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‘Go Big or Go Home’ Era Ends for U.S. Grocery Retailing
By Dennis Kaiser
The era of “go big or go home” in U.S. grocery retailing is coming to an end, as top chains leverage new strategies to cope with change. That was the conclusion of a presentation by Elkhorn Real Estate Partners’ Joe McKeska at the 2018 ICSC OAC Summit in Dana Point, CA, which focuses on the open-air segment of retail real estate.
“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 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, a 25-year veteran of the grocery business who previously headed real estate operations for Southeastern Grocers, LLC and Supervalu, Inc., noted that U.S. discounters and grocers have shown an extraordinary willingness to alter their business models in a strategic response to disruptive forces, ranging from e-grocers, specialty formats and Amazon Alexa, to meal kit delivery and everything in-between.
The changes are reflected in the capital investments planned by leading chains. Kroger plans a 68% reduction in new store capital from 2018 to 2020, compared to the prior three-year period. Walmart’s expansion plans for 2018 have shrunk to just 25 new stores, its lowest level in 30 years, and is in stark contrast to the 230 new stores the retail giant opened in 2015, pointed out McKeska.
Today’s strategies tend to focus on internal operational efficiencies and changes. “The capital focus continues to shift to remodeling existing stores under the banner of enhancing the shopping experience,” McKeska explained. “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.”
The total dollar volume of transactions last year actually increased by 12.2%, while the number of grocery-anchored shopping centers sold decreased. “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.”
For comments, questions or concerns, please contact Dennis Kaiser
