Focus on: Solar Power
From Kohl’s to Whole Foods Market, retailers nationwide are utilizing solar power as a way to rein in energy costs. Still, solar energy remains victim of many misconceptions, according to Ben Collingwood, director of national accounts for REC Solar, a San Luis Obispo, Calif.-based solar power provider. Here are some of the most common:
- Solar is not practical for retailers. FALSE
“Retailers large and small are going solar. And these companies wouldn’t be doing so if it weren’t financially attractive,” Collingwood said.
According to Collingwood, today’s retailers are utilizing solar power for the return on their financial investment.
“Going solar allows a retailer to lock in energy rates for the next 25 years or so, creating a hedge against future energy prices,” he explained. “It gives them a competitive edge over chains that don’t have a built-in hedge against rising rates. There will be big differences down the road in operating costs for retailers that invest in solar versus those who do not.”
- Solar systems have a high upfront cost. TRUE and FALSE
A retailer can purchase a solar system outright, which involves a significant cash investment but greater benefits after the initial payback is realized. Or a retailer can enter into a power purchase agreement, which involves no upfront costs at all.
“If a chain purchases the solar system on its own, the electricity produced by the system is free to the chain,” Collingwood said. “So once the payback on the investment is realized, the system is generating profit in the way of free electricity for 20 or 25 years.”
With a power purchase agreement, a third-party provider owns the solar system on the retailer’s property and is responsible for installation and maintenance. The chain pays only for the power produced by the facility, not the equipment or installation.
“Under a PPA, the third party sells the electricity produced by the solar facility to the retailer at a reduced price,” Collingwood said. “The arrangement is cash-flow positive from day one, but the potential for long-term savings is not as great as compared with when a chain owns the system outright.”
Currently, the market is about equally split between retailers that prefer to purchase the system (both Ikea and Costco fall into this camp) versus those who go the PPA route (Kohl’s and Wal-Mart).
“In considering the two options, retailers first need to decide whether they have the cash available to make the investment and, if so, whether they want to put it to work for solar or another investment,” Collingwood said. “But if you are willing to put up your own money, the long-term savings can be double what you would have saved under a PPA.”
- It takes a long time to see a return on investment for solar systems. FALSE
Depending on the area, payback can be in two years or less, according to Collingwood. In general, the payback comes the fastest in areas with high electricity prices, such as New Jersey, Hawaii and California. Solar incentives and solar compliance requirements also hasten the payback.
- Solar systems require substantial investment in system maintenance and upkeep. FALSE
Solar systems, which have no moving parts, require much less maintenance and upkeep than other types of renewable systems, according to Collingwood.
“Maintenance basically requires cleaning dirt off the solar panels once or twice a year. The system also requires a general electric check once a year, with the latter typically performed by an authorized representative,” he explained.
While retailers that own the system can perform the maintenance themselves, most outsource it to the original solar provider. Under a PPA, the third party is responsible for all maintenance and upkeep.
- Solar technology changes quickly. FALSE
The changes in solar technology have been very incremental for the commercially available products that retailers use, according to Collingwood.
- Complications from leasing facilities and operating multi-site locations make going solar difficult. TRUE and FALSE
According to Collingwood, retailers that are exploring a PPA need to consider how long they plan to be in the building. Many PPAs require the retailer to buy the electricity for the next 20 years.
“It does not make sense for a retailer with a short-term lease to enter into a PPA unless the agreement includes the option to relocate the system to another facility,” he said. (REC is one of the few solar integrators who will offer a relocation option. It has a specially designed solar system that does not penetrate the roof, making it easy for relocation.)
If you want to know how supermarkets are trending, just talk to the companies that acquire, build and operate the shopping centers that grocers anchor. Grocery-anchored centers are a specialty of certain real estate companies that have accumulated enough skill and category understanding to pick the right grocery retailer for the community or trade area, and to ensure that the grocer and the center remain relevant during changing market conditions.
Chain Store Age talked with six shopping center companies that specialize in grocery-anchored properties — and found that their supermarket partners and centers have adapted to the economic conditions and the evolving consumer in a myriad of ways.
Dually anchored: Donahue Schriber has created an interesting strategy for success in more than one of its grocery-anchored centers. The Costa Mesa, Calif., owner/operator of 79 centers, of which 80% are grocery-anchored, has a dual-grocer concept that works not only for the consumers but for the anchors and other tenants, also.
“The two grocers complement each other well,” said Larry Casey, president and COO, Donahue Schriber. In the case of its Del Mar Highlands Town Center project near San Diego, Donahue Schriber added a 14,000-sq.-ft. Jimbo’s Naturally store to the second phase of its $20 million, near-complete re-imagination of the town center in Carmel Valley. Already anchored by a 45,000-sq.-ft. Ralph’s Fresh Fare, the addition of Jimbo’s created a full-service, two-stop shopping experience for area residents.
Donahue Schriber employed the dual-grocer concept at its Town & Country shopping center in Sacramento as well. The 230,000-sq.-ft. center is co-anchored by Save Mart, allowing shoppers to buy traditional grocery fare, and Trader Joe’s, where they can purchase organic specialty items.
“Most grocers would see Trader Joe’s as a complement, rather than a competitor,” Casey said. “This dual-grocer concept is working well for both Del Mar Highlands and Town & Country, and we would do it again if the opportunity arose.”
Growing by acquisition: Cincinnati-based Phillips Edison has found opportunity through strategic acquisition, growing its portfolio by joining forces with American Realty Capital to form a non-traded REIT — Phillips Edison – ARC Shopping Center REIT Inc.
The venture has allowed Phillips Edison to leverage the development slowdown by focusing its full attention on raising funds to buy properties. Today, the company has 225 shopping centers comprising more than 25 million sq. ft. in 38 states and plans to acquire another 150 grocery-anchored centers over the next three years.
“Some of the primary grocers we partner with are Kroger, Publix, Safeway, BiLo, Food Lion, Trader Joe’s, Giant Eagle, Winn-Dixie, Wegmans, March, Tops and Save-a-Lot,” said Bob Myers, COO of Phillips Edison. “Our acquisition strategy is to acquire grocery-anchored centers generally located at Main and Main, in strong markets, and anchored by the No. 1 or No. 2 grocer in that market.”
Lakeside Plaza, in Salem, Va., is anchored by market powerhouse Kroger, which operates a 52,337-sq.-ft. store in the 82,333-sq.-ft. shopping center. “This is a solid, classic grocery-anchored center, which we acquired about two months ago,” Myers said. “Kroger offers a fuel program, which is something we like to have in our centers.”
Fueling margins: Savvy grocers are aggressively adding fuel to their list of offerings. That, and strategically shrinking footprints, is allowing supermarkets to maintain purchase in a slippery economy. According to Adam Ifshin, president and CEO of DLC Management Corp., based in Tarrytown, N.Y., which operates 119 centers in 33 states, of which 64 are grocery-anchored, shifting strategies have been key to grocery success.
“In the Northeast in particular, we’ve seen smart grocers stop trying to put 65,000-sq.-ft. to 70,000-sq.-ft. stores in dense, upscale markets where land is scarce and NIMBY fights are particularly fierce,” Ifshin said. “Savvy grocers are learning to operate in a 35,000-sq.-ft. to 40,000-sq.-ft. box, and are developing the strategies to succeed in that smaller footprint.”
Eliminating SKUs in the middle of the store, where the margins are the lowest, and maintaining SKUs on the higher-margin items are allowing grocers to shrink footprints, “which means lower upfront capital expenditures and opportunities to put stores in locations they couldn’t get into before,” he said.
Ocean East Mall, in Stuart, Fla., is an 113,328-sq.-ft. center anchored by a soon-to-open 17,000-sq.-ft. Fresh Market. “Fresh Market is ceding the center of the store, where the lower-margin SKUs are located, and focusing on produce, meat, even upscale canned goods,” Ifshin said. “Fresh Market operates under a different model than more traditional grocers, such as Safeway or Kroger or Publix, and it has found success in this model.”
Driving traffic: The grocery-operating model also impacts the overall shopping center and its remaining tenants. “The average of 7.3 monthly trips to the grocery store, which is a higher percentage than any other tenant sector, spurs increased activity with the smaller tenants as well,” said Nancy Mozzachio, VP leasing, Cedar Shopping Centers, Port Washington, N.Y.
Cedar, which owns and operates 131 shopping centers across nine states, of which about 100 centers are grocery-anchored, has found that the traffic driven by the supermarket anchor has largely insulated the center and its tenants from recessionary climes and the Internet boom. “Having that grocery anchor creates a strong community center, one that brings in traffic and supplies a solid tax base for the region,” Mozzachio said. “Another bonus is the partnerships our centers establish with the community that provide a strong bridge between the shopping center and its tenants and the community in which they reside.”
Cedar’s Upland Square shopping center, in Pottstown, Pa., near Philadelphia, will be just over 600,000 sq. ft. when complete; to date, 500,000 sq. ft. has been constructed, featuring a 76,000-sq.-ft. Giant as the grocery anchor, along with a Carmike Cinemas theater, Target, Staples, Best Buy, T.J. Maxx and more.
Creating community: Edens & Avant, based in Columbia, S.C., knows a lot about creating community with the grocery-anchored shopping centers it owns and operates. Ninety percent of its portfolio of 125 retail centers in 15 states is grocery-anchored, and the company has existing relationships with such industry-leading retailers as Whole Foods, Publix, The Fresh Market, Market Basket, Uncle Giuseppe’s Marketplace, Stop & Shop, and others. Each grocer plays a major community-building role within an Edens & Avant center.
“We put community at the forefront of all of our business decisions and are very mindful of the role we play in the quality of food that our communities eat,” said Jodie McLean, president, Edens & Avant. As well, “We create unique retail centers that are connective to the community in both design and merchandising mix,” McLean added.
“Because shoppers are busier than ever, a grocer-anchored center can be a place where friends and neighbors can reconnect and relax … our grocer-anchored centers have become central gathering places for entire communities.”
An example is the redevelopment of Merchant’s Walk in East Cobb County (Atlanta), Ga., featuring a just-opened, 45,000-sq.-ft. Whole Foods Market, whose presence was perhaps the most anticipated aspect of the center’s dramatic makeover. Together with the new Whole Foods, Merchant’s Walk features major aesthetic and parking improvements, a theater expansion and renovation, and additional regional and national restaurants and retailers, making the center a central gathering place for East Cobb residents.
One state, multiple transformations: Paster Enterprises, based in St. Paul, Minn., owns and operates eight grocery-anchored centers — and all are located in the company’s home state.
“We operate where we live,” said Howard Paster, president. “We know quite well what the grocery-anchored shopping center delivers to area residents.” Paster partners with a wide variety of grocery retailers, including local players Cooper’s Foods, Festival Foods, Jim’s Market and Knowlan’s Food Markets, along with Cub Foods, Aldi and Whole Foods.
“Remember that the grocer tops the list of amenities that new residents look for when they move into a community,” Paster said, “so you can’t underestimate the importance of the grocery-anchored center.”
Paster was responsible for bringing Whole Foods to the community of Minnetonka — the company purchased a 33,000-sq.-ft. vacant Circuit City building in late 2010, and Whole Foods is in construction on a new store that is slated to open in early October.
And at Crystal Town Center, in Crystal, Minn., Paster backfilled a vacant Office Depot space with an 18,000-sq.-ft. Aldi grocery store, transforming the 15-year-old shopping center into a vibrant destination that also features Papa Murphy, Chipotle, Half Price Books and Liquor Barrel. “There was a real need for a grocery store in the area,” Paster said, “so adding the Aldi has proved very successful. Reports are that the Aldi is meeting, if not exceeding, expectations.”
Focus on: Risk Management Mitigating the damage of a security breach
While retailers continue to beef up computer security, hackers continue to find ways to circumvent even the most sophisticated cyber-blockades. And the threat is not only hackers or rogue employees maliciously liberating private information: Data breaches occur when sensitive information is improperly disposed of and tossed in the trash or lost when a laptop or other portable electronic device is mislaid by or stolen from a well-meaning employee. This not only impacts your customers but can damage a company’s reputation and bottom line.
In addition to computer security, retailers must have a crisis plan in place to prepare a strategic offense when a breach occurs. The right response can go a long way to mitigating the damage an incident can cause to both a retailer’s bottom line and its brand reputation.
The following three steps are critical:
1. Get to the root of the problem. As soon as a breach is known or suspected, a retailer may be bombarded with questions and possibly adverse publicity. Almost universally, the company will need to call on third-party forensic and technical experts to help determine the root cause of the breach and the extent of the damage.
2. Assess notification needs. Almost every U.S. state now has a statute outlining what a company must do in the event of a data breach, including specific requirements for notifying those impacted by the incident. (Check current notification laws by state at beazley.com/databreachmap.) The costs associated with these notifications can stack up fast when you consider that thousands — even tens of thousands — of customers need to be alerted. Outside of notifications, additional regulations are constantly being enacted, and place ever-greater burdens on businesses handling personal information.
Negotiating the maze of applicable laws can be complicated. Retailers are wise to engage legal counsel to help them through the process and to ensure compliance.
3. Nurture customer relationships. After individuals are notified that their data have been lost or stolen, they will understandably be concerned about the potential consequences of the breach. Putting their minds at ease is critical to maintain customer confidence and protect a retailer’s reputation. According to a recent study, customer turnover in direct response to breaches is the main driver of data breach costs. (Ponemon Institute, 2010 Annual Study: U.S. Cost of a Data Breach) If a customer is really dissatisfied, they may sue.
Consequently, providing credit monitoring and other “recovery” assistance to mitigate the impact on a breach victim is critical for retailers. And it can be an expensive proposition. Studies by the Ponemon Institute show ex-post response costs — costs of credit monitoring, legal defense, identity restoration and other assistance to victims —has increased at a double-digit pace in the past five years, reaching $51 per record in 2010.
Of course, the real key to an effective response is planning and preparation before a breach occurs. Insurance is a critical part of this preparation. Retailers may be surprised to learn that their current property and casualty insurance policies do not cover costs and liabilities arising from data breach issues. These traditional policies are likely to extend to a small portion of the costs and liabilities at best. However, insurance expressly for the legal liability and costs associated with a data breach has been available for some time.
The newest products on the market cover not only a retailer’s legal liability and response costs, they make a comprehensive, strategic breach response essentially turnkey. Look for insurance that couples an insurance contract with services from best-in-class experts such as:
• Forensic specialists to uncover exactly what happened,
• Privacy lawyers to assist in addressing the legal requirements of a breach,
• Notification service providers to print and mail letters to affected individuals, and
• Credit monitoring and fraud response service providers.
Legal liability insurance is just one part of the multifaceted data security exposure. To be truly effective, any data breach insurance solution should address the broad spectrum of costs associated with an incident, help to rapidly mitigate the reputational damage caused by an incident and relieve retailers of the administrative burdens of a breach. Fortunately, today’s best-of-breed solutions do all that and more.
Nicholas Economidis is an underwriter in the technology, media and business services group at Beazley Group, a specialist underwriter that offers a complete privacy-breach response management and information security insurance solution.