From the rise of farmers markets and organic-only “foodies,” to the attacks on sugar and trans fat, the food industry is evolving right along with consumers’ tastes and preferences. This means those who appraise assets for lenders in the food manufacturing, retailing and food service sectors need to be sure their analytics are in step with the times, write two 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 plant, machinery and equipment (M&E).

Given the razor-thin margins in today’s food industry, Huber and Boland write, it is 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-foot 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 the 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.”

There are key differences between liquidation sales involving grocery stores and those focused on other retail inventories. “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. “A well-run grocery store will restock the perimeter anywhere from three to six times a week. The perimeter’s freshness is critical to making sure customers keep coming in the door. If a chain files for bankruptcy, but then fails to replenish the meat, dairy, fruit and veggies in the time it takes to choose a liquidator, customers will flee and the liquidation value of the store will be decimated.”

Recovery values differ as well, given that grocery stores often employ relatively large payrolls of union workers and must contend with other expenses. “Occupancy costs for supermarkets also tend to be higher as a percentage of cost inventory than in other retailer categories,” they write. “As a result, recovery values for traditional grocery liquidations can often be in the low-to-mid 60s. But 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.

Looking beyond the retail side, the authors describe how appraisals in other areas of the food industry involve unique, context-dependent considerations as well. “For any appraisal of food-processing equipment, for example, it is critical to understand the ways in which multivariate factors can affect collateral values,” they write. “Imagine a 100-foot 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 100-foot 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 consideration of current market opportunity: What is the availability of comparable equipment, and how actively is it traded?”

Specific market trends can be big factors in these analyses. Over the past couple of years, for example, the secondary market for the sophisticated countertop equipment used by fast-food chains and other food preparers has been less stable. “Time and convenience are more important than ever, and national food preparers want employees to be able to simply swipe a screen or push a button,” they write. “Today, [food preparers] want the latest and greatest equipment, with the easiest-to-use interfaces, fastest production outputs and lowest mistake rates. On top of that, some of the major chains only buy new and are simply not in the market for used equipment. Meanwhile, more companies want next-generation equipment that can be used to guarantee gluten- and allergen-free products.”

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.”

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