When you walk into the Kroger store at Dublin Plaza in Dublin, Ohio, you don't find your typical staid, antiseptic supermarket. There's no harsh fluorescent lighting, sterile white tile or plain metal shelving. Instead, the recently renovated store showcases a new décor featuring hardwood floors, wood casings and warmer lighting.

The merchandise mix is different too. Shoppers can browse through an expanded selection of organic and gourmet products, prepared foods and a larger produce department than you'll find at a typical Kroger.

“Kroger really upgraded the store, and I've noticed a big pick up in volume,” says Linda Swearingen, executive vice president of Columbus, Ohio-based Casto, which owns Dublin Plaza. (For good measure, Swearingen says she shops at the store herself.) “Over the long term, we're confident that the remodel will help us retain our tenants and upgrade the tenant mix.”

Kroger was the first tenant to sign onto Dublin Plaza when the 182,000-square-foot project was built 20 years ago. Landing a stable anchor enabled Casto to convince other tenants to come onto the project.

But times have changed. The grocery market has morphed, with conventional supermarkets facing well-documented pressure at the low end from supercenters and wholesale clubs, and at the high end from a crop of upscale grocers that have proliferated in the past decade. Over the years Dublin Plaza has fared well, but it was not immune to these trends.

Today, though, Dublin Plaza has gotten a new lease on life. Taking a lead from Kroger, Casto has updated the rest of the plaza with a more upscale look. It has added a new façade, lighting and parking lot to the project. And that, Swearingen says, has sent a clear message to tenants that Dublin Plaza will remain a fixture on the local retail scene.

“With the renovation, tenants and customers can look at the center and can see that the owner and the grocery anchor are committed,” Swearingen says. “It shows prospective tenants that the center has a long-term viability: that it will look good and have a lot of traffic.”

Across the country, similar stories are playing out. Conventional grocers, including the three biggest players, Kroger Inc., Safeway Inc. and Supervalu Inc., are increasingly going back to older stores and renovating and expanding them rather than building new stores. They are bringing in more prepared foods, wine selections and other new departments. The mainstream grocers are finding the moves help them compete with the proliferation of chains like Wild Oats and Whole Foods. It also helps distinguish them from Wal-Mart, Costco and Target, who in the past decade have gobbled up huge shares of the grocery market.

“All the major chains are reinvesting in their existing infrastructure,” says Joe Bona, president of the retail division of Colemanbrandworx, a global branding agency. The firm has created new prototypes for several grocery chains including Pathmark, Stop & Shop, Shaw's, Safeway Canada and Japan's Jusco.

For their part, Swearingen says, Casto and Kroger are looking to emulate what they've done at Dublin Plaza at other centers. “Over the last couple of years, we've spent more time with Kroger on renovations and expansions versus new development,” she says.

Meanwhile, Albertson's CEO Jeff Noddle recently announced that the chain has allocated $1.2 billion per year for remodels and will upgrade 100 stores this year, converting them into what it is calling its new “Premium Fresh” prototype.

Similarly, Safeway opened just seven new stores in 2006 compared with 11 in 2005 and 22 in 2004. However, the Pleasanton, Calif.-based company completed 276 remodels in 2006 and expects to remodel another 275 stores this year. All of Safeway's newly remodeled stores have been converted into the “Lifestyle” format, which boasts an expanded perishables offering including meats, bakery, deli and produce. The new stores feature earth-toned décor, custom flooring, unique display features and special lighting to highlight products and departments.

As of June 30, Safeway had remodeled 48 percent of its 838 stores, according to chairman, president and CEO Steven Burd. He says the company is on track to spend $1.7 billion on remodels this year alone.

“Our new store program continues to be pretty moderate, and we still think that's the right course of action given that we've got another 50 percent to [remodel],” Burd said during Safeway's second quarter earnings conference call in mid-July.

Safeway, in fact, has had such success with its prepared foods sales that in June it opened a freestanding restaurant called Citrine New World Bistro in Redwood City, Calif. The 5,000-square-foot, 125-seat eatery features food with five regional flavor profiles and will bolster the company's store-label brands such as O Organics chicken, Rancher's Reserve beef, and Primo Taglio meats and cheeses.

One big exception to the renovation and upscaling trend is privately owned and operated Publix Super Markets Inc. The Lakeland, Fla.-based chain is expanding more aggressively than its larger competitors, with 30 units under construction this year to go along with another 30 that are under renovation, according to a company spokesperson.

Experts speculate that Publix's remodeling efforts are more about keeping stores fresh than completely revamping the brand like Safeway has done with its “Lifestyle” concept. “Publix owns its customers' heart and soul,” says Mary Lou Fiala, president & COO of Regency Centers Corp. “That's why their remodels aren't as extensive.”

Rebuild it and they will come

Most grocery chains find new development far less compelling today than they did a few years ago. While the slowdown in the housing market is somewhat limiting the need for new projects, that's not the only factor. It's the price of land, high construction costs, zoning issues and competition that have really taken the shine off ground up development.

“Many grocery chains that might have looked around for sites in the past are now more likely to stay in place and renovate their stores,” says Adam Ifshin, president of DLC Management, a Tarrytown, N.Y.-based company with a portfolio of 70 shopping centers. “Investing in existing stores is less risky because the location has already been validated. And it's less expensive and usually doesn't take as long.”

In addition to development challenges, grocers are upgrading their existing stores in an effort to distinguish themselves from all the competition.

“Traditional grocery stores are caught between the guys on the price end of the spectrum and the guys on the quality and prepared foods end,” says Lee Peterson, a vice president with WD Partners. The firm is working on Albertson's remodeling strategy. “They've spent 10 years trying to hold off Wal-Mart on the price side and have realized that the best way to compete is to focus on the shopping experience.”

Chris Weilminster, senior vice president of leasing of Federal Realty Investment Trust, agrees: “We've really seen the traditional grocers focus on those types of services and products to further differentiate themselves.” Currently, he's working on five grocery store renovation and expansion deals.

Moreover, renovations are a strong defensive tactic. Ifshin contends that DLC Management routinely sees its grocery anchors rushing to renovate stores in advance of new market competition. In Lawrenceville, Ga., for example, Kroger renovated its store before a new Wal-Mart Supercenter could open in the market, adding new floors, casings and lighting and new departments. DLC Management changed the center's exterior and added a two-story façade to Kroger.

When the Supercenter opened, it had a “brief impact” but Kroger rebounded, Ifshin says. The Publix across the street, which was not renovated, wasn't so lucky. It closed soon after the Wal-Mart Supercenter opened.

Customer Experience

Will Ander, senior partner of McMillan|Doolittle, a Chicago-based retail consultancy, says traditional grocery chains are remodeling their stores to focus on things that low-cost operators like Wal-Mart and Target don't do well. “Convenience, service and quality are the things that discounters can't or don't offer,” Ander says. “It's the prepared and organic foods where the supermarkets can do a better job, so that's where they're spending their money.”

In fact, nearly all food retailers (98.8 percent) are addressing competition issues by emphasizing perishable products such as meat, produce, prepared foods and deli and bakery items, according to a report issued by the Food Marketing Institute. The report, Food Retailing Speaks: the Annual State of the Industry Review 2007, found that retailers rate this strategy as one of the best.

“The Whole Foods of the world established the benchmark for consumers. The experience and environment that Whole Foods provides has taught the industry that in order to be competitive they just can't have rows and rows of metal shelving and expect to succeed,” Bona says.

As a result, grocers are focusing on customer experience, something they ignored in the past.

“Grocers have been asleep at the wheel. For 75 years they didn't give a damn about customer experience,” Peterson asserts. Today, he contends that grocers are adapting the same remodel cycle as specialty retailers, rolling out new prototypes and updating stores every three to four years.

Salisbury, N.C.-based Food Lion, for example, has rolled out two new concepts:Bloom, an upscale brand that emulates Trader Joe's and Whole Foods; and Bottom Dollar, a no-frills type of discount store. In Hampton Roads, Va., the company is converting 18 traditional Food Lions into eight Bloom and 10 Bottom Dollar stores.

“Food Lion has taken the approach that one size does not fit all,” says spokeswoman Karen Peterson. “We used to have a shotgun approach to remodels, but now we have an approach where we go into one market at a time and redo all the stores, updating some of the Food Lions and rebranding some of them as Bloom or Bottom Dollar.” Food Lion has 52 Bloom stores and 17 Bottom Dollar stores across the U.S.; the remainder of the company's 1,200-plus stores remain branded as Food Lion, at least for now.

The Food Lion store in Williamsburg Shopping Center in Williamsburg, Va., will soon be transformed into a Bloom store, says Ifshin of DLC Management, which owns the center. The Food Lion has suffered from the competition with Ukrops and a nearby Wal-Mart Supercenter.

“With Bloom, Food Lion is really trying to differentiate itself from regular competition and from Wal-Mart,” Ifshin explains, adding that the Bloom is expected to drive traffic at the center and help “reassert this corner as a retail destination.”

But chains don't have to roll out entirely new concepts to reap renovation rewards, experts contend.

Consider Pathmark Stores Inc. The Carteret, N.J.-based company has been working with Colemanbrandworx on a new prototype design that combines freshness, neighborhood stores and farmers' markets, Bona says. So, instead of the boring and typical meat department, Pathmark customers buy their fish from the “Chesapeake Fishing Company” and get their deli meats and cheeses from the “57th Street Deli.”

Pathmark recently rolled out the new design to its store in Edgewater Commons in Edgewater, N.J. The store features an expanded food demonstration area and a café that stocks gourmet coffees and specialty pastries.

Rewarding Remodels

Remodels like Pathmark's are much more complex and expensive than the renovations of the past. Ifshin estimates that a total redo that includes new technology, casework, lighting, flooring and signage costs $2.5 million to $3 million.

“We've learned that if you spend anything less than $1 million for a 45,000- to 50,000-square-foot store, the return starts to drop off significantly,” Peterson says. “At that level, the difference is indistinct to customers. If you go above that amount, you start to get traction with the customer.”

Experts contend that most grocery chains don't expect their remodels to attract many new customers. Instead, they're hoping to increase the basket size — the amount of money existing customers spend in the store — and to increase the frequency of shopping trips.

“The addition of new customers might be a goal, but I'm not sure it's happened too much,” Ander says. “But if you've got more merchandise and goods that the customer likes, they'll spend more with you and visit more often.”

Experts estimate that grocery chains can achieve sales increases of 10 to 40 percent depending on the type of remodel. Safeway's “Lifestyle” remodels are rumored to post sales increases in excess of 25 percent.

And it seems that remodeling programs have had a positive impact across the industry. Supermarket industry sales increased 5.3 percent in 2006, and same-store sales rose an average of 4 percent, the biggest gain in more than a decade, according to the Food Marketing Institute.

In July, Safeway said its market share had grown for the 10th consecutive quarter, with five consecutive quarters of same-store sales growth of more than 3.5 percent. “With less than half of our store system converted to the highly successful ‘Lifestyle’ format, we expect our aggressive remodeling program to generate strong same store sales gains for several years,” Burd said.

It's not just the grocery stores that benefit from the remodels, either. Regency Centers, for example, was able to improve the small shop occupancy in Baker Hill Shopping Center in Glen Ellyn, Ill. after Safeway renovated the center's 72,000-square-foot Dominick's supermarket.

“Baker Hill had always been a slow center for us. It's in a very nice area but it's always been outflanked by other centers because the Dominick's was very tired and people had stopped shopping there,” Fiala recalls. “Now that the grocery store has been renovated, customers are coming back and we have letters of intent on the vacant space.”

That's one reason why DLC Management encourages its grocery anchors to remodel their stores.

“We know that we'll end up with a product that will make us more competitive,” Ifshin explains, adding that the company generally sees a bit of an uptick in the center after a renovation and is able to achieve rental increases of 15 to 30 percent on the small shop space.

All signs point to continued renovation activity. “For the most part, grocers have found that their best returns on capital come from reinventing and renovating their existing stores in markets where they are dominant,” says Terry Brown, CEO of Edens & Avant, a shopping center owner and developer based in Columbia, S.C.

Safeway's Burd adds: “From a pure return on investment standpoint — plus the fact that we consider the lifestyle stores to be every bit a good defense as they are an offense — we're going to continue to focus on remodels.”