Not only has Wal-Mart grabbed a big share of the food buck, but the discount giant's aggressive development strategy also has sparked a price war between traditional supermarkets. Wal-Mart's supercenter brand is the No. 2 grocer by national market share, second only to Kroger, according to Morgan Stanley.

Long considered as safe, recession-proof investments, grocery-anchored centers are now becoming a war zone as Wal-Mart and Target roll out their supercenter concepts. These giant outlets, with upwards of 69,000 sq. ft. of grocery space, have “increased the risk of owning grocery-anchored centers,” according to Parsippany, N.J.-based Prudential Real Estate Investors' second-quarter 2002 Market Perspective report.

Investors do not fully recognize how these supercenter expansions — particularly by Wal-Mart — are wreaking havoc within the grocery industry, adds Morgan Stanley analyst Matthew Ostrower.

For grocers, that means slimmer profit margins in an already small-margin industry. Albertson's and Safeway, the No. 2 and No. 3 largest chains, both issued warnings about fourth-quarter earnings.

War of Attrition

For property owners and investors, the risks are rising, too. Year-to-date through October, 1,014 grocery stores have closed compared with 1,156 closings in all of 2001 and 1,343 in 2000, according to Trade Dimensions, a retail research firm in Wilton, Conn. But grocery-anchored centers are still priced on the old perception of invulnerability, exposing REITs and private investors to possible losses. “We're concerned that they're far from bulletproof,” says Ostrower.

As investors have snapped up grocery-anchored centers, prices have risen steadily and capitalization rates have fallen. Cap rates for neighborhood centers fell from 10.11% in 2000 — when 165 centers changed hands — to 9.97% in 2001, when 158 centers sold, according to New York-based Grubb & Ellis. As of mid-October this year, 106 centers had sold and cap rates had dropped to 9.78%, indicating continued aggressive pricing.

In addition, according to Marcus & Millichap's 2002 National Retail Report, average prices for both stand-alone supermarkets and those within shopping centers climbed to $100 per sq. ft. in the second quarter of 2002 from $95 per sq. ft. at the end of 2001. And prices are expected to continue their upward trend, says Bernard Haddigan, managing director of Marcus & Millichap's National Retail Group.

With Wal-Mart revving up its super-center initiative — it plans to open 200 to 210 supercenters in the fiscal year beginning February 2003 — and Target and Costco putting more emphasis on groceries, too, these expensive properties may be at risk. When supercenters arrive, the impact on existing supermarkets can be fatal. In Shawnee, a growing suburb of Kansas City, Price Chopper closed a 60,000 sq. ft. store after Target and Wal-Mart both opened supercenters within approximately one mile of the grocer. Now some 77,000 sq. ft. of the 92,000 sq. ft. shopping center sits vacant.

Haddigan says investors have come to recognize the supercenter threat. When assaying a property, investors first ask where Wal-Mart supercenters are and where they could sprout. “Any investor who knows what he's doing has asked this question a lot over the last few years,” Haddigan says, “but now everyone's asking it.”