REAL ESTATE

Retail grocery real estate: Optimizing returns in the new world order

BY CSA STAFF

By Andy Couch, DJM Real Estate

Grocers are operating in a rapidly changing environment — an exploding omni-channel marketplace in which competitive strategies that worked five years ago are obsolete. Smart, traditional grocers are rethinking priorities and redefining success. Wall Street is also changing how these companies are viewed. Total sales growth is less important than the need to increase, or at least “hold” comparable store sales and find operating efficiencies to maintain profitability and stay relevant with consumers.

While companies strive to minimize costs in labor, product and overhead, real estate holds tremendous untapped potential for optimizing profitability. The key to profit optimization, from a physical real estate perspective, is a disciplined, thorough and regular portfolio review to determine what to do with each store.

This is not your father’s grocery store
Consumers shop more frequently, from more sources, and with more “precision” to get exactly what they want, when and where they want it, at the lowest possible price. E-commerce and alternative format stores provide deep offerings for specialty products (gluten free, vegan, kosher, organic) that few physical grocery stores can match. Formats and distribution platforms exist today that were never envisioned five years ago. Price formats of all sizes are becoming more formidable as they evolve and multiply: Winco, Market Basket, Woodman’s, Aldi, Save-a-Lot, dollar stores, Walmart Neighborhood Market, and the wholesale clubs are updating their product assortment, adjusting pricing and expanding food offerings to stay relevant with consumers, encroaching on other traditional grocers.

Demand is finite, supply is not
Consumer demand can shift, but it is finite, at least in the grocery space. As big-box, specialty and discounters move in, they come to represent more and more slices in a fixed-sized pie. Something has to give, and it appears that the “give” will be at the expense of marginally located, traditional grocery stores in the 40,000-sq.-ft. to 70,000-sq.-ft. range as they face stiff competition and intense margin pressures.

These competitive factors (physical and virtual), paired with changing trade areas, will put pressure on sales for physical stores such that locations that are feasible now may not be in the future. Further, traditional grocery stores will likely shrink in size – perhaps with the exception of discounters and very special, large-format stores like Wegmans, Kroger or HEB that offer a compelling and unique combination of freshness and value.

But the talent, resources and “will to win” among traditional grocers cannot be underestimated. They are already investing heavily in big data, social media, mobile commerce, home delivery and click & collect pursuits in order to become even more relevant and profitable. While some store closures will occur, it won’t be for lack of investment, creativity, and a determined effort.

Growth is (not always) good
Based on these changes, growth is being redefined, and it looks very different than it did 10 years ago. Growth often is not profitable, nor is it sustainable – even though it may seem that way early in the cycle of adding stores. The growth curve for a new store is very high in the first three to five years, before flattening out. After that three to five year window, positive comparable store sales are very hard to come by, and by then, the stores are no longer fresh and shiny. Even worse, if a store performs well, it invites competition. Naturally, growth companies reach a tipping point where sales from new stores represent a smaller and smaller percentage of the total sales base. At that point, composite comparable store sales level off as a course of evolution and the sustainability of that business model can be called into question.

More offense, less defense
Current M&A activity is very different from in the past, and in many cases, current strategies are more effective at building a strong and sustainable business. From 1990 to 2010, chains would acquire a target that included all stores. Based on the theory that “the best offense is a good defense,” the acquirer would often control the weaker stores to keep competition out by holding them dark or turning them over to non-competing uses. Defensive real estate moves used to be a pivotal part of the competitive chess game, in combination with forward-looking “offensive” strategies to compete in merchandising, marketing and retail operations. Now, with competition from so many sources – defensive real estate moves are rarely supportable. It’s hard to defend against what can’t be seen and the old adage is sorely in need of updating, where today, “the best offense is … a good offense.” This approach also benefits consumers as it offers a more efficient market to serve and anticipate customer demands.

Surgical acquisitions & real estate implications
As a result of the need to play an offensive game, acquisitions are now surgical, where the buyer takes only the stores it needs, and leaves the seller with the rest. This was the case in a number of recent transactions, such as the sale of Delhaize stores in the Southeast, and the acquisition of former Fresh & Easy stores. A similar “surgical” process is playing out in the case of Safeway closing Dominick’s locations in and around Chicago. Roundy’s acquired 11 of the closing Dominick’s stores to be operated as Mariano’s stores, Whole Foods acquired seven locations, New Albertsons acquired a few, and about 10 stores have been acquired by various independent grocers. However, that still leaves somewhere in the range of 30 to 40 stores unclaimed for Safeway. In these surgical operations, buyers are more selective and not just chasing growth for growth’s sake.

Success breeds complacency
To be successful, grocers, and all businesses for that matter, need to continually question the relevance of their business today and in the future. Andy Grove, former CEO of Intel famously said that “Success breeds complacency. Complacency breeds failure, and only the paranoid survive.” In the semiconductor industry, Grove’s mindset was very true, and today, it applies to the grocery sector as it undergoes these major transitions. Complacent grocers will become obsolete and irrelevant in the new world order. Suspicion of the competition, virtual and physical, will be crucial. Innovation and adaptation will differentiate the winners from the losers. Grocers can never let their guard down.

Portfolio review: Hold, invest or divest
A smart strategy for avoiding complacency and staying ahead of these myriad threats is for chain grocers to conduct regular portfolio reviews to help drive decision-making and optimize profits. These store-by-store assessments are essential. Grocers need to ask themselves “How is a store doing today? How will it do tomorrow? Is it worth more now than it was a year ago? Will it be worth more next year than it is today? How can I continually add value? What is in the best interest of my shareholders?” Other questions include “Is it worth more for me to operate the store or to sell or to close? Is it worth more to a different retail operation (or a non-retail use) rather than being run as a supermarket?”

This “Portfolio Review” is not just an inward look, but a comprehensive analysis of internal and external information for every store – its market share, profitability, competitive assessments and current and projected valuations. This inward look reveals strengths and vulnerabilities. Grocers can then make informed decisions about individual locations – whether to invest or divest, build, buy or close. From there, it’s all about flawlessly executing the new Game Plan.

Andy Couch specializes in the retail grocery sector at DJM Real Estate. He focuses on performing granular store-by-store portfolio reviews and executing strategies to help companies optimize profitability and assess if an acquisition or divestiture makes sense, and is financially justified. Couch has extensive direct retail and advisory experience in retail real estate; investment and operating finance; corporate acquisitions; and strategic divestitures. He can be reached at [email protected].

DJM Real Estate, a division of Gordon Brothers Group, specializes in occupancy savings, real estate dispositions, growth strategies, strategic reviews, auditing, advisory and equity investments. DJM Real Estate has serviced the nation’s most recognizable brands in healthy and distressed situations. DJM Real Estate clients have included Toys “R” Us, Pep Boys, Yum! Brands, Food Lion, CompUSA, BI-LO, Office Depot, CVS, Dollar Tree, Blockbuster and Winn-Dixie. DJM Real Estate is a leader in finding innovative ways to consolidate and reconfigure real estate to achieve the highest possible value. DJM Real Estate was founded in 1992 and is headquartered in New York, with offices in Boston, Atlanta, San Francisco, Chicago and Dallas.


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Peeling the love with Dole

BY CSA STAFF

Dole and Blue Diamond Almond Breeze are launching two simultaneous Peel the Love Banana Cabana Tours in 2014.

Dole said that the tour aims to reacquaint Americans with “the fun, whimsy and versatility of bananas and offer compelling new ways to add fresh produce to summer meals, snacking, parties and entertaining plans.” Since separate tours launching Memorial Day Weekend covering the Eastern and Western portions of the U.S., Dole will be able to visit banana fans in 26 cities by Labor Day.

Last year, Dole’s nationwide Peel the Love Tour handed out 107,703 recipe samples made from Dole Bananas at 147 tour stops at supermarkets, special events and other local venues.

“Last year, our Peel the Love Tour took the eating-healthy-can-be-fun message to banana lovers in 10 cities across the country,” said Bil Goldfield, Dole Fresh Fruit Company’s director of corporate communications. “But almost from the start, consumers and retailers wanted more. So, we’re doubling the love in 2014 to help meet untapped demand for recipes, serving suggestions and other tangible ways to put the ‘fun’ back in summer produce.”

Organized by Dole Bananas and co-sponsored by Blue Diamond Almond Breeze Almondmilk, the two caravans will depart New York City and Dallas simultaneously May 26 and head to local supermarkets, public events and venues in 26 cities in 21 states throughout 104 days. The colorfully wrapped Tour vehicles and “Banana Cabanas” will offer banana recipes, recipe booklets, product samples, banana-themed kid’s activity sheets and other free giveaways. A full tour schedule will be posted in April at www.dole.com/peelthelove.

Visitors at each Peel the Love Banana Cabana Tour stop can present a grocery receipt showing a Dole Bananas qualifying purchase to receive a complimentary gift such as a commemorative Dole hat, T-shirt or other branded item. Also new for 2014 is a focus on other tropical fruits including Dole Pineapples. Visitors at select tour stops can learn how to peel and cut a pineapple from a live demonstration and enjoy fresh-cut Dole Pineapple samples.

The Eastern tour will depart from New York City and visit New Jersey; Philadelphia; Baltimore; Virginia; Raleigh, N.C.; Columbia, S.C.; Jacksonville, Fla.; Alabama; Mississippi; St. Louis; Des Moines, Iowa; and Minneapolis.

The Western Tour will leave Dallas and visit Houston; San Antonio; Salt Lake City; Phoenix; San Diego; Los Angeles; San Francisco; Reno, Nev.; Portland, Ore.; and Seattle.

“We’re delighted to partner again with Dole in 2014. Peel the Love is the perfect fit for Blue Diamond since we’re also committed to showing consumers that summer eating can be nutritious, delicious and fun,” said Suzanne Hagener, group marketing manager of Blue Diamond Almond Breeze. “Through the Tour recipes that feature Almond Breeze®, we hope to prove that almond milk is a convenient and nutritious alternative to traditional milk options, and it tastes great. The tour will feature Almond Breeze in several recipes that are not only delicious, but also fit with a healthy lifestyle, which we believe is important.”

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Urban Outfitters names new president

BY CSA STAFF

Urban Outfitters has named Trish Donnelly as president of Urban Outfitters brand, North America reporting directly to Ted Marlow, CEO, Urban Outfitters Group, effective July 14.

"It is with great pleasure that Ted and I welcome Trish to the Urban Outfitters brand," said CEO Richard A. Hayne. "Trish is a strong leader who brings with her a deep understanding of the direct-to-consumer channel as well as an extensive background in merchandising. We are delighted to have Trish join our executive team and believe she will play an instrumental role in the Urban brand’s on-going growth story."

Donnelly joins the Urban Outfitters brand from Steven Alan where she has served as president for almost three years. Prior to joining Steven Alan, she spent more than seven years at J. Crew as the EVP of J. Crew Direct. Donnelly began her retail career with Ralph Lauren where she spent 12 years immersed within the merchandising organization.

Urban Outfitters is a leading lifestyle specialty retail company operating under the Anthropologie, Bhldn, Free People, Terrain and Urban Outfitters brands.

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