Grocery Sector Overcoming Challenges

Consolidation and increasing competition from discount retailers and superstores is not crimping the grocery store sector outlook, according to a new report from Marcus & Millichap.

Recent food inflation has been concentrated in restaurants, which if it continues, “should help maintain groceries as a focal point for consumers and keep foot traffic consistent,” according to the report.

Grocery store vacancy has been posting in the low-2 percent band and the average asking rent is nearing its prior peak. Spending in each of the past 23 months through March accounted for 24 percent of all store-based retail sales, which “is facilitating standout property metrics,” the report said.

Merger activity continues to steal the headlines and outcomes have been mixed.

In late February, the Federal Trade Commission sued to block the proposed Kroger-Albertsons merger, with the first preliminary hearing set for Aug. 26.

Other consolidations have closed, most notably, Aldi completed its acquisition of Southeastern Grocers Inc., the parent company of Winn-Dixie and Harveys Supermarkets.

Consumers continue to fight inflation within their household budget. More than half of all individuals hunt for deals as a popular cost-cutting strategy, and another cohort buying in bulk more frequently, Marcus & Millichap said.

This benefits discount grocers and superstores and dollar stores. Dollar stores such as Dollar General have moved to offer fresh produce in more than 5,000 of its stores.

“With the upcoming closure of all 99 Cents Only Stores and 1,000 Family Dollar locations, [this potentially creates] opportunities for expanding grocers to reach new consumer bases, according to the report.

Meanwhile, online grocery market sales have edged down. Sales last year declined by 2 percent on a year-over year basis amid a pullback in both order frequency and value.

This bodes well for brick-and-mortar grocers following a three-year span in which visitations were generally stable, with average weekly foot traffic per year ranging from 232 to 240 million people.

There is 2.8 million square feet of grocery space slated for delivery this year — the lowest total since at least 2000.

The West Coast and Mountain markets, where completions are sparse in 2024 will see the most completions this year. Leasing should be noticeable across all zones as no region adds more than 1 million square feet.