Commercial Real Estate, Capital, Insurance, Leasing & Management

Across the Aisle: Grocers Compete

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"Kroger and Publix spend a lot of time evaluating their customer in each store, and they adapt their stores to what those needs are." - Brian Bern, Franklin Street Real Estate Services

Traditional grocers are protecting their market share from their specialty counterparts, and investors continue to pursue grocery-anchored centers because of their long-term value.

For a number of years, metro Atlanta’s affluent East Cobb district has supported a quartet of grocers within a square mile of the high-volume intersection of Roswell and Johnson Ferry roads. Publix, The Fresh Market, Trader Joe’s and Whole Foods Market have operated and thrived within these tight quarters, but the well-established intersection will soon have company in the vicinity that could shake up the foursome’s foothold.

Sprouts Farmers Market is currently building out its new store, located across Roswell Road from Whole Foods Market. The Phoenix-based affordable and health-conscious grocer currently operates more than 195 stores in 12 states and is opening more across the country. The company is one of several grocers expanding its store count at a brisk clip.

“Every grocer is positioning purposefully in trade areas that they feel are aligned to their customers,” says Brian Bern, senior director at Franklin Street Real Estate Services.

The calculated gamble that emerging specialty grocers are taking is that the market will absorb their new stores. Operators are hoping that their new locations will capture a strong share of sales within a give trade area. So far, these grocers are experiencing strong sales int heir existing locations.

Whole Foods Market leads the way with sales over $930 per square foot, while Sprouts and The Fresh Market are averaging $490 per square foot, according to a 2014 study conducted by PNC Bank, Chainlinks and Retail Lease Trac. Publix is performing at $552 per square foot, respectively. On the lower end, Weis Markets and Ingles are performing at $335 and $325 per square foot, respectively.

From a real estate perspective, grocery-anchored shopping centers remain a prime target for investors, and the sales price reflects how competitive the sector’s acquisition market has become. In February 2015, 78 grocery-anchored centers sold for $1.1 billion, according to Real Capital Analytics (RCA). The price per square foot, $196, is the highest it has been since at least 2001.

“Investors are paying a premium for grocery-anchored centers right now,” says Bern. “The cap rates have really compressed, not just because of the low interest rates, but the demand is there.”

In 2014, 929 grocery-anchored shopping centers sold for more than $13 billion, a 39 percent jump in sales volume year-over-year, according to RCA. The last time that many grocery-anchored centers sold in a given year was in 2007, when 1,119 centers sold for roughly $15.6 billion.

Cap rates are steadily compressing for grocery-anchored shopping centers. In 2014, cap rates were hovering at 7.1 percent compared to 7.3 percent in 2013 and 7.5 percent in both 2011 and 2012.

Private investors like Westwood Financial Corp. (WFC) are attracted to the assets’ long-term value. The Los Angeles-based private investment firm owns roughly 75 grocery-anchored shopping centers that feature 33 separate grocery operators.

“Grocery-anchored properties are attractive to private investors because the investments are relatively easy to finance, the price point allows for the investment of equity allocations that are easily raised from multiple sources and the locations are comprehensible and measurable from a location, layout and quality of sales perspective,” says Randy Banchick, executive vice president of WFC.

WFC owns Steele Creek Crossing, a grocery-anchored center in Charlotte, and has recently inked a lease with Publix to anchor the center. Steele Creek is one of seven former Bi-Lo locations that Publix has taken over in the Charlotte area. Traditional supermarkets like Publix and Kroger are making strong real estate moves like Publix’s consolidation of former Bi-Lo stores that will allow the chains to cement their position as the top grocers in most every market in the Southeast. 

The Mainstays

Besides Publix taking over former Bi-Lo locations, the Lakeland, Florida-based supermarket chain has a full slate of new stores in the pipeline. The company recently opened two stores in South Carolina, two in Florida and one in North Carolina. Additionally, the grocer will soon open three new stores in the Southeast: two in North Carolina and one in Florida. Publix has been actively pursuing North Carolina, which it just entered in February 2014.

The company has dominated the Southeast with 1,098 stores, eight distribution centers and 10 manufacturing facilities. What really sets the supermarket chain apart from a commercial real estate perspective is the company’s wave of acquisitions in recent months, especially in Florida. Publix Super Markets Inc. recently purchased Corner Lakes Plaza, a 77,260-square-foot, Publix-anchored shopping center in Orlando, for $14.6 million. The company has also recently purchased Publix-anchored centers in Tallahassee, New Smyrna Beach and Cermont.

Publix Super Markets has decided to own these well-located centers because they are generating strong sales and have proven to be viable long-term locations and dependable investments. The acquisition trend has also afforded Publix the opporutnity to act as landlord in these centers.

“Publix’s ownership is very proactive – they keep the properties clean, deal with any maintenance issues and stay very focused on the customer,” says John Crossman, president of Crossman & Co., a retail landlord representation firm that leases several of Publix’s centers in the Southeast. “The best grocery-anchored center int he Southeast is going to be a Publix-anchored /Publix-owned center.”

Publix gets to choose their tenant roster and positions each store to complement one another. For example, Publix is well-known for its in-house deli and in particular its sub sandwiches, or “Pub Subs”. As a landlord, Publix is careful to not cannibalize its own business, or one of its tenants, by signing a sub sandwich eaters in its owned centers. According to Bern, Publix is an ideal landlord.

“Publix is incredible as a landlord, they’re really good to their tenants,” says Bern. “They care about their public perception and what their tenants and partners think of them. They look at ownership a little different that most landlords because they have customers of their own.”

Like Publix, Kroger has enjoyed Georgia, South Carolina and eastern Alabama.

Kroger is also busy repositioning its existing stores. Following a strategic review, Harris Teeter, which is now owned by Kroger, announced that the brand was exiting the Nashville market, where it operated four stores. Three of the four will be rebranded as Kroger. In another example, Kroger recently rebranded a Ralphs in Belmont, California, into its value-oriented Food 4 Less concept. The shopping center is owned by WFC.

“Kroger utilized a newly designed format that adjusted its prior design to open up the store and provide an immediate focus on fresh produce and service areas, which upgraded the feel of the store beyond a strict value concept,” says WFC’s Banchik. “Store sales have nearly doubled as a result of the investment. Kroger has impressed us as being very proactive in responding to consumer demand and local store needs.”

Kroger has also introduced its Kroger Marketplace concept to certain markets to compete against supercenters like Target and Walmart. The Marketplace stores offer Starbucks Coffee, Fred Meyer Jewelry, The Little Clinic, a drive-thru pharmacy, Murray’s Cheese, Chef On the Run, toys, me and women’s apparel and home furnishings such as rugs, lamps and chairs.

“Kroger’s Atlanta Division introduced our first Marketplace store in Carrollton, Georgia, last year,” says Jenkins. “We determined many communities that would benefit from the extensive array of quality grocery products and upscale amenities that a Kroger Marketplace offers. Plans are underway to open more Marketplace stores in the Atlanta Division.”

To stay at the top grocers in the region, Publix and Kroger aren’t resting on their laurels. Instead the grocers are adapting their storefronts, realigning their real estate portfolios and changing their offerings.

“Kroger and Publix spend a lot of time evaluating their customer in each store and they adapt their stores to what those needs are,” says Bern. “That’s going to help them stay relevant and compete against the organic grocers.”

Multi-Channel Shopping

Consumers aren’t sticking to just one-stop shops to satisfy their grocery needs. A recent JLL study suggested that consumers are splitting their grocery bills between as many as five stores, resulting in a re-shifting of market share for traditional grocers like Publix and Kroger. A family may get its main list of items from a traditional grocer but get its produce from a different store, meat from another, wine from another and so on.

“Consumer shoping patterns have converted into a multi-channel experience,” says Banchik. The multi-channel shopping patterns have led to specialty and organic grocers to thrive.

Whole Foods Market has 395 stores in the United States and is rapidly expanding. In January and February of this year, Whole Foods Market opened four new stores in Florida alone: Miami, Pompano Beach, Davie and West Palm Beach. In April, the Austin-based grocer opened stores in Houston, Chicago, New Jersey and Olathe, Kansas.

Trader Joe’s, a grocer specializing in high-quality pre-packaged and frozen products, has benefited form knowing its target market and its untraditional site selection.

“Trader Joe’s is very particular about where they open new stores, almost to a fault,” says Bern. “They will identify a location where their customers are and not veer off, even if they can get a better deal and better site elsewhere.”

Trader Joe’s has already opened nine stores in 2015: two in Texas, two in Florida and one each in Utah, Illinois, Pennsylvania, Colorado and California.

Grocers like Trader Joe’s and Sprouts are giving shoppers an alternative to traditional grocery shopping that wasn’t as readily available as soon as five years ago. These emerging grocers have attracted consumers not only because they can offer specialty items, but also because they have innovated their store layouts.

“Sprouts has fueled excellent growth by turning traditional grocery store inside out – removing the aisles and opening the store to its ‘farmer-to-store’ produce,” says Banchik.

Sprouts is another grocer that is expanding aggressively, especially in Atlanta. Ted Frumkin, chief development officer of Sprouts, says it’s part of the grocer’s development strategy to zero in a particular market.

“Generally at Sprouts we employ a hub and spoke strategy when it comes to regional expansion, which means we open stores in a central hub market – in this case Atlanta – and then build a spoke of stores in the surrounding area,” says Frumkin. The grocer is planning on additional stores in Georgia, Tennessee and Alabama.

“Well supplement Atlanta with a new distribution center, which will enable us to open stores in even more Southeastern cities over the next 24 months.”

Like Sprouts, Greensboro, N.C.-based The Fresh Market is expanding into more locations in the region. The company currently operates 168 stores in 27 states and has announced new leases in Alabama, Connecticut, Florida, Georgia, Louisiana, North Carolina, New York, Pennsylvania, South Carolina, Texas and Virginia. Other specialty and organic grocers expanding rapidly in the region include Earth Fare and Lucky’s Market.

Beyond the crowded field of specialty and organic grocers is maybe the most aggressively expanding grocer: Walmart Neighborhood Market, Wal-Mart Stores Inc.’s small-footprint grocery concept. The company is rolling out anywhere from 270 to 300 Walmart Neighborhood Markets in fiscal year 2015, according to Amanda Henneberg, director of communications, public affairs and government relations for WalMart Stores.

“We have several new Nighborhood MArkets slated to open through August of this year in the Southeast, including four alone in the state of Florida,” says Henneberg. “Walmart is committed to expanding its Neighborhood Market format across the nation, especially in the Southeast, which is an important area for the company.”

To set itself apart from its small-footprint counterparts and convenience stores like Walgreens, Neighborhood Markets are open 24 hours a day, seven days a week and offer groceries – including meat and fresh produce – as well as pharmacy items.

“Nearly all include a pharmacy and many include a gas station,” says Henneberg. “By combining our Supercenters and small-store formats with ecommerce, we provide our customers with anytime, anywhere access to our brand.”

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