Jim Koury, HFF
While demand for all types of retail product has been strong over the past few years, investors continue to have a strong appetite for Boston area grocery-anchored shopping centers in 2015 despite meaningful changes to the food distribution industry.
The competitive landscape for traditional supermarkets is evolving as value-oriented grocers such as Market Basket, Walmart, Trader Joe’s, Aldi, and Save-A-Lot lure away price-conscious customers, while service-oriented formats such as Wegmans, Whole Foods and Roche Brothers are expanding and gaining market share with more affluent customers. These chains achieve success by targeting the low- and high-end niches of the market.
According to IBISWorld, the online grocery sales industry is projected to increase approximately 9.5 percent annually to become a $9.4 billion industry by 2017. Companies such as Amazon and Walmart are increasing their capabilities for selling food and beverages online, and Ahold’s Peapod service continues to expand in an effort to maintain its position as the leading Internet grocer. The food distribution industry has been further saturated by big-box retailers and national pharmacy chains offering a growing selection of packaged goods and dairy products. These non-traditional grocers and e-commerce providers derive much of their profits from non-food items, allowing them to challenge the already thin margins of traditional grocers.
Traditional supermarkets have been forced to adapt to compete with the influx of grocery options. Not surprisingly, the supermarket sector has been one of the most active markets for mergers and acquisitions as retailers recognize that is it easier to gain market share and economies-of-scale through acquisition than through organic growth. The recent Ahold-Delhaize merger consolidates four established supermarket chains in the U.S.: Stop & Shop (131 stores in Massachusetts), Giant, Food Lion, and Hannaford (25 stores in Massachusetts). The merger allows the parent company to lower operating and purchasing costs to keep up with the increasing competition. Similarly, earlier this year, under an investor group led by Cerberus Capital Management, Albertsons acquired all outstanding shares of Safeway Inc. The merger consolidates a network of more than 2,200 stores under one umbrella, including New England chains Shaw’s (51 stores in Massachusetts) and Star Market (17 stores in Massachusetts). On October 4, Albertsons set pricing for its initial public offering at $1.9 billion in an SEC filing with plans to use the proceeds to pay down debt and fund future growth plans.
While the latest mergers serve as great short-term strategies for these grocers to lower overhead costs, it has never been more competitive for supermarkets as retailers continue to strategize and compete for market share in new ways. Market Basket (46 stores in Massachusetts), one of the Boston area’s most popular grocers, has been very successful at delivering low prices and substantial profits by operating with low corporate overhead and leverage levels, buying a consistent array of products, and maintaining an experienced and extremely loyal non-union workforce. Whole Foods’ new value-concept chain, which will be introduced within the year, comes after the company has been scrutinized for its high prices. Rather than altering its original business model, Whole Foods has chosen to introduce a distinct value-conscious chain called 365, which targets customers on the other end of the spectrum. Likewise, Ahold, Stop & Shop’s parent, just opened a new, grocery concept called bfresh in a former Staples store on Harvard Avenue in Allston, Massachusetts, in September. The smaller scale store differs from the traditional Stop & Shop stores in the area, and is designed to offer fresh produce and a wide range of take-out options to draw the area’s large student population.
The recent surge in residential development in Boston has grocers vying for their share of emerging 24/7 neighborhoods. With more than 8,459 recently completed residential apartment units in the downtown/outer urban Boston market and an additional 5,468 units slated for delivery over the next 18 months, grocery retailers are sprouting nearby to meet the increased demand. With limited traditional grocery-retail space available in these areas, big-name grocers are either replacing local and regional grocers or signing on to anchor large redevelopments in order to secure their share of the market. Whole Foods has utilized both strategies to increase its presence in Boston by replacing Johnnie’s Foodmaster in Brookline, Charlestown and Somerville, and opening its new anchor store at the former Boston Herald site in the South End. Other examples include Roche Bros.’ new store in the historic Filene’s Basement redevelopment, Star Market’s recently signed lease to operate a store in the mixed-used North Station project, and Wegmans’ plans to anchor the rehabilitation of historic Landmark Center in the Fenway neighborhood. The new stores in these urban locations cater to a customer that is likely to buy fewer items on a typical shopping trip by emphasizing smaller portions, fresh produce and prepared foods.
Traditional grocers like Stop & Shop, Hannaford and Shaw’s have dominated the Boston area grocery market for years offering middle-of-the-road prices and modest services/prepared foods. However their competitors’ aggressive focus on either the value or service-oriented format is forcing traditional grocers to rethink their marketing strategy. We have already seen them adapt to meet changing consumer tastes with more organic food options, health-conscious sections and allergy-friendly aisles.
While the growing diversity of supermarket formats presents a healthy choice for consumers, it also creates an environment where grocers are constantly battling for market share. And while the changing dynamics in the grocery sector have some investors wary, the changes do not seem to deter them from paying aggressive prices for the highest volume stores in the best locations. Recently, niche grocers like Whole Foods have commanded the lowest cap rates (sub-5 percent), but all grocery-anchored shopping centers continue to garner significant investor interest.
— By Jim Koury, Senior Managing, Director, HFF. This article originally appeared in the November/December 2015 issue of Northeast Real Estate Business magazine.