Dive Brief:

• Smart & Final has agreed to be acquired by Apollo Global Management for $1.1 billion, according to a news release. The private equity firm will pay $6.50 per share in cash for the warehouse chain, representing a 25% premium to Smart & Final’s average stock price at market close over the past 24 days. The deal, which has been approved by current owner Ares Management, is expected to close in the third quarter.
• The acquisition amounts to a buyback for Apollo, which sold Smart & Final to Ares in 2012 for $975 million. Apollo also owns The Fresh Market and held a controlling stake in Sprouts Farmers Market from 2011 to 2015.
• Smart & Final operates 324 grocery stores and foodservice outlets in California, Oregon, Washington, Nevada, Idaho, Arizona, Montana and Utah. Its latest quarterly earnings showed a 1.9% increase in same-store sales while adjusted earnings were $41.5 million. Smart & Final’s 2018 sales totaled $4.7 billion.

Dive Insight:

Smart & Final's stock price has fallen by nearly half since going public in 2014 as it struggles with heightened competition. The company's unique model — it's a warehouse chain that also runs a business segment — has proven challenging to manage, but Apollo clearly sees value in it.

“The unique differentiation and strong value proposition of both the Smart & Final and Smart Foodservice banners are evident to us and we welcome the opportunity to augment and enhance the experience for the company's household and business customers,” Andrew Jhawar, senior partner and head of the consumer and retail group at Apollo, said in a statement.

Smart & Final’s foodservice outlet, rebranded last year to Smart Foodservice Warehouse Stores, appears to be the most promising piece of the business. The division, which serves restaurant operators, is benefiting from increased consumer spending on eating out, according to company executives. During the most recent quarter, net sales for the division rose 5% while same-store sales rose 4.3%.

The retailer has also thrown its weight behind its Extra! store format, which features a wider assortment of perishable, organic and household products than its legacy stores. The format, which launched in 2008, now comprises more than three-quarters of Smart & Final’s warehouse store portfolio.

Smart & Final has steadily grown its footprint in recent years, acquiring 33 Haggen stores in 2016 and building 15 new locations in 2017. But intensifying competition in markets like Southern California, where Aldi has firmly established itself, has curbed Smart & Final’s warehouse store growth. The company opened fewer than 10 locations last year and closed almost as many. This year, it plans to open two to three Extra! stores and four Smart Foodservice locations.

The company's warehouse stores, which promote discounts of 12% to 14% below competitors, have doubled the size of their meat departments, expanded private label assortment and launched home delivery from most locations. Further changes will no doubt be needed as Aldi and Walmart continue to level up in discount grocery. 

Apollo, meanwhile, has had a mixed record in the grocery business. It invested $200 million in Sprouts Farmers Market in 2011, took the retailer public two years later and cashed out in 2015 for $2 billion. Apollo also guided The Fresh Market through a period of rapid expansion, but that didn’t pan out as well. The retailer has slashed its store count over the past few years and retrenched as a more European-style specialty retailer.