Shifting Trends Dominate Grocery Sector

Coresite detailed several grocery real-estate trends to watch in its recent market outlook report. Not surprisingly, Amazon was the leading one to watch, as it ramps up its offline grocery footprint.

Amazon is seeking to establish a presence in the mainstream US grocery market that is currently not served by Whole Foods, by stepping up its Fresh store footprint. The retailer has opened 23 Amazon Fresh stores in the US as of January 2022, just over a year after the launch of the grocery format, with more locations in the pipeline.

Coresite also sees momentum in grocery discounters’ real estate expansion. Discount retailers have seen strong growth over the last few years and were able to maintain that momentum amid the pandemic, with sales growth of 8.6% in the US in 2020, according to Euromonitor.

“We expect growth among discounters and their relentless real estate expansion to accentuate competition with traditional grocers and accelerate consolidation in the fragmented US grocery market— smaller and less differentiated players will likely struggle to cope with further margin pressure,” according to the report.

Also, dark stores (brick-and-mortar stores that are dedicated to fulfilling online orders and so do not serve walk-in customers) can be manual or combined with some form of automation. They often support delivery and pickup services and are gaining attention.

Amid the pandemic, retailers turned to dark stores to meet increased volumes of e-commerce orders, which grew beyond what can be efficiently fulfilled from an operating store. 

Several retailers, including Giant Eagle, Kroger, Stop and Shop and Whole Foods Market, repurposed some brick-and-mortar locations as dark stores, driven by the lack of available pickup slots for online orders, a reduction in store-operating hours and the introduction of capacity restrictions inside stores.

On the technology side, Coresite found that Israel-based Fabric provides micro-fulfillment center (MFC) solutions that are designed to improve online fulfillment speed from a small footprint. Such improvements are sought by all grocers.

By leveraging robotic automation, Fabric allows retailers to implement on-demand fulfillment solutions and claims to offer one-hour delivery, 99.9% order accuracy and 70% savings in labor and rent to its retail partners.

Grocery Store-Anchored Retail on Solid Ground

To date, grocery anchored retail properties have proven to be the most resilient retail category. But at least one analyst believes inflation could erode some of this stability. 

“Grocery anchored retail has been the safest bet in the retail sector throughout the pandemic,” Lisa Knee, Partner, EisnerAmper, tells GlobeSt.com. “But the driving force influencing grocer performance is switching from COVID to inflation.”

“Higher food and restaurant prices will keep people eating at home. At the same time the local grocery store chains are becoming more expensive relative to savings-oriented options like Walmart and Costco. That could take some of the shine off investing in neighborhood centers if current inflation rates persist,” she says.

So far, though, these fears are not affecting investment sales, although the category does have a persistent buyer-seller gap. 

“The appetite for grocery anchored shopping centers continues to grow in 2022 as the entire investor spectrum, from fund advisers to private syndicators, is now shifting their strategies away from multi-family and industrial towards grocery anchored retail,” IPA’s Tom Lagos tells GlobeSt.com.

“However, owners are reluctant to sell these properties as they have proven operationally efficient, and shop tenant space is outperforming rental growth forecasts. We believe the amount of liquidity in the marketplace driving this demand will eventually win and this gap between buyers and sellers will further drive cap rates down to a breaking point where we will see a larger number of transactions at historically low cap rates.”

Expansion

Meanwhile, Aldi and other brands continue to look to expand.

“Aldi’s first wave of store openings in Southern California have all proven successful, and now they are looking to fill additional trade areas,” Matt Hammond, partner and Senior Vice President for Coreland Companies, tells GlobeSt.com.

“Ethnic grocers, including 99 Ranch Market and Superior Super Warehouse, are looking to expand into suburban markets. Additionally, Ralphs has elected to renew at sites previously earmarked for closing.”

While the grocer and restaurant sectors have been greatly impacted by the rising cost of food and labor, grocers are able to pass price increases on to the customer more strategically than restaurants, Hammond said.

Performance Buoyed by Data, Technology

IPA’s Tom Lagos tells GlobeSt that during the pandemic period of 2020 grocery retailers were able to capture both unprecedented sales growth and customer information. 

“In 2021 grocery sales stabilized and in 2022 and beyond this sector will now experience sustained sales growth. These thriving retailers are now in a better position to understand and service their customers through automation strategies (delivery and in-store fulfillment), direct marketing through revamped loyalty programs and enhanced customer experiences by updating and redesigning their stores.”

There is still some room for improvement, though. Douglas Munson, president & CEO, MTN Retail Advisors, tells GlobeSt.com that balancing frictionless versus experience while still making the customer feel engaged is something grocers will aim to achieve.

“Walmart would not have said this 3+ years ago, but as the largest grocery chain in the US with 2019 revenue at $272.2 billion, it has invested significant capital in eCommerce/Digital platforms over the past five years. Walmart’s grocery online sales in 2020 (during pandemic) was around 30% of total business with the majority of online consumers utilizing the ‘pickup at store’ option.

“At Kroger, the second-largest grocery chain in the US with 2019 revenue at $117.4B, it is focusing on the macro fulfillment process. Kroger’s eCommerce sales in 2020 is estimated at 10% of total revenue.”