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Amazon-Whole Foods Merger ‘Reinforces Importance of Brick-and-Mortar Presence,’ Says Marcus & Millichap

2017-07-18-Retail-Completions-vs-Vacancy

The recent announcement that online retail giant Amazon plans to acquire upscale grocery chain Whole Foods for $13.7 billion sent ripples through the commercial real estate industry when it was announced in June.

The move signals a lot of trends and changes within the retail sector, according to a newly released report by real estate brokerage firm Marcus & Millichap.

“The purchase highlights the importance of omnichannel platforms, which incorporate a blend of brick-and-mortar establishments with an online footprint to drive traffic and sales,” states the report. “In addition, grocery stores are typically retail center anchors, underscoring the importance of strip and neighborhood centers in the retail landscape.”

The 11 largest grocery chains in the country all plan to expand this year, with many doing so aggressively. Discount grocer Aldi, which already has more than 1,600 locations, expects to open 900 new stores by 2022.

This expansion within the grocery sector is snapping up a lot of available real estate. Combined with a low rate of new retail construction over the past seven years since the Great Recession, retail vacancy has reached a 16-year low of 5.4 percent.

The flip side is that existing space is extremely constrained, and increased construction starts may be on the horizon to fill this gap, according to the report.

“The announced store openings by major grocers will absorb an estimated 25 million square feet, which could be difficult to [find] without additional development. As new grocery stores are built, in-line space will likely accompany [the growth], pushing retail construction out of its currently flat trajectory and into a period of more aggressive development.”

Expansion plans among major grocers

Expansion plans among major grocers (click to view larger). Source: Marcus & Millichap

Groceries fall behind in online trends

Although e-commerce continues to grow quickly — increasing 148 percent over the past 10 years — it still only makes up 13.2 percent of core retail sales (which excludes gasoline and automobiles). The vast majority of shopping is still done in buildings, but online sales have become a key component in many sectors. Grocery stores have been particularly resistant to this trend, according to the report.

“While online sales have integrated successfully into a wide range of retail segments, Internet sales of groceries have notably lagged. Amazon, by way of its Whole Foods acquisition, is seeking an opportunity to establish a more meaningful brick-and-mortar presence in order to synergize its online presence with its ambitions for the broader retail landscape.”

The online sales component of the grocery segment has increased appreciably in recent years. According to the report, less than 10 percent of shoppers were likely to buy some (but not all) of their groceries online in 2015. That number has increased to nearly 30 percent in the report’s estimate for 2017.

This is where Amazon and Whole Foods could potentially lead the way in future online grocery orders.

“Amazon brings an e-commerce-savvy customer base, a powerful web portal, a penchant for innovation, a significant capital war chest, and a seasoned fulfillment and delivery system,” states the report. “It will blend these strengths with Whole Foods’ 467 locations, existing supplier network and brand that is known for quality. Together, the unified offering has the potential to offer more than the sum of its parts, possibly reinventing the grocery business in the process.”

The new, massive brick-and-mortar footprint for Amazon will create a massive testing ground for whatever innovations Amazon has in mind, adds the report.

Although the commercial real estate community largely views the acquisition as a positive development, the marriage of these two dynamic companies will face its share of challenges.

“Whole Foods operates at a high-margin price point, yet Amazon has made lowering costs and margins a key factor of its success,” according to the report. “These strategic differences must be carefully integrated in order to realize the clear synergies between the brands. Amid pitched competition in the grocery sector, losing customers could be costly for both enterprises.”

To read the full report, click here.

— Jeff Shaw

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