easy to get along with? What's the situation with your employees? Why are you selling the business in the first place? So, there are so many variables before we even get to saying it's X of EBITDA, because that number might be 3x or maybe 6x, and 3x might be a horrible deal and 6x might be a fantastic deal. But you really need to get into the nitty-gritty of it and really see what you’re buying before you end up getting to that point.”
The current economy, he says, is likely going to slow down the deal pace significantly mainly because of the rise in interest rates. Many sellers were asking high multiples because they knew that money was cheap and there was a lot of buyers willing to spend that money because there was going to be very low interest on the debt. As the interest rates rise, he says multiples are going to have to adjust, as are seller expectations. But it also increases the stakes.
"You can't have a strike. You can't miss because the cost of missing gets a lot more expensive now than it was two or three years ago," Jorge says. "Your due diligence better be very thorough before you pull the trigger on that because if you swung and you missed, it's going to hurt even more than it would have a year and a half or two years ago."