Grocery Stores Slow Expansions, but Prepare Big Changes

By Globe St | February 28, 2018

CHICAGO—Grocery-anchored centers continued to be an attractive property type for investors in 2017, with sales volumes increasing by 5.3%, according to JLL’s Grocery Tracker 2018 report. The asset class remained stable even though investors kept most other retail types at arm’s length.

But regardless of the overall stability, many grocers continue to experiment with new strategies like healthier food options, more advanced technology, and the possibility of alliances with non-grocery companies, leading Chicago-based JLL to conclude that this retail sector will have an eventful 2018.

Last year, the industry took a breather in some ways. Builders slowed the pace of new construction in 2017, opening 13.4 million square feet of space, which represents a decrease of 28.8% year-over-year, JLL finds.

“It’s not surprising that overall grocery store expansions fell in 2017, when compared to the boom in 2016,” says James Cook, the company’s director of retail research. More than one-third of new store openings were in just three states: CA with 1.6 million-square-feet, and NC and VA with growth of 2.7 million-square-feet across both states. “Retail follows rooftops, so the states with strong population growth will continue to see an influx of grocers.”

Consumers have become partial to specialty grocers, discount grocers and wholesale clubs, he adds, putting pressure on the largest grocery chains. “But we are seeing strong local chains competing head to head, and winning. Locations within the trade area and in the right markets is key.”

Healthier food choices, especially at affordable prices, was one of the three main strategies which helped many grocers compete. Aldi, Lidl and Grocery Outlet have done well by embracing gluten free and vegan-only diets. Aldi, for example, launched LiveGFree, a gluten free product line, in 2014, while Lidl offers shoppers a vegan option.

Moves like this helped Aldi expand its market share, JLL finds. The discount grocer significantly grew its presence last year in CA, VA and TX. And it plans to invest $3.4 billion in store expansions over the next four years while also remodeling 400 existing properties.

Grocers that sell products under private labels also have a competitive advantage. Consumer tastes can change quickly, JLL points out, but private labels allow grocers to quickly respond to market changes. Furthermore, cutting out the middlemen can double profit margins. Albertsons, one of the nation’s top grocers, recently added hundreds of new USDA-certified organic products to its O Organics private label. The line just hit $1 billion in sales in the most recent year, a 15% increase, and the grocer plans to add hundreds of more new products in 2018.

Like most brick-and-mortar retailers, grocery stores have begun establishing online shopping options. Still, JLL finds that online penetration in the sector remains at a mere 0.8%.

But property owners can expect grocers to continue experimenting with online shopping, grocery delivery and click and collect. Kroger opened its 1000th ClickList store, where customers can have items brought to their car after ordering online. The service has been a hit with shoppers, and Kroger has seen digital sales more than double since the launch.

JLL advises investors to pay attention to the strategies adopted by grocers. “Owning a property anchored by one of the top grocery chains is no longer a guarantee of strong performance,” says Chris Angelone, the company’s retail investment sales leader. “Owning retail is like owning an operating business, and investors need to keep in mind changing consumer preferences.”

The biggest recent news in the grocery world was Amazon’s $14 billion acquisition of Whole Foods. The implications of that move are not yet clear, but JLL expects more partnerships between grocers and non-grocery companies “that focus on innovation and technology that can build upon digital networks, logistics, delivery, and customer engagement.”