Grocery Evolution

Widening competition for commodity grocery sales is changing grocery-anchored shopping centers

Paster's Crystal Town Center in Crystal, Minn., is taking on the big-box commodity grocery discounters with Aldi Foods.

Supermarket-anchored shopping centers haven't changed much since the invention of suburbia. Find a good location, sign a grocery anchor, get a construction loan and some inline local, regional and maybe national retailers, and you're in business.

Today, however, supermarkets are beginning to change, and supermarket-anchored shopping centers, of course, must follow along.

Why are grocers changing? Competition from all sides.

Big boxes like Wal-Mart, Target, warehouse clubs and drug stores are competing with traditional grocers for commodity dry-goods sales.

Specialty grocers such as Whole Foods Market are attacking from the high end with prepared meals and excellent service.

These trends arose before the Great Recession. Today, as recovery proceeds, so will the evolution of grocery-anchored shopping centers, looking for economic recovery and competitive weapons.

Here's an overview of the kinds of changes that shopping center developers and owners are seeing.

Crossroads Cos.
Evolution is natural

Mahwah, N.J.-based Crossroads Cos. owns, manages and leases five shopping centers in New Jersey and southern New York. The firm has developed some of its centers from the ground up and acquired others. So president and CEO Stephen L. Hittman has observed the grocery-anchored business from all angles.

"Supermarkets are constantly evolving based on size, customers, food products and price model," said Hittman. "The recession made companies close unprofitable operations and focus on operating efficiencies. Disposing of surplus real estate from the closings had a downward effect on rents, while job losses had a negative impact on profit margins as income levels and spending dropped."

Hittman's point: All of these kinds of pressures cause shopping centers and the industry to adjust, change and evolve.

The company's Crossroads at Somerset development in Franklin Township, N.J., offers an example of controlled evolution.

Anchored by a 73,000-sq.-ft. ShopRite, the center has evolved in phases over the past five or so years, as the surrounding upscale suburban neighborhood has been producing and filling 4,000 new housing units.

"We have completed three of four retail buildings and expect to start construction on the remaining 25,700-sq.-ft. building this fall," Hittman said. "Upon completion, it will be a 120,000-sq.-ft. neighborhood shopping center, with a nice mix of regional, national and neighborhood tenants."

Phillips Edison
The industry is making better decisions

One of the largest privately held owners of neighborhood and community shopping centers, Cincinnati-based Phillips Edison & Co. manages a portfolio of more than 280 properties, works with industry-leading grocers such as Kroger, Publix, Safeway and Giant Eagle, and has a comprehensive overview of the industry.

How is the industry evolving from that vantage point? "The majority of our grocery-anchored growth is driven by acquisitions for Phillips Edison-ARC Shopping Center REIT," said Bob Myers, president and COO. "That said, I think people have changed more than the assets. Most everyone has learned from the difficulties that we all experienced during the recession, and this has resulted in improved decision-making.

"Shoppers are more strategic on where they spend their hard-earned dollars. Landlords are savvier about creating a more stable merchandising mix of quality tenants. Retailers are more sophisticated in developing their expansion plans. Lenders are more disciplined in their underwriting."

As an example, Myers pointed to the quality of the merchandising and location decisions made by the developer of a recent acquisition — the 148,963-sq.-ft. Kleinwood Center in Spring, Texas, a Houston suburb. "It is our first center with H-E-B as the anchor, and it is 93% occupied. Other key tenants include Starbucks, Hallmark, Jimmy Johns, TGF Haircutters, The UPS store, Little Caesars and Weight Watchers.

"We like this center because it is located at an excellent intersection with a growing population base."

Rely on long-standing relationships

Change comes easier to developers with long-standing relationships with blue-chip anchor tenants.

"Real estate is about relationships," said Don Casto, a partner with Columbus, Ohio-based Casto.

The company has been building relationships with grocers, retailers and communities for more than 85 years. It has a portfolio of more than 120 shopping centers in the United States and Puerto Rico. Of those, 90% include a supermarket or a big-box retailer with a large food selection.

"We have long-standing relationships with gold-credit tenants," continued Casto. "We partner with Kroger, Whole Foods, Harris Teeter and Giant Eagle. We include Wal-Marts and Targets with expanded food selections in the mix as well."

Casto also said that the recession caused grocery anchors to become more selective about expansion plans. "Still we benefited from strong relationships," he said. 

"Our tenants trusted that if they committed, we would then be able to bring a nice tenant mix and achieve appropriate financing."

A recently completed center, the 121,177-sq.-ft. Memorial Commons, in Goldsboro, N.C., illustrates Casto's core thinking. "It all goes back to the old adage, 'location, location, location,'" said Casto. "Anchored by Office Depot and a 53,232-sq.-ft. Harris Teeter, Memorial Commons has an ideal location at the gateway to Wayne Memorial Hospital, Wayne County Community College and the highest concentration of high-end housing in Goldsboro."

Donahue Schriber
Leveraging a lack of new developments

In California, the recession brought supermarket-anchored shopping center development to a halt.

"With no new development and competition from discount grocers, we've seen our traditional grocers investing in their existing stores and developing new offerings," said Lawrence P. Casey, president and COO of Costa Mesa, Calif.-based Donahue Schriber. "If you're a developer, that's bad news. But for owners — and we own — it is good. By investing in their stores, they invest in our centers and drive more business."

Donahue Schriber owns and manages a portfolio of 79 shopping centers throughout California, Arizona, Nevada, Oregon and Washington. Not including Targets and Wal-Marts, the company has 39 grocery stores and 13 major names, including Safeway, Kroger brands, Raley's, Save Mart and Trader Joe's, according to Casey.

The lack of new centers makes it difficult for new grocers to break into the California market. They have to fit themselves into existing vacancies.

That's what happened recently at Donahue Schriber's Laguna Crossroads in Elk Grove, Calif. "At one time, an Albertsons shadow-anchored that center," said Casey. "When it closed, we bought the site and reconfigured the 60,000-sq.-ft. space for Stein Mart, Kirkland's and a 22,000-sq.-ft. Fresh Market, which was just entering the California market.

"In fact, Fresh Market is going into a former Borders in another center that we own."

Battling the commodity grocery discounters

Based in St. Paul, Minn., Paster Enterprises senses that powerful competitive challenges are beginning to buffet the industry. "How do we compete with big-box retailers getting into groceries?" asked Howard Paster, president. "Grocery folks from the low end to the high end realize that service is the way we differentiate ourselves from discounters."

Paster is working with his grocers — Aldi's, Cub Foods, Festival Foods, Jim's Market and Knowlan's Food Markets — to figure out a service formula at Paster Enterprises' half-dozen grocery-anchored centers.

With that question in mind, he is watching an experiment being carried out by Lunds & Byerlys, a regional Twin Cities grocer. In May of last year, the company opened a 20,000-sq.-ft. Lunds in downtown Minneapolis. "It has a smaller footprint, green construction, and 70% of the product is prepared foods," Paster observed. "They aren't selling groceries at a 1% margin. I think this is where a lot of the industry is heading."

Service isn't the only answer to big-box competition. Paster is beating the discounters at their own game in one of his centers. Aldi Foods co-anchors (with Chipotle and Half Priced Books) the 55,532-sq.-ft. Crystal Town Center in Crystal, Minn. "No one beats us on price there," he said. "You can differentiate with service at the high end and by price at the low end."

A cross-shopping trend

During the recovery, Peter Moersch has seen a number of new trends emerge.

Moersch, VP neighborhood and community center leasing with Irvine Co. Retail Properties in Irvine, Calif., has a good vantage point. Irvine has 30 grocery-anchored centers and a diverse roster of grocers, including Albertsons, Ralphs, Vons Pavilions and Gelson's, plus specialty supermarkets like Sprouts Farmers Markets, Trader Joe's, Whole Foods Market and Bristol Farms. Four centers have Wal-Marts or Targets with grocery stores. "We're seeing people shopping each of the different formats," Moersch said. "They will go to high-end outlets for meat and poultry and to discounters for commodities."

Moersch also noted that dual-income families seem to be seeking out more prepared foods. Woodbury Town Center in North Irvine illustrates both trends. Population within five miles is 233,188 and average household income is $129,611. If you think those demographics suggest a specialty grocer as anchor, you would be right. There is a Trader Joe's. But you would also be a little bit wrong, because Ralphs also anchors the center.

"Both are well shopped," explained Moersch. "In addition, we think that addressing all grocery needs in one center draws people in.

"We view our grocery stores as an amenity. Each grocer in each center fits the shopping habits of that particular community."

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