Food and Drug Retailers Prune Their Portfolios

The recent spate of store closings announced by Eckerd and Winn-Dixie promises to leave shopping center owners scrambling for tenants — again. A total of 156 Winn-Dixie stores are set to close by the end of the year, as the chain exits 16 markets and closes other under-performing grocery stores. Meanwhile, CVS will close between 200 and 225 stores in nine states, when its acquisition of Eckerd is complete this month.

Combined, that's more than 10 million sq. ft. coming on line over the next year. That glut of space could prove to be a headache for affected shopping center owners. The combination of drugstore consolidation and a shakeout among traditional grocers due to the emergence of Wal-Mart and other discounters has led to a steady stream of vacancies in the once-safe haven of grocery-anchored strip centers.

Winn-Dixie is paring locations as part of its second turnaround effort since 2000. Meanwhile, Eckerd's parent J.C. Penney looked to sell its sluggish drug store chain to CVS and Jean Coutu Group to focus on its department store business.

“Indeed, you've seen a lot of grocery closures where there is a Wal-Mart Supercenter located nearby,” says Kelly Whitman, senior real estate economist for Property & Portfolio Research, which studies trends in commercial real estate. “If the grocery store closes, and drugstores are moving out on their own, that's a challenge. There's a lot more risk.”

The risk factors have some analysts questioning the grocery-anchored model — especially given Wal-Mart's expansion. In a recent earnings conference call with New Plan Excel Realty, analyst Lee Schalop of Banc of America Securities questioned whether there's a movement away from this longstanding model.

New Plan CEO Glenn Rufrano rejected the idea during a conference call in May, citing protection among the top three grocers in any given market. “It's a caution,” Rufrano says, adding, “and making sure we don't get caught.”

CVS spokesperson Mike DeAngelis says that of the 1,260 acquired stores, the closures will hit many markets, including Florida, Texas and Arizona, where 90% are located. Inline Eckerd locations could be among the first to close, says Richard C. Moore II, a senior vice president who follows REITs for McDonald Investments, an investment banking firm.

Even though some of the older Eckerd leases may look attractive with cheaper rents, re-tenanting options are drying up, according to Doron Valero, president and COO of North Miami Beach, Fla.-based Equity One Inc., which owns shopping centers with 27 Eckerds in the portfolio. “They're problematic,” Valero says. “If a supermarket is in the center, they don't like to have dollar stores anymore because those stores sell groceries.”

Meanwhile, New Plan Excel Realty may also risk some exposure, since it has 28 active Eckerd leases.

Landlords also risk exposure with Winn-Dixie stores, many of which are in older, second-tier locations. Winn-Dixie plans to market its locations to prospective buyers first. But if it fails to attract a buyer for its earmarked stores, the locations will shutter.

New Plan is looking at Winn-Dixie closures in Tennessee and North Carolina, but the company also has 22 Winn-Dixie stores operating in joint ventures. So far, Developers Diversified Realty plans to shutter three Winn-Dixie stores. Meanwhile, Equity One's 16 Winn-Dixie stores, located in Florida, Alabama, North Carolina and Louisiana, are not affected.

Planned Store Closures for Winn-Dixie and Eckerd