COVER STORY, DECEMBER 2006

ROLLING THE DICE ON GROCERY-ANCHORED RETAIL
Look for fundamentals, and give shoppers what they need.
Adam Lutz

Lutz

It’s no secret that investing in a grocery-anchored neighborhood shopping center is no longer the “sure thing” it was in the past. While the old adage about groceries being recession-proof still holds true, it has become more difficult to predict where consumers are going to shop. Given the invasion of the discount stores and the ongoing consolidation of the major grocery chains, is a grocery-anchored center worth the risk?  The answer is a resounding “yes” — if you have the right grocer in the right location.

In the western states, as elsewhere in the United States, Wal-Mart and other discount stores, ethnic markets and upscale grocers are continuing to take market share away from the traditional grocers. Many major markets have become highly competitive as various grocery chains pursue the best locations they can while continuing to define their market niches.

With the U.S. population “following the sun,” many southwestern cities have experienced considerable population growth. This trend has contributed to the increased competition among grocers in some markets, as subsequent new development has opened up opportunities for new store locations.

Between the growth of the Hispanic population and general population shift to the Sun Belt, some of the nation’s fastest-growing grocery markets are in western cities. Las Vegas, Phoenix and Austin, Texas, are among the fast-growing locales. The West also is home to some of the most fiercely competitive grocery markets, notably Dallas.

The recent break-up of Albertsons will undoubtedly change the competitive landscape in many western cities. SuperValu’s acquisition includes, among other properties, 564 Albertsons locations in Southern California, Idaho, Montana, Nevada, North Dakota, Oregon, Utah, Washington and Wyoming. The Cerberus Capital Management-led consortium acquired 665 Albertsons locations in Arizona, Northern California, Colorado, Oklahoma and Texas, as well as Florida and Louisiana, along with a few other grocery-store properties.

Albertsons historically has been a dominant brand in many of these areas. Nonetheless, SuperValu and the Cerberus-led investor group will likely close some locations or perhaps lease them to other grocers or retail tenants. 

In Denver, for example, the local market in recent years was dominated by King Scoopers (a unit of Kroger), Safeway and Albertsons. It is not clear yet how the Albertsons break-up will affect local market dynamics, creating great uncertainty for local shopping center landlords. Meanwhile, a Pasadena, California-based chain of Hispanic grocery stores, Liborio Markets, has entered the Denver exurbs, opening its first Colorado store in summer 2006. The new Rancho Liborio store is the first of several the company says it plans to open in the state — another indication of the growing influence of the Hispanic market in the West.

The grocery landscape in Phoenix, on the other hand, is more complicated. With its burgeoning Hispanic population, Phoenix is a likely target for Hispanic grocers. According to Metro Market Studies, a Tucson, Arizona-based research firm, Kroger has the area’s largest market share at 28 percent, followed by Bashas’ Market at 16 percent, Safeway at 15 percent, Albertsons at 12 percent and Wal-Mart at 9 percent. Based in Arizona, Bashas’ Market is a good example of a strong regional chain that is able to compete with much larger companies.

Many of the Albertsons locations are either owned or controlled by master leases on which rent will continue to be paid so that the immediate financial impact will be minimal for landlords even if a location goes dark. The larger issue for these shopping center owners is that grocery anchors drive traffic for smaller tenants, some of which may also choose to vacate if their leases permit it rather than waiting for a new grocery anchor to appear.

Despite the uncertainty in the grocery industry, certain real estate fundamentals still pertain to grocery-anchored centers just as they always have. Consumers do need groceries and other necessities that some grocery stores provide, but finding the right grocer for a particular community is a critical success factor for a neighborhood shopping center.

Also critical is the competitive environment, of course, such as natural or manmade barriers to entry for competitors. A new development is not the only option for a commercial property investor or a grocery store. In some western markets, investing in a grocery-anchored shopping center in an infill location within an established community could potentially prove more advantageous. Many older suburban communities offer potential opportunities for a grocery-anchored shopping center. In such a location, customer demand is high and retailers want to be within such submarkets. However, finding ideal sites is challenging, particularly when the suburbs in question offer minimal options in the way of new retail development sites. Raw land sites are often few and far between, and the rare site available may not be the appropriate size or in the best location for retail use.

These barriers to entry do not guarantee success for a grocery-anchored center, but can reduce some of the risk that the current state of the grocery industry entails. However, not every shopping center can accommodate the unique space requirements of today’s sophisticated store formats in order to attract retailers that meet the needs of area consumers.

Furthermore, not every property investor can afford to make the financial commitment required for a new grocery store format. Most of today’s leading retailers will require a landlord to make a commitment to a redevelopment plan or to upgrading the quality of a suburban infill shopping center before the retailer will sign a lease, no matter how attractive the consumer base. This requires thoughtful planning, a capital investment and an understanding of the culture as well as the goals of the immediate community.

Given the state of the grocery industry, rolling the dice on a grocery-anchored shopping center is not always the gamble it might appear to be. The key is to understand the competitive environment, and to secure a grocery anchor with a proven track record of meeting the needs of local consumers. By aligning the goals of all parties involved, it is possible to give residents an ideal place to shop, retailers the right environment for new store formats and owners the sites they need to make it happen.

Many suburban shopping centers in the western United States have become outdated and suffer declining rents because the tenant roster does not provide the right mix of goods and services appropriate for the community. In fact, new developments sometimes fail for these reasons as well. It is in locations like these with strong fundamentals and a need for targeted, grocery-anchored retail offerings that there is opportunity. With the increased variety among grocery store concepts and offerings, giving area shoppers the kind of grocery store they want and need is a viable strategy that creates value for grocery-anchored shopping center investors.

Adam Lutz is principal of Lutz Real Estate Investments, a Michigan-based firm that invests in commercial real estate throughout the country.

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