Elkhorn: ‘Go Big’ Grocery Retailing Era Ending

Grocery retailing’s “go big or go home” era is ending as top chains pursue new strategies to cope with market disruptions, said Elkhorn Real Estate Partners, Oakbrook, Ill.

“For years, the prevailing strategy for chains to drive growth was through some combination of opening new stores and finding good brick-and-mortar operators to acquire in order to increase economies of scale,” said Elkhorn President Joe McKeska. “But today, we’re seeing less and less focus on new store growth and horizontal integration. Now the direction is vertical–grocers are intently focused on cultivating the capabilities they need to survive in a disrupted marketplace.”

McKeska said U.S. grocery retailers show an “extraordinary” willingness to alter their business models in response to disruptive forces including e-grocers, specialty formats, Amazon Alexa and meal kit delivery services.

Grocery retailers’ capital investments plans show how much the sector has changed, McKeska said, noting Kroger plans a 68 percent reduction in new store capital from 2018 to 2020 compared to the prior three-year period. Walmart plans to open just 25 new stores this year, the lowest number in 30 years, he said. “Bear in mind that as recently as 2015, Walmart opened 230 new stores for the year.”

Instead of rolling out large numbers of new stores or growing horizontally by acquiring significant portfolios operated by their rivals, grocers are looking to improve their own operations, McKeska said. “The capital focus continues to shift to remodeling existing stores under the banner of enhancing the shopping experience. Heavy investments related to digital and e-commerce capabilities–in particular, those for click-and-collect, home delivery and offering personalization–are now the order of the day.”

Grocers are also investing to improve their supply chains and operational efficiencies. “They understand the imperative to continually reduce prices,” McKeska said. “You’re competing not only with Amazon and other e-commerce channels, but with dollar stores and a growing deep-discount grocery segment.”

Grocery retailers can grow their market share by acquiring and converting second-generation space, McKeska said. “The costs and performance risks are much lower than those associated with building new ground-up stores,” he said. “While these types of acquisitions are increasing, what we’re seeing very little of are the massive combinations and scale-ups that were quite fundamental to the grocery business stretching back over the last few decades.”

These trends will affect the market for grocery-anchored retail centers, McKeska said. Elkhorn analyzed grocery-anchored real estate investment trends from data provider Real Capital Analytics and found the number of grocery-anchored shopping centers sold decreased from 709 in 2016 to 656 last year. “What we’re seeing is a flight to quality,” McKeska said. “There’s a supply-demand imbalance for high-quality grocery-anchored centers where the risk of store closure in the future is very low. When it comes to those with more questionable anchors, we’re seeing a decrease in pricing. Frankly, I expect that trend to continue given the increasing uncertainties in today’s marketplace.”