Central to my long thesis on Grupo Chedraui is a rollout of the Smart & Final cash and carry grocery warehouse format.
This 254-store warehouse retailer (think of a smaller version of Costco specializing in groceries and food supplies without the margin sapping gas-bars and no requirement to buy a membership) was purchased by Chedraui in 2021. The timing seemed astute with an inflationary trend in food providing a significant tailwind for grocers.
My position was that Chedraui would evaluate the chain purchase for a time and that we would only know whether the banner acquisition was a good deal based upon a public declaration to expand the footprint.
The local notice of the new 39,000 square foot location in San Jose, CA provides the first confirmation of Chedraui’s intentions for expansion of the Smart & Final warehouse chain.
I consider this to be a “big development” from a regional banner offering national growth potential in consumer staples.
Any new Costco or BJs location typically represents a multiyear “planning to ribbon cutting” process, due to the size of each store, road work typically involved, the expectation that a gas bar will be added, plus the lengthy civic and environmental approval process involved for underground fuel storage tanks.
In clear contrast, Smart & Final can rather quickly (within a year) convert almost any existing 35,000-50,000 square foot site into a revenue producing store; there are more than one thousand potential locations presently in inventory throughout the United States, primarily located in/adjacent to regional shopping centers. The more compact retail footprint of Smart & Final, specializing in higher margin perishables, frozen goods and commercial merchant sundries, can be nimbly rolled out at a pace that runs laps around a ponderous bureaucracy embedded within certain warehouse retailers.
We will learn more about the expansion program in the coming quarterly report, to be released in less than two weeks.
Should the fiscal result meet my forecast, operating cash flow will be more than sufficient to embark upon a methodical and steady expansion, of a potentially exciting brand for consumers, within the cash & carry grocery business.
Bulk cash and carry food retailers might presently carry a perception as little more than a niche by analysts; decades ago, membership warehouses were also considered a niche, an interesting experiment with limited growth potential. What cash and carry does offer, in this market, is an ability to seriously undercut membership retailers by eliminating expensive “value added” services and focusing upon what consumers and small businesses are willing to pay for, nothing more, nothing less. Smart & Final seems to be precisely the right format, at precisely the right time, for an inflationary economy.