Acquisitions & Conversions: A Telltale Indicator For Our Industry?

In the world of large-scale retail and restaurant brands, acquiring a prominent, well-known name may initially seem like a shrewd move, particularly when notable resemblances exist between the two companies. That said, just because a deal seems like a no-brainer doesn’t necessarily make that the truth. The success of these multi-million or billion-dollar acquisitions often hinges less on brand harmony, and more on the current dynamics of the market and that business’ standing in the commercial real estate market. This brings us to an intriguing debate regarding how these acquisitions and brand conversions will shape the ever-changing landscape of competitive commercial real estate.

Questions surrounding these deals become particularly pronounced in areas like Texas, which has several retailers actively pursuing expansion and an increase in market share. These companies often see the acquisition of faltering retail brands as a sure thing. While some certainly are, there are other factors that can come into play that may muddy the waters.?

What are you really buying?

A required first step to understanding the value of an acquisition is to understand where the value comes from in these deals. In many cases, the most significant value that comes from an acquisition is in the actual real estate itself. Buyers who know what they want — and where they want it — are in a strong position that can lead to quicker, low-hassle deals. These buyers are in a spot where they may be able to skip over the lengthy processes of identifying the proper markets for expansion, negotiating leases, and doing all the red tape and drudgery that comes alongside any large expansion plan. As soon as a location is zeroed-in on, buyers can lock down deals and make positive changes to their company outlook without having to undergo the traditional months- or years-long process of a market expansion that requires extensive research and manpower.?

Goes both ways

EōS Fitness’ acquisition of five Houston-area Texans Fit locations this April is a good example that these acquisitions and conversions don’t have to be multi-billion-dollar, national-scale deals in order to make waves in our industry. EoS Fitness’ expansion also shows how the same locations (Texans Fit had itself backfilled a number of 24 Hour Fitness locations) are able to maintain appeal to different brands in the same retail segment. While the internal deliberations and discussions surrounding these deals are not typically made public, it's still worth noting that it’s not always the acquiring brand that starts the conversations of an acquisition. Brands experiencing difficulty in today’s market may see an acquisition from another source as a lifeline. Even ones who are surviving may see a stronger competitor entering their market and choose to sell, rather than duking it out in what may be a losing battle in the long term.?

Internal conversions

In addition to acquiring other brands, retailers are also converting their existing stores into new concepts. This strategy, called "internal conversion," enables retailers to test new ideas with a lower level of risk and investment.

For example, Dick's Sporting Goods is working toward closing its Field & Stream locations and converting many of them to its new concept, House of Sport, which consists of features that allow customers to experience sports in-store through exhibits like rock climbing walls and batting cages. Target is another business experimenting with internal conversions by converting some of its stores into smaller-format "Express" locations that are designed for urban areas. The retail giant has also added new sub-stores to some of its stores, such as a Starbucks or a CVS Pharmacy.

Internal conversions can be a valuable way for retailers to test new ideas and stay ahead of the competition. By converting their existing stores, retailers can avoid the high costs associated with opening new locations. They can also use their existing customer base to test new concepts and get feedback.

A broker’s opinion

It’s worth noting that brokers can play a unique role in acquisition and conversion transactions. While many of these deals are handled directly by the retailers themselves, brokers occasionally come in to give estimates on values for newly purchased assets and to assess aspects of deals, such as economics and the prospect of closing vs. conversion.?

Brokers can also leverage their expertise and local network to help businesses gain perspective from other trends and similar deals that have been made in the region. These interactions often lead to a better understanding of an acquisition and a better outcome overall.

Trend lines

Will a crowded commercial real estate market, paired with widespread economic uncertainty, lead to more acquisitions and conversions in place of traditional expansion? While it’s too early to tell for sure, there’s little doubt they will continue to play a role in the competitive Texas markets, where high-quality real estate is difficult to find these days.

A few things to keep in mind: first, some decision-makers in retail may leverage pessimistic economic forecasts to buy new property, and thus, enter a new market for far less than what it would cost to build from scratch. On the flip side of that mindset is similar economic sentiments were prevalent in early 2020, and though there was some fallout from the pandemic, it never materialized anywhere near where economists originally thought it might. Additionally, while some acquisitions may have a huge local impact here in Texas, these deals are often driven by national factors. It isn’t just bankruptcies that lead to acquisitions and conversions; a chain thriving here in Houston may be struggling in other markets around the U.S. Whatever happens, these acquisition deals will continue to reveal a great deal about the trajectory of the retail market along with the decision-makers who shape its future.