Superman of Retail

As apparel chains struggle to maintain margins in a volatile marketplace, the grocery industry has found its groove. And although supermarkets aren’t immune from the margin hunt, they have the advantage of escalating sales and reliable cash flow.

What’s perhaps most interesting about today’s lineup of grocers—from chain retailers such as Wegmans to the one-off specialty supermarkets—is that they have more real estate options than ever before, staking anchor claims in upscale lifestyle projects, power centers and valuable vacated spaces in both urban and suburban developments.

Market wise: The cornerstone of Tri-Land Properties’ business is grocery-anchored centers. The Westchester, Ill.-based developer plots its acquisition and redevelopment projects market by market—and the grocery anchor selection depends entirely on a grocer’s position in the area.

“We never enter a market with a ‘We’ve got to have a Kroger’ attitude,” explained Richard Dube, president, Tri-Land. “We generally want the No. 1 or No. 2 grocer in the market, or we want the emerging independent.” In the Kansas City market, Tri-Land aligns itself with Price Chopper—and no one else. “In Kansas City, if it wasn’t going to be a Price Chopper [in our shopping center], then we didn’t want a supermarket,” said Dube.

Brywood Centre, in the far-eastern Kansas City, Mo., suburb of Brywood, is a Tri-Land center anchored by an aging, outdated Price Chopper store that still manages to generate about $23 million a year, according to Dube. Tri-Land is investing $2 million to upgrade and expand the store from 62,000 sq. ft. to 72,000 sq. ft. The company will spend another $18 million—with TIF (Tenant Increment Financing) assistance—to renovate the entire center.

In Chicago, however, the independents are winning the battle for consumer loyalty, and that, says Dube, is reflective of a nationwide trend.

“The traditional supermarket of 10 years ago is an unsustainable place to be in the market,” he said. Bottom-dollar pricing anchors one tier of the grocery industry, dominated by Save-a-Lot and Aldi, which compete on limited assortment and low price, and the supercenter lineup, which achieves price based on super volume. The top tier is owned by Whole Foods Market and other specialty grocers such as Fresh & Easy and Trader Joe’s. “The supermarkets in the middle were getting squeezed by companies that could sell cheaper and those that emerged at the top, such as Whole Foods,” explained Dube. For the middlemen, it was either find a way to be competitive or die.

Traditional grocers Wegmans and Kroger evolved with higher style and flexible footprints. But for every concept that listened and learned, there were 10 that didn’t. And that has left a wealth of vacant, or soon-to-be-vacant, real estate for developers such as Tri-Land to recharge with smarter grocery selections. “This has brought about the rise of the independent,” said Dube. “Many of these independents understand they can build a supermarket more like a specialty store, and make it appropriate for the market.”

Giant gains: Wegmans’ flexing footprint has had a far-reaching impact on the real estate picture around the country. According to Leo Ullman, CEO of Cedar Shopping Centers, Sewell, N.J., a developer whose bread and butter is the supermarket-dominated shopping center, Wegmans’ upsized iteration has propelled other chains to follow suit with larger stores and expanded offerings.

“As competing chains have introduced features such as pharmacies, cooking schools, community rooms, Wi-Fi rooms, Starbucks-type coffee shops and prepared-food eating areas, obviously larger space is required to house them,” explained Ullman. “But the real estate impact is greater than simply added size. Because supermarkets are bringing in-house many concepts that used to be external—such as branch banking, dry cleaning, pizza ovens and Chinese takeout—that has impacted landlords’ ability to fill the remaining space in the shopping center.”

The addition of fuel-service facilities as an adjunct to some traditional supermarkets must also be factored into a real estate deal.

But, emphasized Ullman, these accommodations are justifiable if they bring the right grocery operator into a shopping center space. For Cedar, that operator is frequently Ahold’s Giant Food of Carlisle, Pa.

“Giant represents about 13.5% of our total revenues and GLA, and we have 20 existing stores and another five that are in the works right now in development projects,” he said. These 25 projects comprise a variety of center formats and grocery-store sizes, ranging from 30,000 sq. ft. for the smaller properties, Ullman said, to a “98,000-sq.-ft. store we’re building for them in Harrisburg, Pa., on the east side of the river.”

To facilitate the new Blue Mountain Commons project in Harrisburg, Cedar bought an existing Giant center located nearby, and with Giant’s blessing is converting that property to a specialty-food anchored center. Blue Mountain Commons, at 135,000 sq. ft., will house the relocated—and reconfigured and expanded—Giant store, featuring organic and prepared foods, a pharmacy, and other amenities. Complementary tenants, including a bank and Sonic restaurant, will complete the center.

Traditional community strip centers such as Blue Mountain Commons aren’t the only format that works for grocery tenants. Big-box centers are attracting supermarkets as co-anchors; Cedar is co-developing a Target- and Best Buy-anchored, 700,000-sq.-ft. power center in Pottstown, Pa., that will feature another large Giant supermarket.