Super Markets

The grocery segment has felt less of a pinch from America’s belt-tightening than any other category, except dollar stores and other discounters.

That’s not to say that grocers are all flourishing; notable bankruptcies in the category include BiLo and Bruno’s. Whole Foods Market has reported flat sales and shrinking profits; and Costco Wholesale Corp. missed Wall Street’s mark in the fiscal third quarter, attributing its weakening sales to the slowdown of high-ticket purchases and fuel.

But grocer good news outweighs the negative. Kroger is actively rolling out its Kroger Marketplace concept. In May, the Cincinnati-based supermarket chain announced it was opening its largest Kroger Marketplace store to date, in Texas, this October.

Aldi opened its 1,000th U.S. store in March, and the discount grocery retailer said it plans to open 80 U.S. stores, at an average size of 17,000 sq. ft., in 2009.

Publix profits rose 12.4% in its fiscal second quarter, and sales at Giant Food and Stop & Shop supermarkets shot up in the first quarter, according to results released by Dutch parent Royal Ahold. (Giant’s same-store sales rose 3.6%, and Stop & Shop’s rose 4.8% in the quarter. In tandem, operating income for the two chains increased 20% from the quarter last year.)

Trading down: Helping supermarkets earn a spot among the best-performing business sectors in the recession is not only the category’s focus on selling the essentials, but also a result of shoppers trading down to them from restaurants and pricier specialty food retailers.

But, trading down can benefit some groups more than others. “If you divide supermarkets into three groups—the high-end retailers such as Whole Foods, the mid-range grocers such as Kroger, and discounters like Aldi—then the mid-range and discount grocers have benefited most from trading down,” said Richard Dube, president, Westchester, Ill.-based Tri-Land Properties, an active developer and redeveloper of grocery-anchored properties.

After the recession took hold, higher-income shoppers traded down from Whole Foods to the mid-range stores, said Dube. “And the middle customers, who used to shop Kroger and Jewel, have traded down to Aldi’s and Costco.”

Understanding the grocers and their evolving customer bases and markets are key to a successful project, said Dube.

In the case of Tri-Land, which focuses 90% of its activities on redevelopment, every project launch is preceded by garnering that understanding. “We first look at older supermarkets with outdated formats but that are still doing good volume,” he explained. Tri-Land then ascertains whether the existing store can be enlarged, “but usually it can’t, because these old stores often aren’t deep enough to be enlarged and still achieve optimal functionality.”

The next move, then, is to find an alternative site, usually within a mile of the current location, and initiate discussions with the grocer and with the municipality.

“The attitude of the town is of paramount importance,” said Dube, “in terms of zoning, entitlement and financial assistance.”

Tri-Land’s The Crossing project in Smyrna, Ga., met all of the above criteria. Currently in the planning stages, with a 2010 construction start and an early 2011 completion, the project will feature a 92,000-sq.-ft. Kroger Marketplace anchor. “It’s a classic redevelopment project, with high density, a cooperative township, the right site and access, and the right depth to handle the parking field.”

The right market: When Boston-based Sam Park & Co. tapped Market Basket to anchor the developer’s first grocery-anchored project—Gloucester Crossing in Gloucester, Mass.—it did so because of how well the grocer knows its market.

“We went with Market Basket because they know their market, and they know how strong this location is for them,” said Sam Park, managing partner. “And they will drive enormous retail traffic to our center.”

Market Basket, a New England-based chain of about 60 stores, will open a 60,000-sq.-ft. anchor in the 195,000-sq.-ft., mixed-use Gloucester Crossing, situated at Route 128 and Gloucester Crossing Road, in downtown Gloucester. “Those people who live here know that this area needs retail,” said Park. “The nearest competition is over 17 miles away.” Park added that the center won’t be “ho-hum, but rather a vibrant retail village,” with direct access to the highways, yet surrounded by rooftops, businesses and downtown amenities.

“Mixed-use allows us to create greater density, to provide greater variety and create collectively a destination within a city,” he said. The first phase of Gloucester Crossing opens this fall, and features Market Basket, Marshalls and approximately 60,000 sq. ft. of stores and restaurants. Phase 2 will include a 100-room hotel with ground-floor retail, along with the Shops at Gloucester Crossing—more than 40,000 sq. ft. of smaller stores, restaurants and specialty retailers. Phase 1 openings are slated for this fall. Leasing is being handled by The Wilder Cos., Boston.

“Given our success with Market Basket and our mixed-use program, we are now exploring several grocery-anchored opportunities that we intend to start once this project is completed,” said Park.

Reducing risk: Cedar Shopping Centers isn’t new to grocery-anchored centers. The Port Washington, N.Y.-based developer has perfected a formula for creating successful projects, while reducing risk. “Our overriding objective when launching a new grocery-anchored project is to take as much risk out of the project as is humanly possible,” said Leo Ullman, president and CEO, Cedar.

As an example, he said, Cedar won’t purchase the land until the grocery anchor is signed, sealed and delivered. “Once we have a grocery anchor lease in our pocket, we will acquire the land and finish the entitlement process for all the approvals,” he said.

Cedar typically builds to a fixed negotiated cost to eliminate the risk of escalating construction costs.

Other keys to risk reduction are paring down the amount of speculative ancillary retail space next to the grocer, carefully examining the road patterns (“to ensure there isn’t going to be a new road on the other end of town with a new Walmart on it, for example,” said Ullman) and, finally, “We look to develop with the No. 1 or No. 2 grocer in the area,” he said.

Cedar frequently teams with Giant Food, a dominant operator in Pennsylvania and a crown jewel of Ahold’s U.S. operations. In fact, Giant will anchor one of Cedar’s current projects—Blue Mountain Commons, in Harrisburg, Pa. The center features a 98,000-sq.-ft. Giant supermarket.

“This new Giant store is a prototype for the chain, featuring a pharmacy and fuel, as well as a full range of additional food offerings,” said Ullman. The center itself will feature brick facing, Giant’s upscale fuel facility, a new bank in-and-out parcel, and another 30,000 to 35,000 sq. ft. of ancillary retail. The store is expected to be delivered in August.

Abetter grocer: Adam Ifshin, president of Tarrytown, N.Y.-based DLC Management Corp., won’t go so far as to say the grocery segment has been unscathed by the downturn: “The severity of the recession has been such that no center has been spared at least some degree of negative impact,” he said. “But, if you consider other formats such as power, mall and lifestyle, then certainly grocery is the least impacted of the group.”

Understanding who is healthy and who isn’t has played a huge role in how DLC approaches its shopping center projects. “Our main objective when launching a new project is analyzing the tenant mix—and making sure it is right for the economy and right for the area,” said Ifshin.

A retailer in a grocery-anchored center must have a business model that works in this economy,