Grocers compete, retail real estate · PDF fileGrocers compete, retail real estate wins Some expanding grocery sellers are competing with low costs while others win with unique experience

Janua ry 2016 a J L L r e t a i l r e s e a r c h p o i n t o f v i e w

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Supermarket sweep Do you remember the game show Supermarket Sweep? In it, teams of shoppers would race through the grocery aisles competing to fill their carts with the most expensive items within a time limit. The show turned what many considered a dull weekly chore into a race against time. Back when Supermarket Sweep first aired in the sixties and later when it was revived in the early nineties, the weekly shopping trip was a typical mainstay for most American families.

Grocers compete, retail real estate wins Some expanding grocery sellers are competing with low costs while others win with unique experience. Both cases foster steady demand for retail real estate.

Image: Eddie Welker, CC by 2.0

That was a time before the super centers, small format discount grocers, online shopping and expanded grocery options at your local drug store. Now it seems like everybody wants to get in on the grocery action. That competition means more options than ever for the consumer and often lower prices too. It also means a growing segment of grocery sellers are focused on creating a unique shopping experience in order to attract loyal customers.


Grocery competition has been good for retail real estate For players in the grocery sector, this stiff competition has meant a tough battle in three main arenas: price, convenience and experience. This led to strong expansion of limited assortment discount grocers, a modest expansion of high-end grocers and new web-based sales options from old and new retailers alike.

The victors in this war are as yet undetermined, but the overall impact on retail real estate is clear:

Grocers compete, retail real estate wins Some expanding grocery sellers are competing with low costs while others win with unique experience.

Image: Dean Hochman, CC by 2.0 Grocery propels new retail construction Across the nation, new demand from grocery-oriented users has propelled much of the new retail construction. While retail construction levels overall have remained modest since the recession, they are growing annually at sustainable levels. Of the more than 81.0 million square feet of new retail space built in 2015, 77.5 percent fell into two broad categories: freestanding retail buildings (50.9 percent) and neighborhood and community shopping centers (26.5 percent). In other words, more than two thirds of new construction occurred in categories dominated by daily needs retailers including traditional grocers, limited assortment grocers and super centers.

Grocery competition and expansion has prompted a steady demand for new and existing retail real estate in the form of freestanding super centers and supermarkets as well as neighborhood and community centers.

Freestanding general retail

51%

Malls 10%

Power centers 7%

Neighborhood and community centers

27%

Specialty centers

5%

2015 new retail construction

(by square feet)



Neighborhood and community centers feel benefits of grocery competition Existing neighborhood and community centers clearly see the benefit of grocery sector demand. The national vacancy rate in those centers dropped by 60 basis points over the year 2015. These centers absorbed over 376.5 million square feet of space, more than half of all the retail absorption for the year. This is good news for a type of retail property that has seen higher vacancy rates. Neighborhood and community center vacancy fell to 8.8 percent in 2015, higher than the overall U.S. retail vacancy rate of 5.6 percent.

Asking rents in these centers have been climbing too, although not at the same rate as other retail property types. The Q4 2015 national average asking rent for neighborhood and community center space was $14.37 per square foot, a 1.3 percent bump over last year.

Fighting for a piece of that $10 billion pie The supermarket and grocery store industry saw $10 billion in profit in 2015 , yet future growth prospects are rather modest. IBISWorld projects that the industry will grow by an average annual rate of 0.8 percent from 2015 to 2020. One reason for this is the fact that American consumers have seen little shift in what they have spent on shopping trips. In terms of real dollars, retail and food service sales have shown only modest growth.

In order to carve out market share in the slowly growing industry, grocery sellers will have to fight tooth and nail in order to prevail in each arena: convenience, price and experience

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Real retail and food service sales, monthly, seasonally adjusted

Q4 2015 Year-over-year asking rent increase

Year-over-year change in vacancy rate

Freestanding general retail 2.8% -0.5%

Malls 3.8% -0.1%

Power centers 1.4% -0.3%

Neighborhood and community centers 1.3% -0.6%

Total retail 2.0% -0.5%

Source: JLL Research, CoStar


CONVENIENCE: Make it easy to buy Surrogate shoppers do the hard work for you It was Saturday morning at my local grocer. With the usual crowd of weekend shoppers, navigating my cart was becoming a pain. In the produce section I leaned over a bin of sweet onions and then noticed something odd. I wasn’t the only shopper digging through onions that morning. A store employee equipped with a small computer and bar code scanner on his wrist bagged some onions of his own and placed them in a plastic bin on a cart. The employee was assembling a click-and-collect order for a consumer more astute than I. This online shopper had avoided the crowds altogether, employing a grocery store employee as a surrogate shopper. Grocers charge small fees for this service, but for many time-pressed shoppers the price is worth the convenience. Customers submit an online shopping list one day and pick it up the next.

Harris-Teeter, which had been an early innovator in grocery click-and-collect, was acquired by Kroger in 2014. Kroger has since gone on to roll out its ClickList shopping service in at least five markets. Safeway, which was acquired by Albertsons in 2015, has been shipping groceries to consumers since 2000.

Millennials are leading the way in online grocery shopping. Eighteen percent of them reported that they already shopped in a virtual supermarket and another sixty-four percent expressed their willingness to do so in the future. The results for generations X and Z weren’t that far behind. Every age cohort younger than the baby boomers is ripe for conversion.


For the pure convenience of it, nothing beats picking out groceries on your laptop or smartphone and having them delivered to your doorstep. Especially for prepackaged commodities, shoppers will likely have a growing willingness to shop in this fashion…if they can afford it.

Grocery delivery and pickup comes in a few broad categories:

§  Traditional grocers have generally offered either home delivery from a store and click-and-collect at a store.

§  New startups have focused on either home delivery from a company warehouse or third-party home delivery of purchases made at multiple retailers.

FreshDirect has been delivering online grocery orders in the New York area since 1999. Peapod, now owned by Royal Ahold has been delivering web-ordered groceries since 1996. Peapod now delivers exclusively for Royal Ahold grocer banners Giant Food and Stop & Shop.

One of the drawbacks of shopping online via an individual grocer is the fact that a shopper is limited to goods sold at a particular store. Third party options such as Google Express and Instacart charge fees to do the shopping for you. Shoppers can choose higher per-order fees or pay for memberships in exchange for reduced or free delivery. Both services are rolling out in a growing number of markets, offering same-day delivery in some and next-day delivery in others.


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Fifty-six percent of all U.S. supermarkets are in just 10 states

Grocery grows where people go Despite the proliferation of online and delivery options, most grocery sales continue to occur in person. Rush hour shoppers picking up a rotisserie chicken for dinner on the way home from the office do not have the foresight to plan ahead for online delivery. Lower income families on a tight budget may not be willing to pay the additional cost of delivery. For all of those in-person shoppers, the apex of convenience continues to be that old real estate standby: location, location, location.

Traditional grocers in markets with significant residential construction are fighting over key intersections in growing communities. Some have even been willing to cannibalize existing trade areas in order to protect market share.

In Texas, regional heavy hitter H-E-B, which operates more than 340 stores in Texas and Mexico, has been opening new stores at the pace of approximately one per month across the Houston region.

Source: JLL Research, AggData; Image: ornello_pics, CC by 2.0


Grocers find new homes in office buildings, residential towers and even malls While traditional suburban residential construction continues to drive some grocery expansion, there remains a good deal of opportunity in urban markets, especially as population continues to flow into major U.S. cities. Some grocers are making an effort to adapt their store prototypes and product mixes to meet the needs of urban shoppers. While rents in these locations are generally higher, so too are the incomes of shoppers and the potential profit margins.

In uptown Charlotte, North Carolina for example, a Whole Foods will occupy the first floor of a tower which will house hundreds of apartments. The site is adjacent to a light rail station. The 47,000-square-foot supermarket will feature a bar and rooftop dining.

In shopping malls where traditional department store anchors are shrinking footprints, there is also potential for grocers to become a part of the tenant mix. In Virginia Beach for example, The Fresh Market will soon open its doors at Pembroke Mall. The upscale grocer has signed leases along with apparel retailers DSW and Nordstrom Rack to take over a portion of a downsized Sears anchor. It will be the grocer’s third location in the region.

Some urban settings are better fits for grocers with limited assortments and smaller footprints. Lassens Natural Food & Vitamins, for example, recently opened 12,000 square feet at Wilshire La Brea, an urban Los Angeles apartment complex. This is the 11th location for this popular organic grocer. Trader Joe’s will open 12,700 square feet in Downtown Los Angeles at USC Village in late 2017. USC Village is a 1.3 million-square-foot mixed-use project spread over 15 acres of USC campus. Erewhon, another high-end natural grocer occupies the first floor of Broadcast Center Apartments on Beverly Boulevard in West Hollywood.



PRICE: Make it affordable Aldi shoppers choose lower prices A typical Saturday at Aldi finds young parents, children and elderly couples out in force, stocking up on affordable groceries. The stores’ entrance ways are stacked high on either side with tempting snacks and other impulse items. Fresh options are limited, with only the most popular vegetables, meats and cheeses for sale.

Some may miss the selection offered at a large supermarket, but for the Aldi shopper this lack of selection is a good thing. The staff required is a fraction of that found at a traditional supermarket and the savings are passed on to the consumer. Check-out lines move at lightning speed, as there are no baggers here. The sole job of the cashier is to scan each item on the conveyer belt and return it to the shoppers’ carts. When families bag their own groceries, they are making a conscious choice of price over convenience. With, for example, only one kind of onion to choose from, cost-conscious shoppers choose price over selection.

Lidl soon to follow Aldi to American streets Aldi has been in the U.S. since 1976, but a recent expansion push has meant real growth for the German discounter. Its stores in the U.S. now number over 1,300, with locations in 32 states in the Eastern half of the U.S. Aldi is rumored to have approximately 29 Southern California locations set to open soon, with expectations to open about 130 new U.S. stores each year through 2018. Meanwhile, another limited assortment grocer from Germany, Lidl is planning an American entrance of its own with an initial target along the East coast from Pennsylvania south to Georgia. Lidl expects to eventually open 500 U.S. locations.

New concepts to compete on price Whole Foods has built its business on delivering high levels of service and quality in an experience rich grocery environment. But despite the inherent profit margins found in the high-end food world, Whole Foods has now determined that growth will come in the form of lower price points.

365 by Whole Foods is the concept created to fuel that new growth. 365 is smaller than a typical Whole Foods. The first 365 will open this year within approximately 30,000 square feet in the Silver Lake neighborhood of Los Angeles. Like the denizens of this hip neighborhood, 365’s target customers are the children of Whole Foods shoppers. The stores will focus less on the shopping experience and more on speedy service and discount prices. After Silver Lake, 365’s will open in Santa Monica, Bellevue, Houston and Portland in 2016. Whole Foods plans to open twice as many locations in 2017.

Images: Mike Mozart, CC by 2.0; Tim Samoff, CC by 2.0



Grocers still hot for SoCal For a conflux of reasons including attractive demographics, continued in-migration and a strong economy, Southern California remains a top destination for retailers, grocery sellers included. Indeed, one market observer remarked he can’t imagine a more active grocery field, especially in the discount arena. In addition to the aforementioned Aldi and 365 by Whole Foods, Smart and Final and Grocery Outlet are also opening new locations.

Grocers looking to expand along the West Coast have been helped by the unusual ongoing woes of the Haggen chain. The small, 18-store chain based in Bellingham, Washington made a high stakes bet when it purchased 146 stores from Albertsons and Safeway. The two large grocers were in the process of merging and needed to sell off the stores in order to satisfy FTC requirements. Just three months after converting the branding and operations at the newly purchased stores, Haggen was forced to file for bankruptcy. Since then, Haggen has put nearly all of those new stores up for auction.

Smart and Final has purchased and converted 30 Haggen stores to its brand. Smart and Final is, like Haggen, owned by a private equity firm. However, the stores themselves are quite different. Smart & Final has branded itself as a warehouse grocer without the membership fees. Through the newer Smart & Final Extra! stores, the chain has combined the discount elements of its warehouse stores with the convenience of meats, produce and other traditional offerings. The limited assortment grocers are in footprints under 20,000 square feet.



EXPERIENCE: Make it a rewarding event Grocery sellers provide daily needs goods such as food and beverages. And as such, they are more likely than other retailers to compete on price. But some grocery sellers, especially those targeting a more affluent demographic, are competing to meet more advanced human needs through unique shopping experiences. While expansion options appear limited for grocers with high-end artisanal offerings, there is still some fresh movement in the sector.

New concepts bid for the artisanal experience Kroger has launched a new concept in Gig Harbor, Washington called Main & Vine. It has a focus on fresh healthy food with a culinary bent. Meanwhile, Ahold has opened two bfresh stores in the past year in Massachusetts and Connecticut. These are small format stores with a foodie bent, clearly meant to compete with the likes of Trader Joe’s.

Food and Drink A growing bar scene Some grocers have advanced their food and beverage options in order to entice shoppers to visit, hang out and spend money. As one writer for LA Weekly provocatively asked, “Are supermarket bars the new dive bars?” In downtown Los Angeles, that may just be the case. As gentrification progresses, more and more affordable boozing options for millennials are disappearing in favor of high-end restaurants and shops. This has led to bars and wine bars in some Whole Foods and Ralphs. This trend isn’t limited to the West Coast. Hy-Vee, a Midwest grocer with over 235 stores, offers in-store drinks and dining at its Market Grills, which are currently within 80 supermarket locations. These full service restaurants offer 65 craft beers and an extensive wine list.

Target too has been testing the alcoholic waters. In Chicago’s Streeterville neighborhood, the latest small-footprint urban Target (~24,000 square feet) boasts a Starbucks that serves booze as a part of the coffee chain’s Evenings program. It’s the first bar in the nation inside a Target. (See our “Starbucks to Barbucks” report for more on the Evenings program.) To further cater to the local millennials who make up much of the neighborhood’s population, Target’s grocery offerings at the store are heavy on natural, local and organic goods.

Beer, barbeque and live music H-E-B, a privately owned grocer with 318 locations in Texas and another 52 in Mexico, is also experimenting with adding a dining experience, although in contrast to Hy-Vee’s full-service dining, the atmosphere at The Café at H-E-B is decidedly more fast casual. Currently found at nine locations in the Houston and San Antonio markets with a tenth on the way, these offer fresh made-to-order dining, with an emphasis on local brew and Texas barbeque. Some locations also feature live music programming.

Image: Nan Palmero, CC by 2.0

Image: David Woo, CC by 2.0


Grocery Outlet opts for a different kind of experience One grocer that competes in the value segment has also developed a unique method to offer shoppers a new kind of old fashioned experience. Grocery Outlet is an “extreme discount” chain with a model which allows them to both expand like a larger chain and still offer the traditional experience of shopping in a home-town family-run store. Stores have operated under the Grocery Outlet banner since 1946. Each Grocery Outlet is independently operated by a locally-based family that shares a percentage of the ownership. These co-owners develop community roots, have children in local schools and become an integral part of their cities. Meanwhile, the Grocery Outlet corporate operation purchases overstock and surplus items in bulk. The experience offered in a discount setting is unique and this old fashioned chain does not sell its goods online.

Expect further expansion from grocery sellers In the short term, the growth prospects for grocery are good, as discretionary spending will continue to grow. As per capita disposable income continues to rise in the U.S. along with total urban population, we can expect shoppers to continue to drive demand for grocery sellers in all price categories.

§  Owners of neighborhood and community centers can continue to expect demand from grocery occupiers. In some communities this will primarily come in the form of limited assortment discount sellers. In urban markets, higher-end grocers offering an artisanal foodie experience will be adapting their typical prototypes to fit unique urban spaces in residential towers, office buildings and even regional shopping malls.

§  Demand will certainly continue in suburban and urban markets in and around places like Los Angeles and Houston where a steady stream of new residents propels new construction.

From the European model of limited selection, self-service and deep discounts, to the high-touch experience found at a large gourmet market, community and neighborhood centers will continue to experience dropping vacancies and sensible levels of new construction in order to meet the demand.





Source: JLL Research, company reports and Supermarket News 2016 Top 75 Retailers and Wholesalers rankings.

Top 10 U.S. grocery sellers Grocery sales locations Same-store-sales growth

1. Walmart

5,249 U.S. locations, including 3,445 supercenters, 656 neighborhood markets

and 652 Sam’s Clubs. In January, Walmart announced it would close 154 U.S. stores, including all 102 Walmart

Express locations.

U.S. same-store-sales increased 1.5 percent in fiscal Q3 2015.

Neighborhood Market comps

increased by about 8.0 percent.

2. Kroger 2,623 supermarkets and multi-

department stores. In December, Kroger acquired 151 Roundy’s stores.

Same-store-sales growth (without fuel) in fiscal Q3 2015

grew by 5.4 percent.

3. Costco 480

U.S. comparable sales (excluding impacts from gasoline declines and foreign exchange)

grew 6 percent in fiscal Q4 2015.

4. Albertsons 2,205 N/A

5. Target 1,573 Q3 2015 store comps grew by 1.9 percent.

6. Publix 1,115 Q3 2015 store comps grew by 4.2 percent.

7. Ahold (Merger with Delhaize to complete in mid-2016)

781 Q3 2015 same-store-sales

growth (excluding gas) grew by 1.8 percent.

8. H-E-B 370 (52 in Mexico) N/A

9. Supervalu 1,541 Retail food same-store-sales

were down 2.6 percent in Q3 FY 2016.

10. Delhaize (Merger with Ahold to complete in mid-2016) 1,300

Q4 2015 saw 2.3 percent comparable U.S. store sales

growth.


Thank you A special thanks to the JLL professionals who contributed insights to this report: Scott Burns (Los Angeles retail brokerage), Simmi Jaggi (Houston retail brokerage) and Mike Longmore (retail agency leasing).



Trust our retailntelligence.

About JLL JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual fee revenue of $4.0 billion and gross revenue of $4.5 billion, JLL has more than 200 corporate offices, operates in 75 countries and has a global workforce of approximately 53,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3.0 billion square feet, or 280.0 million square meters, and completed $99.0 billion in sales, acquisitions and finance transactions in 2013. Its investment management business, LaSalle Investment Management, has $50.0 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com. About JLL Research Jones Lang LaSalle’s research team delivers intelligence, analysis and insight through market-leading reports and services that illuminate today’s commercial Real estate dynamics and identify tomorrow’s challenges and opportunities. Our more than 400 global research professionals track and analyze economic and property trends and forecast future conditions in over 60 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions. About JLL Retail JLL’s retail experts partners with retailers, investors and owner/operators with an extensive team of dedicated experts around the world. They understand the inherent complexities and variability associated with both the retail industry and increasingly complex capital markets. Its specialists are recognized for their independent and expert advice to clients, backed by industry-leading research that delivers maximum value. With leading in-depth knowledge of the local, regional and global market dynamics, JLL aims to truly partner with its clients for the entire lifecycle of an asset or lease. Its experts deliver clients maximum value that support and shape their investment, site selection and brand strategies. JLL is the largest third party retail property manager in the United States with more than 1,000 centers, totaling 125 million square feet under management. The firm has more than 140 retail brokerage experts spanning more than 30 major markets, representing more than 900 retail clients. In 2015, JLL’s Retail Group completed transaction management and portfolio optimization on 1,500+ leases, negotiated 500+ leases for retailers and 1,000+ leases for landlords and completed more than $2.7 billion of investment sales, dispositions and financing for investors. For more news, videos and research from JLL’s Retail Group please visit: www.jllretail.com. © 2016 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.

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Grocers compete, retail real estate · PDF fileGrocers compete, retail real estate wins Some expanding grocery sellers are competing with low costs while others win with unique experience