Grocery retail is still a safe bet

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Grocery retail is still a safe bet

By Taylor Coyne - 05/20/2019
The United States saw a surge in grocery expansion in 2018. Across the nation, grocery openings were up 29.4% from the year prior with 17 million sq. ft. of new grocery space. Rapidly expanding regional grocers contributed to this surge, particularly in Florida, thanks to a number of Publix store openings across the state. California and Texas, the usual frontrunners for grocery expansion, got the second and third spots with each accounting for 7.8 % of this year’s new grocery square footage. Increasing their presences in California were Sprouts Farmers Market, Aldi, and Grocery Outlet, — while Kroger and regional favorite H-E-B expanded in Texas.

The U.S. expansion of two German chains also fueled grocery growth. Aldi opened 82 stores, increasing its square footage by 15.6%, while Lidl bolstered its East Coast presence with plans to purchase 27 Best Market Stores in New York and New Jersey. More of the same is likely in 2019 as regional grocers look to grow and national chains continue to open innovative grocery retail concepts.

While transaction volume is down year-over-year, grocery continues to be a sweet spot for retail real estate investors. The leading grocery-anchored centers in primary markets have become prized acquisitions and, in the past two years, their average price per sq. ft. has increased by 9.5 percent in primary markets. A good example is at the Diamond Heights Shopping Center in San Francisco. Anchored by Safeway, it recently achieved cap rates of 4% with pricing at $635 per sq. ft. Investors are increasingly interested in experimental retail concepts that aim to stay relevant to changing customers, and the grocery industry is working hard to do just that.

Just how are grocers reinventing themselves? By investing in convenience and flexibility both online and in store. Grocers are plunging significant amounts of capital into perfecting the online experience for shoppers, while also ensuring that stores remain easy to navigate and provide an enjoyable retail experience. It’s not just about the in-store or online experience, it’s about providing flexible and reliable options for customers no matter how they want to shop.

Here are some new-concept success stories from 2018:

Driverless delivery coming to a door near you. Kroger has partnered with Nuro, a Silicon Valley startup, in Scottsdale, Ariz., to test autonomous vehicle grocery delivery. Similarly, Walmart has partnered with Waymo, an Alphabet-owned company focused on self-driving technology. Stop & Shop has a partnership with Robomart and online grocer Farmstead has begun working with Udelv — both last-mile delivery systems employing autonomous vehicles. The goal is to deliver groceries cost efficiently without the long wait times consumers are currently experiencing.

Innovating the distribution center. As consumers want the flexibility to shop online for groceries, grocers must find ways to make the process smoother for their grocery delivery and click-and-collect programs. To achieve this, grocers are building new fulfillment centers and micro-distribution centers. Kroger has partnered with Ocado, the British e-grocer, to build automated warehouses across the U.S. to speed up delivery times. The first three facilities will be located in the Cincinnati area, Central Florida, and the Mid-Atlantic region.

Giant Foods recently opened an e-commerce and fulfillment facility in Lancaster, Pa., that has click-and-collect lanes for shoppers and a counter where customers can place orders on the spot. Ahold Delhaize, Albertsons, and Walmart are also piloting micro-fulfillment centers to reduce last mile costs.

Small stores with local goods. A lot of shoppers make short trips to the grocery store for items needed that day. Smaller stores allow shoppers to find the products they need more efficiently — which makes the process more convenient. Grocers are shrinking store sizes to appeal to this type of shopper, while adding in local foods and products to provide a unique experience.

Last year, Publix opened its first GreenWise market in Tallahassee which has prepared foods, craft beer, and a lounge. Hy-Vee Fast & Fresh opened in Iowa in a 10,000 sq. ft. space and is the second of the grocers’ small format concepts. Its first, HealthMarket, focused on health and fitness consumers and included a health clinic and sports nutrition area.

Giant Food recently opened its first Giant Heirloom Market in Philadelphia and will have plans for three more in 2019. Heirloom is 9,500-sq.-ft. footprint with kombucha on tap and a craft-your-own olive stand. The store also offers next-day delivery through Peapod, providing the efficiency of a smaller store while giving shoppers access to the services of the larger Giant Food network.

Focusing on unique experiences. Grocers are making partnerships with other retailers to add specialty kiosks and products to draw in consumers. Kroger has partnered with Walgreens to place smaller Kroger Express stores inside pharmacies across the country. Hy-Vee allows retailers like Wahlburgers, the fast-casual burger restaurant, and beauty retailer Basin to open smaller retail concepts within their existing stores.

Wegmans made its New York City debut at the Brooklyn Navy Yard. The space includes an in-store café with a full bar. Stop & Shop, meanwhile, redeveloped 21 stores in Connecticut with in-store smokers, local produce, and kombucha fountains.

While grocery is a necessary retail category, it is striving to evolve to meet the needs of customers who desire the flexibility of picking up a gallon of milk at a store even though they order the bulk of their groceries online. The unique shopping habits of grocery retail customers continues to be a major factor driving both innovation and investment in the grocery industry.

Taylor Coyne, a research manager at JLL, recently co-authored a report on tech trends changing retail and the strategies behind renovating malls.

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