Have you ever imagined owning a full-line supermarket or your own group of full-line supermarkets? Scared of paying inflated prices because of the huge demand for big stores?
Do what some smart retailers in Queensland are doing. They’re finding that the most cost effective way into big supermarkets is to buy an existing, smaller store and transition it into new, larger premises via a store development or redevelopment process.
How is this cost-effective? Let’s look at the 5 facts of expansion:
When you buy an existing store in an area with a need for expansion, you can almost be guaranteed that the business will have large, existing profits (because there is more demand than supply in the local market). While the new store is being constructed, these profits enable the retailer to offset the price they paid for the existing business and grow their capital base. It also allows the retailer to get to know the market and specifically design the new supermarket around the needs of the community. This means more profit in the future. It makes sense that buying something that generates profit is cost effective.
Opening a new supermarket in an area with competition can mean a long and slow process of building your customer base to its potential. Also the customer can choose to change where they shop at any time. Retailers who buy existing supermarkets essentially eliminate competition and guarantee themselves turnover from day one in the new supermarket. It’s not hard to see how cost effective it is to have a guaranteed, solid base of turnover in place before opening the new store and to have a customer base over the long term that grows rather than risks being eroded. Once a large, new supermarket opens in a given area, competition is unlikely to enter the market.
Plant and Equipment that was purchased as a part of the existing business that would not be used in the new store, could be written off and claimed as a tax deduction if it was disposed of (as it is in most cases). From a tax perspective any loss that is sustained (i.e. disposal of plant and equipment) can be used in a tax effective way.
Everyone knows that it is cost-effective to have high amounts of depreciation. High amounts of depreciation equate to substantial tax savings. The clever thing about the way retailers go into these deals is that it maximizes plant and equipment cost and as a result maximizes depreciation. Think about it, the new premises are normally fitted out with brand new state-of-the art equipment and the goodwill component is relatively small (because it relates to the smaller existing business). If you compare buying an existing full-line supermarket to fitting-out a new supermarket, the goodwill component is normally high and the seller has usually already taken advantage of most of the depreciation on the plant and equipment. Doesn’t it make sense that fitting out a new 1500sqm store for $1,700,000 and being able to depreciate it all, is much more cost effective than paying $1,700,000 for an existing supermarket and only being able to depreciate $200,000 because that is the depreciated value of the plant and equipment?
You don’t have to be a brain surgeon to figure out that retailers love large supermarkets because of the large profits they offer. When a retailer goes into a new site, longer leases are normally available. (I have seen leases up to 30 years including the initial term and options). This means that the retailer has a longer, guaranteed period of time to retail from the premises and therefore a longer period of time to keep making returns. Many existing businesses only have shorter leases (most common is 10 years) in place, making new sites a far more cost effective option. A long lease also adds to the value of a supermarket.
It is true also that a business with new plant and equipment is far more cost effective to sustain as repairs and maintenance are kept to a minimum – especially in the shorter term.
When you consider the upside you can see why I believe retailers utilizing this option are smart. How could you see these cost effective funds working for you? How would the potential tax savings affect your personal situation and your business in the long term? How would the sustainability impact on your lifestyle?
Buying an existing supermarket and expanding into a bigger store in an environment where there is the need, is most definitely cost effective. Smart retailers in Queensland are already talking advantage of this process and you can too. As with any business venture, always speak to your accountant and advisors and make sure that this type of opportunity will work effectively for you.