A small region of central North Carolina has become the most competitive grocery market in the U.S., with national and international chains alike making it the focus of their expansion plans.
The area bounded by Chapel Hill, Durham and Raleigh, known as The Research Triangle, has a population of about 2 million. It also happens to be smack in the middle of battle lines drawn by Lakeland, Fla.–based Publix, which is moving north from its Florida base, and Rochester, N.Y.–based Wegmans Food Markets, a Northeast rival coming from the other direction.
This grocer war began in earnest about two years ago, when Publix opened a store in the Raleigh suburb of Cary. Then, early last year, Wegmans announced plans to open four stores in the area by 2018, while Germany-based Lidl said it would open eight of its own.
Fueling all this is the fact that the region boasts some of the strongest demographic trends in the country. “Economic fundamentals in the Triangle are extremely strong,” said John Bemis, executive vice president and retail market lead at JLL. Annual income in the area averages $75,000 per capita, and this combines with a comparatively low cost of living and doing business. “Also, the strong higher-education component, including the University of North Carolina and Duke University, is feeding talented graduates into this machine that the Triangle has become,” said Bemis. “It makes for a great environment for people to operate in.”
For decades the local market has been dominated by North Carolina–based Harris Teeter Supermarkets, which The Kroger Co. acquired in 2013 for $2.4 billion. “When you have a market like that all to yourself for a long time, people are going to finally stand up and take notice,” said Bemis. “It’s kind of this whole coming together of a lot of different forces that have turned this into a grocery battleground.”
Beyond Harris Teeter, the new dynamic adds to a relatively fragmented local grocer market. “Publix, Wegmans and Lidl are crossing paths at the same time, and then you add all the grocery stores that are already here, including Harris Teeter, Food Lion, Lowes Foods, Earth Fare, Fresh Market and Ingles, and you have some competition,” said Charlie Coyne, senior vice president of retail in CBRE’s Raleigh office.
The new entrants are all hoping that their major points of differentiation will help them achieve success, observes Bemis. “Lidl is in that discount Aldi mode: sparse, very German and very well run,” he said. “Wegmans dominates the Northeast, and their customer loyalty is legendary. Harris Teeter has some of that in the Carolinas, especially in their higher-end grocery stores, and they are extremely well operated. It is not going to be easy to unseat them. And Publix is kind of the same thing as Wegmans in the South.”
Publix has gained the most traction recently, opening three stores in the Triangle in the past two years, with a fourth slated to open next year. Meanwhile, Lidl has broken ground on a site in Raleigh, and Wegmans is developing a 120,000-square-foot store in Cary as part of a mixed-used development planned by Columbia Development Group just north of CBL & Associates Properties’ Cary Towne Center mall. In total, these developments will add an estimated 1.5 million square feet to the market’s current grocer inventory of about 8 million square feet over the next few years.
Coyne also has his eye on other recent entrants: Sprouts Farmers Market, Trader Joe’s and Whole Foods. “It will be interesting to see how they fare, because even though they are organic, they are sort of in that middle ground, where they are not really upscale, and they are not necessarily discount either.”
Even Dollar General has entered the local grocery game with its new, small-store DGX concept, targeting on-the-go urban shoppers in downtown Raleigh. The 3,400-square-foot store began selling some grocery items in February from its ground-floor site in the midrise Edison Lofts apartment complex.
This is not the first time grocers have viewed the South as fertile ground for new stores. In the early 1990s a similar battle brewed in Atlanta as Publix moved in to a market once dominated by A&P, Kroger and Winn-Dixie. “When Publix pushed up into Atlanta, Kroger ignored them for the most part and decided that they [Kroger] were the 900-pound gorilla, and this little upstart from Florida wasn’t going to be a serious challenger,” said Bemis. “I can guarantee you Kroger will not make the same mistake in any market ever again. They will battle hard against Publix.”
To be sure, Harris Teeter is already making moves to fight off the new competition, according to Joel T. Murphy, president and CEO of New Market Properties, which owns a Harris Teeter–anchored, 69,000-square-foot shopping center in suburban Raleigh. “We worked with Harris Teeter to bring in a fuel center, and that’s an important piece of the puzzle, because it drives traffic to the center. That’s one of the ways they are going to respond,” said Murphy. “They’ve also just completed a 15,000-square-foot expansion of their store and a complete interior remodel in anticipation of Publix coming. I think Harris Teeter and everybody has to bring their A-game.”
Having a strong new parent-partner is also a potential benefit. “The Kroger acquisition has given them a lot more ammunition moving forward, as long as they don’t fundamentally change the way that Harris Teeter operates in this market,” said Bemis. “But Publix and Wegmans are both outstanding.”
Market watchers agree that it will take at least a decade to determine any winners or losers. “These are 20-year leases, these are substantial companies, so just because a store starts losing sales, whether it’s moderate or significant, it takes time to consider closing a grocery store that you spent $10 million or $15 million to build,” said Coyne. “The grocers that don’t have a niche — either on the higher end, like Publix and Harris Teeter, or in the discount world, like Lidl or Aldi — the ones that are in the middle, I think, will be the most challenged. In our market Food Lion and Lowes Foods are sort of in that middle.”
The local retail property owners could be among the winners. “In Raleigh, Durham and Chapel Hill, it is very difficult to get entitlements, so you are not going to have grocers popping up on every corner,” said Murphy. “It’s really a good time to own well-located real estate, because these new deals are going to have pretty high cost, which means they’ll have to have a pretty high rent structure to make them work.
It’s going to be a good thing for landlords that have grocery centers and well-located centers, because I think this increased demand is going to make their grocer up their game, and that’s just going to increase the value of the assets. I wish we had more there now.”
Bemis agrees and also speculates that Darwinian realities will come into play. “It is going to be a survival of the fittest, like it usually is in the retail world,” he said. “The people who can satisfy consumer needs and wants at the best price will prevail — and by best price I don’t mean necessarily the lowest price. It is going to be very interesting and exciting to watch what happens.”