Not Your Father’s Supermarket

As supermarket tenants are challenged to meet the needs of an increasingly diversified and sophisticated consumer base, and given the significant trend toward consolidation, landlords are tasked with delivering top-notch grocery-anchored centers — with a diminishing number of anchors from which to choose.

Add in growing pressure on the grocery segment from competitors in the mass merchandise, discount and even dollar store verticals, plus small — but real — grocery inroads from the Internet, and today’s shopping center operators looking for a strong grocery anchor have a lot to contend with.

Fortunately, shopping center operators who do their market research can still find a winning anchor to help ensure long-term success of their developments. Here are a few examples of how some leading players are designing their grocery-anchored shopping center strategies around the latest trends in supermarket retailing.

Experiential grocery retail

Grocery may seem like a pretty straightforward retail channel, but grocery operators are starting to look for ways to differentiate themselves from both brick-and-mortar and online competitors. As Don Casto, partner of Columbus, Ohio-based fully integrated real estate firm CASTO, explains, the days of the staid neighborhood food market are over.    

“Grocers are trying to present unique and different offerings,” Casto said. “That includes gourmet food. There is also a movement toward food as entertainment. Grocers want to provide an entertaining, fun experience more like going to a restaurant or movie theater. While grocery stores are generally immune to disintermediation from Internet retailers in the way that book and electronics retailers were affected, there is a little bit of a threat.”
    
CASTO operates 100-plus shopping centers in the states of Ohio, Florida, North and South Carolina, Illinois and Alabama, with about three-quarters anchored by a grocery store. Casto said his firm likes to have a grocery retailer as an anchor because grocery offers higher daily traffic rates than any other retail vertical and also offers a high degree of stability, with grocers often staying 10 to 15 years in a center. CASTO partners with a variety of chains as anchors, including Giant Eagle and Harris Teeter in the Carolinas; Publix in Florida; and 90% of the Walmart super-centers in Columbus, Ohio. CASTO also partners with gourmet grocers such as Whole Foods and Earth Fare, and has a long-standing relationship with Kroger.

“Our relationship with Kroger goes back to the 1920s, when my grandfather built 8,000-sq.-ft. stores for Barney Kroger,” Casto said.

One classic Kroger-anchored CASTO shopping center is the Avery Square center in Dublin, Ohio. The 216,000-sq.-ft. center includes an 89,000-sq.-ft. Kroger, and is tenanted by Bath & Body Works, Hallmark and Wendy’s.

In addition, CASTO is constructing the final phases of a 750,000-sq.-ft. mixed-use development in Morrisville, North Carolina, called Park West Village, that represents its efforts to make shopping centers into entertainment destinations. A 24,000-sq.-ft. Earth Fare anchor is under construction with a scheduled spring 2015 opening, and current tenants include Stone Theatres, GameStop and YoLo Frozen Yogurt.

The daily-ness of life

Donahue Schriber specializes in necessity-based retail — and no retail segment is more necessary than the supermarket. The Costa Mesa, California-based private REIT’s portfolio is dominated by grocery- anchored centers; in fact, of its 71 properties — which include such distinctive destinations as Del Mar Highlands Town Center in San Diego and Fig Garden Village in Fresno — more than 75% are grocery-anchored.

“Grocery stores fulfill a daily need, especially when complemented with strong restaurant and retail service providers,” said Henry Avila, senior VP operations for Donahue Schriber. “People still want to touch and select their own food, making shopping for groceries mostly Internet-resistant.”

Donahue Schriber, which represents 11 million sq. ft. of space in the western United States, partners with grocery stalwarts, such as Whole Foods and Kroger, to create vibrant, amenity-rich centers that draw customers on a regular basis. In fact, today it is not uncommon for a family to make two or three trips a week, or even daily trips, to a grocery store. The sector itself has grown by leaps and bounds to include specialty grocers, ethnic grocers, health food grocers and bulk warehouse grocers. And, in California, the full menu of grocery offerings is readily available.

“It is important to have an in-depth understanding of the trade area so that you can offer what the consumer is looking for,” Avila said. “We seek real estate deals with the best grocer in each given category.”

At Donahue Schriber’s Orchard Walk East project in Visalia, California, the company partnered with Vallarta Supermarket, a Hispanic grocer with 40-plus stores located throughout the state. The 48,000-sq.-ft. Vallarta is a complement to the center’s anchor Target, as well as Ross Dress for Less and maurices.

Grocery as part of a master plan

Living near a shopping center is a convenience many consumers take for granted, but someone has to plan that center and take the needs of local residents into account. The Irvine Company, owner of a 93,000-acre former family ranch prop erty known as the Irvine Ranch in Orange County, California, places a retail component in all the planned communities it has developed there. And of the 41 shopping centers it owns and manages, 40 feature a grocery component and 30 are grocery-anchored.

Fred Collings, senior VP leasing of Irvine Company Retail Properties, explained how grocery-anchored shopping centers are vital to his company’s master-planning efforts.

“Our grocery-anchored centers are designed to serve as amenities to our residential villages,” Collings said. “We’ve had some shopping centers for 45 to 50 years, and the bulk are grocery-anchored.”

Irvine Company Retail Properties partners with big-box players like Walmart and Costco to large chains like Ralphs, Vons and Albertsons, to specialty players Trader Joe’s and Whole Foods. Whatever grocery chain might be anchoring a center, Collings is seeing changes in the sector.

“Stores are getting bigger,” Collings said. “It’s driven by the need to create prepared food areas. The outer ring of a grocery store is becoming more occupied by the already prepared concept. There are also larger wine store components and even full bars and gastropubs included now.”

The Orchard Hills Village Center, which Irvine Company Retail Properties opened in the North Irvine section of Irvine Ranch, illustrates the company’s approach to developing planned communities with grocery-anchored shopping centers as a key component. Opened in 2007, the center measures 126,000-sq.-ft. and is anchored by a 49,000-sq.-ft. Vons Pavilions as well as CVS Pharmacy. The center, whose tenancy fell off a bit during the 2008-2010 recession, is now 100% leased and includes a Montessori school, two different design firms for home builders in the community, and a residential real estate office.

Doing the grocery math

Having a grocery store as an anchor can serve as a powerful financial advantage for a shopping center. Retail real estate owner Phillips Edison-ARC Shopping Center REIT Inc. leverages grocery anchors as part of its integrated operating platform that includes in-house leasing and quickly improves shopping center occupancy and profitability after acquisition.

“A grocery store can create 50 basis points of value over a center without a grocery store,” said Jeff Edison, CEO of Phillips Edison-ARC Shopping Center REIT. The company’s portfolio consists of 120 grocery-anchored shopping centers across 27 states, featuring a total of 37 different grocery anchors. The company prefers to partner with the No. 1 or 2 grocery chains in the area, with Publix, Kroger and Ahold banners among its primary partners. The total portfolio represents an aggregate $1.8 billion purchase price and 12.5 million sq. ft. of space, with another estimated $150 million to $200 million worth of property under contract to close.

Edison discussed some of the specific benefits a grocery store anchor provides.

“Grocery stores are less Internet-sensitive,” he said. “They’re necessity-driven. You’ve got to eat.”

In terms of grocery industry trends, Edison said that big-box retailers like Walmart are starting to compete with grocers in a variety of markets and sizes, moving into opening traditional grocery stores, as well as offering superstores with a grocery assortment. In addition, he said the industry is slowly embracing the Internet more.

An example of how the company leverages a grocery store to create a successful shopping center is its recently acquired Kleinwood Center property in Spring (Houston), Texas. The 149,000-sq.-ft. center is anchored by an 81,000-sq.-ft. H-E-B. In less than a year since acquisition, occupancy rate has risen from 90% to 98% as result of its leasing and management efforts. Other retailers featured at the center include Starbucks, T-Mobile, Smoothie King and The UPS Store.

“We secured a good mix of merchants and consumer-focused businesses,” Edison said. “We believe strongly in the consumer-focused part of the real estate business.”

Stability through supermarkets

A grocery anchor store can help a shopping center survive difficult economic times. Just ask Paul Maxwell, VP and regional officer of Jacksonville, Florida-based Regency Centers.

“Grocery-anchored centers are very stable,” Maxwell said. “We weathered the economic crisis of 2008 better than others in the industry, especially in retail real estate. Grocery stores hit consumers’ daily needs and provide suitable daily traffic other tenants need.”

In addition, Maxwell said most grocery tenants often will sign a 20-year lease, meeting Regency’s preference for longterm ownership of shopping centers.

Regency owns 332 retail properties in 29 states and 24 target areas, with 86% having a grocery anchor store. Based on population characteristics Regency looks for, such as household income and number of residents, Southern California is its largest market, followed by Northern California and Washington, D.C.

“The grocers we partner with depend on the region,” said Maxwell, naming Whole Foods, Giant, The Fresh Market, Mariano’s, Trader Joe’s, Publix, Harris Teeter, Safeway and H-E-B as examples. “We look for anchors that best suit consumer needs. We don’t put in a center and dictate what consumers want. We look at lifestyle needs, demographics and overall experience.”

As one example of its grocery-anchored center strategy, Regency, in joint venture with Fuqua Development, is developing the 50,000-sq.-ft. grocery-anchored Brooklyn Station on Riverside in Jacksonville, Florida. Slated to open in September 2014, the center is part of a master-planned development that includes two new residential buildings being constructed adjacent to the retailers.

Anchored by a 20,400-sq.-ft. The Fresh Market, the development will bring the first grocery store to the downtown Jacksonville area in more than 40 years, and the first specialty grocer to the downtown area, ever. The current tenant list includes The Fresh Market, Corner Bakery Café (the first in the market), Hair Cuttery and Zoe’s Kitchen.

The rise of the independents

“Indie” has become all the rage in music, art, film and fashion, as small independent operators take on major labels, studios and galleries. In the Chicagoland grocery market as well as other regional markets across the United States, indie is also a rising trend.

“There has been a resurgence in independents,” said Rich Dube, president of Westmont, Illinois-based commercial real estate developer Tri-Land Properties Inc. “From 1972 to 2000, Jewel and Dominick’s operated a near-oligopoly.”

However, as Jewel and Dominick’s went through changes in ownership, which in Dominick’s case led to the chain closing in January 2014, independents sprang up. Dube cited factors including growing consumer interest in prepared and organic foods, as well as increased price consciousness, as leading to growth in both independent chains as well as nontraditional grocery retailers, such as Family Dollar, Dollar General, Walgreens and Walmart. Walmart started adding food to the offerings 25 years ago, and today Walmart is the No. 1 food retailer in the United States.

Tri-Land operates 17 shopping centers in different parts of the United States. Nine currently feature supermarkets, and three are in negotiations with supermarkets. While Dube respects the strides independent grocers have made, his firm doesn’t take chances when it comes to anchors.

“We repurpose old properties without an anchor and attract supermarkets to them,” Dube said. “We prefer to be with the No. 1 or No. 2 market share-leading supermarket chain in a particular market due to the traffic they generate. Higher volume creates high customer counts, which differentiates Tri-Land’s small stores from the competition, and therefore makes leasing them at profitable rents easier.”

For example, in fall 2013 Tri-Land completed redevelopment of Fridley Market, a 165,000-sq.-ft. shopping center in Fridley, Minnesota, anchored by a Cub Foods, downsized and refitted from a 104,000-sq.-ft. operating Cub to the new Cub prototype of 65,000 sq. ft. “We relocated an existing liquor store to a different position and attracted McDonald’s to an out lot,” Dube commented. “Duluth Trading Company will open its fifth store in a 15,000-sq.-ft. space and is the site’s first fashion tenant.”

The center is now 80% occupied and also features Great Clips, Caribou Coffee, AT&T and Teppanyaki Grill. One 15,000-sq.-ft. space remains to be leased. “We have a contract with a hotel chain to build a 10,000-sq.-ft. limited service hotel in the rear of the site along Route 694,” Dube said. “It should open next year.”

 

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