While grocery-anchored shopping centers reign as the safest bet for investors in the troubled retail sector, they’re not immune to many of the same struggles that other retail assets are facing.
Supermarket companies are investing billions of dollars to adapt to consumers’ evolving shopping habits, including delivery and curbside pick-up. Grocers are also dealing with stiff competition from big e-commerce giants like Amazon/Whole Foods and big-box powerhouses like Costco and Walmart.
“The grocery store business is known to be a very cutthroat business,” says Naveen Jaggi, president of retail advisory services and capital markets with real estate services firm JLL. “It’s a very tough, highly competitive business, so every step you take is looking at a differentiator for your consumer to give them a reason to come to your store every single time.”
Profit margins in the grocery business are razor thin. Some regional and national chains have struggled under the strain. Since 2010, five grocers with more than 100 stores filed for bankruptcy, according to Food Partners, an investment banker to the food industry.
Winn-Dixie operator Southeastern Grocers, for example, has emerged from Chapter 11 bankruptcy with fewer stores. Others that filed for bankruptcy protection include Tops Markets, A&P, Fresh & Easy and Haggen. There have also been rumors swirling recently that upscale New York supermarket operator Fairway may be planning to file for Chapter 7, though the chain has denied that is the case.
Consolidation continues to hit grocers
Meanwhile, continued consolidation among supermarket brands is inevitable, industry experts say. Recent notable deals include United Natural Foods’ acquisition of SuperValu, Lidl’s deal to buy Best Markets, SpartanNash’s purchase of Martin’s and Walmart’s majority stake in Flipkart.
In its “Food in Demand Series: Grocery” report for 2019, real estate services firm CBRE predicts that consolidation will continue as scale and footprint become increasingly critical to growth.
“Pricing pressures, increasing competition and the impending impact of e-commerce will require significant capital investments by grocery players over the next five years,” CBRE researchers noted.
Those with margins to invest and physical scale to efficiently reach millions of households will have a distinct advantage. As such, CBRE says expect larger grocers to continue to acquire smaller and regional chains.
Acquisitions have been an integral part of growth strategies for many of the big grocery chains, including Kroger, Ahold Delhaize and Albertsons, according to the firm. These three companies combined have purchased nearly 40 different brands during the past two decades.
“Typically, there’s consolidation because there’s either contraction of capital for the capital-constrained retailer or there’s scale of efficiency and geography by the well-capitalized retailers,” Jaggi says. He points to Alberstons’ acquisition of Safeway, Krogers acquisition of Roundy’s and Family Dollar’s purchase of Dollar Tree as examples.
“To me, that’s not an unusual or unhealthy sign,” Jaggi adds. “That’s just a natural evolution of our economy that goes through cycles. Every 10 to 20 years, you see a change in consumer behavior and that results in someone getting weaker and someone getting stronger.”
Who else is at risk of being snatched up?
The next trend, Jaggi notes, will likely be the drive toward home delivery, which requires significant capital. That move will be driven by the well-capitalized, larger chains, Jaggi notes.
While only 3 percent of grocery spending in the U.S. is currently done online, predictions say that grocery delivery will start to increase as grocers continue to invest in delivery.
“If you start seeing the home delivery aspect of grocery taking off, which many consultants believe and I believe there’s a significant play there as well, that will impact the larger player to dwarf the small, niche player because they can’t afford the delivery level that a larger player can in terms of size, offerings, etc.,” Jaggi says.
He points to a driverless delivery partnership between self-driving car company Nuro and giant grocer Kroger as an example of the huge investment being made in home delivery.
“If you have that significant of a player [as Kroger] investing in automated delivery by car, that tells me there’s a significant future for home delivery of grocery products,” Jaggi says.
That may leave small and regional grocers most vulnerable to possible acquisition or closures.
Consolidation will also be more impactful in certain already challenged geographies, Jaggi notes. For example, the Rust Belt is an already challenged part of the country as more people are leaving over time to move toward the Sun Belt states.
“Whatever is left, now the retailer is playing to a smaller consumer base,” Jaggi says. “I think you will likely see that region looking at more consolidation.”
The strong get stronger
The buyers are generally the stronger operators with larger balance sheets and greater financial flexibility, says Bruce Schanzer, president and CEO of Cedar Realty Trust, which specializes in grocery-anchored shopping centers on the East Coast. The targets of the acquisitions, broadly speaking, fall into two categories. One is the smaller operators that are very successful in their local markets, with well-located stores that would be hard to replicate, Schanzer notes. “A large operator might come along and acquire a relatively small chain of strong stores for that reason,” he says.
The other group is the larger chains that might be slightly weaker or facing some of the practical challenges that grocers are facing today that will be acquired by big, more successful operators boasting larger balance sheets.
An example is Ahold acquiring Delhaize in a $28 billion deal. The move had a big impact on the East Coast, putting four of the biggest chains under the same umbrella, including Food Lion, Stop & Shop, Giant and Hannaford.
Consolidation can be positive for landlords
Generally, when you have a grocer consolidation like the Ahold-Delhaize deal, you end up with a stronger operator with better operating practices, Schanzer notes. Oftentimes, when banners combine, they take the best operating practices from each of the two companies.
For example, Ahold benefited from a better understanding of how Delhaize’s Food Lion brand effectively operated smaller-format stores, he says. Since the merger, Ahold has rolled out its own small-format store concept called Lunchbox.
Meanwhile, the Delhaize banners benefitted from Ahold’s superior technology, real estate and inventory management systems.
“When you look at it from a landlord’s perspective, that’s obviously a positive,” Schanzer says. “The stronger companies have better infrastructure and are better able to navigate into the 2020s on a more secure footing in what we all realize is an increasingly competitive environment.”
A consolidation can also give the players better balance sheets, he notes, making them more creditworthy. They’re more able to undertake the capital investments necessary to stay competitive, he says.
At the moment, the supermarket business is very crowded, according to Schanzer. Walmart and Target are in the general merchandise category, but carrying groceries, for example. Costco and BJ’s are among the warehouse clubs that do the same.
“You have drugstores, dollar stores. Everybody’s trying to get into the grocery business, and classic grocery banners need to constantly innovate while they continue to focus on the efficiencies that come with being larger,” Schanzer adds.
But there can also be significant challenges
There are also obviously concerns for landlords. First is credit concentration, Schanzer says. “When two of our tenants have combined into one company, we’re now exposed to a single credit. If that corporate owner were to go bankrupt, we would have more stores impacted by that bankruptcy.”
The second challenge is market concentration. As more banners combine, these tenants have greater market power and could negotiate better lease terms, Schanzer points out. Also, they might seek to reduce their store counts to reduce duplication, which could lead to anchor vacancies.
A lost grocer could be devastating for a center that depends on that anchor to drive foot traffic. Many shoppers take multiple trips to the grocery store weekly, and “hopefully support some of the other tenants in the center,” Schanzer notes.
The grocer typically contributes significantly to the sales and gross leasable area of any shopping center.
And that space can be difficult to backfill. A minimum of 18 months downtime should be expected when backfilling anchor space, according to Green Street Advisors’ 2019 U.S. Strip Center Outlook. And if a big box needs to be subdivided for multiple new users, that can be a costly endeavor for a landlord.