Is Last Mile Delivery a Problem for Grocery Stores?

As restaurants have struggled during the pandemic, more people are eating at home. That, of course, boosts grocery-anchored retail. Branch Properties, which has been in the grocery-anchored retail space for 43 years, has seen sales growth across its stores during the pandemic.

“A lot of people were talking about the future of grocery and how much grocery was going online,” says Jesse Shannon, Chief Investment Officer of Branch. “Our [tenant’s] grocery sales were not declining pre-pandemic. Our sales growth across our stores is anywhere between 3% and, at some of the Publix, up to 10%. In 2019 pre-pandemic it was up nearly 10% versus same-store sales comps.”

While delivery is beginning to overtake traditional retail in many places, groceries are a different story, according to Shannon. He isn’t optimistic about grocery delivery because he says many grocery delivery services are losing money. 

Shannon says Amazon is even “heavily subsidizing” its grocery delivery.“That was an underlying trend where that last-mile delivery model really wasn’t working pre-pandemic,” he says.

“Even the grocery stores lose money in delivery,” Shannon says. “The reason that Publix outsourced the delivery model and that Kroger and Walmart have you come to the store for that last mile distribution is because that’s the only way they can even break even on the transaction and make money.”

In its new developments, Branch is focused on bringing in grocery retailers, like Publix. “We’ve been more focused on leasing to essential services and decreasing our dependence on non essential, at least on our new development,” Shannon says. “We’ve got multiple Publix deals under development.”

In other cases, Brach has moved away from certain retailers. “We had one deal where we had HomeGoods, Ross and Burlington,” Shannon says. “We redid the entire site plan and eliminated the junior anchor space. And we just went with traditional inline retail to focus on essential services tenants and decrease our dependence upon junior anchors.”

Branch was leery of how lenders and the capital markets would view those deals on the exit  versus essential retail.

“To the detriment of the underlying return for the deal, we made a shift to move away from those tenants because we felt like on the sale or on the exit, there would be a larger impact on our capitalization rates if we had non-essential service tenants in the shopping center,” he says.

Shannon thinks the ability to adjust the tenant mix on the fly has served the company well. And it will be something retail landlords need to keep in mind as they move forward.

“I think one of the lessons learned from this pandemic is that we need to be more flexible,” Shannon says. “Fortunately for us, what we developed–the grocery and retail–was really a commodity.”