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.”
Outside the Box Logistics
By definition, successful retailers are very good at logistics.
“Compared with other industries, retailers are a benchmark of logistical efficiency for moving items through their distribution channels and on to shelves in a timely way,” said Jim Griffin, senior VP sales, PODS, whose detached delivery system allows placement of containers in tough-to-reach and hard-to-fit locations.
Griffin spoke with Chain Store Age about how logistics efficiency can add to a retailer’s bottom line.
What are some of the most common challenges retailers face when it comes to logistics (moving and storage)?
Common problems can include moving important items that need to be routed to their stores in a time-sensitive way, special or new merchandising units, or seasonal displays and special operational support equipment. These types of ‘unique items’ can create inefficiency and error and often end up being mishandled, misplaced or damaged in that process.
How does PODS help retailers with these challenges?
In essence, PODS is a mobile on-demand warehouse that can handle, in many cases, a retailer’s special items and/or initiatives that require moving and storing more effectively than the company’s own logistical systems — and with far less damage, more control and at a lower total cost than traditional third-party truck and fixed warehouse logistical providers.
With over 160,000 containers spread across our network of local and regional storage centers in North America, PODS is an innovator and a leading provider of containerized solutions. Our extensive footprint and dedicated fleets of local and long-distance trucks often provide a level of flexibility at a much lower cost than traditional third-party logistical suppliers. This is especially true when the items require more careful handling of the materials and when time is of the essence. We can place the containers virtually anywhere with our patented, level-loading PODS container lifting system, known as ‘Podzilla.’ We easily support the logistical flow of the retailer.
How does PODS help retailers with new store openings, resets and renovations?
By bringing our dedicated PODS commercial team into the early planning of their events, we develop cost-effective, customized solutions, which enable the retailer to complete the projects often with less damage and usually with better labor and time management control. Here are just a few ways: Retailers can ‘kit,’ or combine, materials into PODS containers in advance of the project, and the materials for these events can be pre-positioned in our network and then scheduled for delivery on short notice whenever the individual stores are ready.
Using PODS also helps a retailer reduce the number of ‘touches’ of the materials and quite often lowers the amount of required labor time to implement because of the ‘on-demand’ nature of our model. For many of our retail customers, the reduced damage savings alone justify the switch to using PODS.
What about disaster and emergency responses?
We pre-position critical disaster supplies and materials in our network and get them to the affected areas often more quickly than alternative methods. Many retailers contract with us to bring containers directly to any of their stores that are damaged in an emergency. Our storage centers provide warehousing until repairs can be made to the impacted facilities. Depending on a retailer’s individualized recovery plan, our commercial customized PODS solution provides a more effective and lower cost alternative.
Logistically, how does PODS move its containers?
With more than 400 storage facilities and warehouse locations spread across the United States and Canada, PODS uses a hub-and-spoke model. Our dedicated fleet of flatbed trucks moves longer distances, and then our fleet of local delivery trucks handles the last-mile needs of our customers. Our container-tracking capabilities allow us to advise customers of where their containers are in our system at any time. We control our entire network and ensure gentle handling, while keeping the containers level at all times, which dramatically reduces damage versus traditional carriers.
What do you see as the biggest advantage PODS offers retailers?
Our innovative PODS commercial team brings expertise to retailers’ moving and storage needs, working with them to cost-effectively gain strategic advantages over their competitors.
One of our retail customers used PODS to stay ahead of competitors by opening new locations faster. A leading fashion retailer utilized PODS for moving and storage, which allowed it to afford to update its key category merchandising every other year. And our logistics allowed the retailer to cost-effectively update more often versus the three-to-four-year model previously used with traditional methods of trucks and 3PL suppliers.
Other retailers have gained significant cost and time improvements, which enables them to keep their stores looking fresher and more contemporary than their competitors.
Birchbox Steps Out from the Web
Another digital retailer has made the leap to the physical space. Online beauty subscription company Birchbox, famous for the pink boxes packed with sample products that it sends to subscribers each month, has opened its first brick-and-mortar store, in Manhattan’s SoHo neighborhood.
The duplex-styled, 4,500-sq.-ft. space is bright and airy, with light woods and a white palette accented with pops of color. With a friendly, inviting vibe, the store is designed to bring the Birchbox digital experience to life, creating a shopping and lifestyle destination where shoppers can check out the newest products and receive expert advice. It also offers quick-fix hair, nail and makeup services, and group classes on beauty and skincare topics. (Birchbox’s in-house design team worked closely with RPG, New York City, on the design of the store.)
The store features a curated assortment of nearly 2,000 products from approximately 250 brands. Similar to Birchbox’s website, the merchandise is organized and displayed by category as opposed to the standard practice of by brand. An upfront case, updated on a regular basis, showcases the company’s top 10 online best sellers. Many of the displays carry editorially styled comments that mirror the playful tone found online.
Birchbox encourages customers to test-drive the latest products with a dedicated “Try Bar” area. (Testers of every product in the store are also available.) And in keeping with the company’s roots, there is a “BYOB” (Build Your Own Birchbox) area where shoppers can create their own custom Birchbox, for $15, with their choice of box color and five sample products from across categories.
Birchbox is savvy in its deployment of technology, using it not to dazzle the customer as much as to create a more personalized shopping experience. Shoppers can view customer reviews and recommendations and video demonstrations to assist in their product selection on the iPads that are positioned around the store. Video screens feature tutorials to keep shoppers entertained — and get them inspired to try something new. At a touchscreen on the main floor, shoppers input key data (hair type, skin color, age, etc.) and receive personalized product recommendations and customer reviews.
Beauty services are offered on the basement level, also home to hair care and nail products, and men’s grooming items. It’s also where Birchbox’s classes are held. The classes, which are free for Birchbox subscribers and $30 for non-subscribers, are designed to appeal to all types of beauty consumers and allow them to sample, try and learn about the products.
“Our goal with Birchbox has always been to make it easy, efficient and fun for people to discover new brands and products fit for their lifestyle,” stated Katia Beauchamp, co-founder and co-CEO of Birchbox. “We have learned so much about how we can drive customers to change their behavior online, and we see an opportunity to extend into offline retail to evolve with our customers’ needs.”
Launched in 2010 by two former Harvard Business School classmates, Birchbox has been on an upward trajectory ever since. The New York City-based start-up now has more than 800,000 active subscribers who pay $10 per month to receive a pink box full of sample beauty products tailored to each subscriber’s needs. It counts more than 800 brand partners.
In 2012, Birchbox acquired an international competitor, JolieBox, giving it a presence in France, Spain and the United Kingdom. That same year, it launched Birchbox Man, which delivers a monthly box of gadgets, grooming and lifestyle products. While the majority of Birchbox’s revenue comes from the monthly boxes, roughly 30% of sales now come from the full-sized products that the company sells on its site.
In April 2014, Birchbox closed a $60 million round of Series B funding from a group led by Greenwich, Connecticut-based Viking Global Investors and was reportedly valued at $485 million. The retailer has said it would use the capital to, among other things, support global growth and expansion. Another possibility: a line of company beauty products.