upermarkets in the u.s. have traditionally been anchor tenants at neighborhood shopping centers. In Canada, Europe and elsewhere, however, it is not unusual to find supermarkets at other types of retail projects, such as indoor malls. Now the U.S. is following suit, and neighborhood grocery stores are increasingly moving into power centers and lifestyle centers. The trend actually started about a decade ago but has gained momentum in recent years and shows no signs of slowing. The ground was broken, one might say, by traditional big-box stalwarts such as Costco, Sam’s Club, Target and Walmart, all of which offer supermarket shopping, albeit in a different format -either warehouse-style or as a supplement to discount retail.
“Power centers are our strength,” said Matthew A. Lougee, senior vice president of finance and head of portfolio management and investor relations at DDR Corp. “And we are one of the busiest landlords to Walmart, which is the largest grocer in the United States by volume. There are a significant number of grocers in these centers, just not necessarily the traditional grocer.” Several trends have brought supermarkets to places like power centers. First, neighborhood shopping center development has slowed significantly since the recession of a few years ago. Meanwhile, specialty, ethnic and organic grocery stores have emerged as a significant force. All these new specialty stores have to go somewhere, and if neighborhood shopping centers are not getting built, then the stores get set up elsewhere.
“The most prevalent grocer expansion for power centers that we most frequently see is the smaller-format, natural and organic grocers,” said Lougee. “Within our portfolio, Whole Foods, Trader Joe’s and Sprouts are the most frequently expanding tenant in that category right now.” DDR put three 25,000-square-foot Sprouts Farmers Market stores in large power centers in Atlanta; Birmingham, Ala.; and Phoenix. At Woodfield Village Green, in Chicago, DDR created a spot for a Trader Joe’s on a former retention pond.
“It’s a very competitive environment, with new supply remaining at all-time lows and retailer demand still very strong,” said David Jamieson, executive vice president of asset management and operations at Kimco Realty Corp. “There is very limited development in today’s -market, especially as it relates to the traditional grocery-anchored strip retail community center. You do see an acceleration of redevelopment activity both in the community and power center projects, which are -becoming opportunities for grocery -expansion.”
None of this explains why -specialty grocers have thrived in power centers, though, and the simple answer is that the way we shop for food has changed, according to retail consultant Jeff Green. “It used to be that the -traditional -supermarket is where we bought close to 100 percent of all our food and soft-goods items,” said Green, president of Phoenix-based Jeff Green Partners. “Now we tend to cross-shop between the wholesale club, like Costco; the traditional supermarket, like Kroger; the specialty supermarket, like Trader Joe’s; and even some local specialty stores, like a farmer’s market. We are not wedded to one supermarket anymore.”
Roughly 800 wholesale supercenters and nearly 700 organic supermarkets will have opened during the five-year period between 2013 and 2018, according to a joint study by JLL and Willard Bishop, while nearly 600 traditional supermarkets will have closed. Sam’s Clubs and Costcos have worked well with specialty grocers in power centers, Green says. “The biggest surprise is how often you now see a commingling of Whole Foods and Trader Joe’s in the same center,” Green said. “That’s because we are shopping at Trader Joe’s for Trader Joe’s–manufactured items — you can’t do a full shop at Trader Joe’s.”
But the shopping center business has converged, observes Sandy Sigal, president and CEO of NewMark Merrill Cos. “We used to have really good differentiation, but the customers have gotten hyperefficient, and they are impatient,” Sigal said. “People want to go to one shopping destination, and they want that to be the place where they can fulfill their needs. The more you can give them in one spot, the more likely you can get them to come back.” And yet, not every power center can be a venue for a supermarket, and not every supermarket works in a power center. It is more challenging for a traditional grocer like a Publix or a Kroger, mostly because these stores have larger footprint requirements, says Lougee. “Power centers tend to be 400,000 to 700,000 square feet, and most of that space is accounted for with already constructed gross leasable area. To accommodate a 50,000-to-100,000-square-foot traditional grocer would require a significant amount of reconfiguration compared to a 15,000-to-25,000-foot organic chain.”
There is also some debate as to how well a specialty supermarket fits into a lifestyle center, though in Sigal’s view, this is a no-brainer. NewMark Merrill tore down a failed mall in Longmont, Colo., and is in the process of building a lifestyle center with a Whole Foods, a Sam’s Club, some restaurants, a movie theater and some apparel and sporting-goods stores. “As part of tearing down that mall and building the new center, we knew we needed to have something that would have people going there through two or three shopping cycles a week,” said Sigal. “We also knew [that] if we just did the movie theater or we just did the Sam’s Club, people would come and go, but they wouldn’t necessarily stay for the other services. By mixing it up — with a daily-needs store, a node of entertainment, a discounter — we get the best of all worlds.”
A grocer in a power center is -attractive “because the developer wants the everyday traffic that food stores bring in,” said Green. “It’s a combination of the developer guiding the retailer toward the power center site and the retailer opening in those locations and realizing it likes the venue.”
Apart from anything else, adding a grocer to a power center makes it a lot easier to sell. “That’s because consumers visit on a more frequent basis, at least twice a week,” Jamieson said. By adding a grocer, the cap-rate -compression is -significant, he says. “With ethnic grocers, such as 99 Ranch Market, shoppers frequent the center on a more recurring basis, as it is very much a part of the fabric of their community.”
Lougee agrees. “Our leasing team will tell you they can drive rents more frequently and at a higher rate with a grocer in a power center,” Lougee said.
Some 72 percent of Kimco’s total annual base rent is represented by grocery-anchored shopping centers, says Jamieson. “We have increased that from 64 percent over the last year and a half,” he said. “It’s been a significant strategy for us.”
DDR sees it the same way. “We do about $100 million in redevelopment a year,” said Lougee, “and our focus is to include a grocer component in as many of these projects as we can.”