Analyst: Grocery real estate no longer a safe bet for investors
- Grocery stores can no longer be viewed as a "safe harbor" for real estate investors, according to Joe McKeska, president of Elkhom Real Estate Partners and 25-year grocery real estate veteran, according to a news release.
- Investors must now be more careful about the types of grocery retailers they invest in, according to McKeska. Among the challenges the grocery sector faces, he cites accelerating consolidation and general disruption in part due to Amazon/Whole Foods, as well as voice-activated and push-button retail, the rise of online delivery services like Instacart and Blue Apron, and a proliferation of specialty channels like hard discount, among others.
- "For anyone who invests in grocery-anchored real estate — whether a publicly traded shopping center REIT, private development companies, or your local neurologist and a few of his tennis buddies — it is important to recognize that the calculus required to maximize returns and minimize risk has changed dramatically from the simpler times that prevailed in preceding decades," McKeska wrote recently in Real Estate Forum magazine.
Grocery stores were once a safe bet for real estate investors, given their steady traffic and high customer loyalty. But times are changing. Amazon/Whole Foods may be generating much of the buzz lately around online grocery, but retailers across the industry are expanding e-commerce capabilities too, raising concerns for grocery real estate investors about the continued profitability and relevancy of stores.
Online grocery sales are growing at 25% per year, according to the latest “Ecommerce Supermarket Scorecard Report” from consulting firm Brick Meets Click. Unata’s 2017 Grocery eCommerce Forecast expects 31% of U.S. consumers will order groceries online this year, a 19% increase from last year. It’s projected that 20% of all grocery sales, representing around $100 billion, will come from online shoppers by 2025, according to data from the Food Marketing Institute and Nielsen.
Despite these lofty e-commerce predictions, 80% of grocery sales will still be done in physical stores in 2025, meaning brick-and-mortar retail isn’t going away. More good news for grocery real estate investors: analysts generally agree that click-and-collect (vs. home delivery) will emerge as the dominant and more economically sound online grocery format across America. This means most shoppers will still be visiting stores to collect their goods. Furthermore, IRI research has found that 69% of shoppers who go in-store to pick up their orders end up buying additional items. Brick-and mortar grocery shopping isn’t dead by any means — it’s just changing.
The shift toward online will certainly leave some casualties in its wake and some players undoubtedly will be forced to shutter stores. The ultra-competitive industry is over-stored. Discounters, specialty retailers and other alternative formats are muscling in, and some conventional grocers are on the chopping block. Chains like Food Lion, Albertsons and Southeastern Grocers’ Winn-Dixie and Bi-Lo brands are under considerable pressure these days. A recent report from Inmar Willard Bishop Analytics finds the number of traditional supermarkets in the U.S. will decrease 24.6% by 2021.
The market leaders and strong regional chains — H-E-B, Publix, Wegmans, among others — are positioning for success by investing more heavily in technology, e-commerce capabilities and existing store improvements in lieu of new store expansion. Consequently, grocery real estate investors have every right to be concerned because for many companies, the years of heavy spending on new stores is in the rearview mirror.
So, while grocery real estate could still be a wise investment choice, more scrutiny is now needed. It’s no longer just a matter of investing in “grocery-anchored” retail centers. Adequate analysis should be done in order for investors to go where the future growth – and likely winning grocery concepts — will be located. For example, Walmart- or Kroger-occupied real estate could be viewed as a good option for investors looking for solid returns over a long haul. But investors should avoid areas where weaker players are succumbing to competitive pressures.
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