Today’s grocer market is fiercely competitive, requiring constant innovation to survive, according to panelists from three of the most successful chains—Trader Joe’s, Aldi and Walgreens, which now sells groceries at its pharmacies—at NREI and RetailTraffic.com’s National Net Lease Investment Conference, held in Chicago on Nov. 1 and attended by more than 150 commercial real estate pros.
Although the traditional grocer used to be an anchor store, that situation is rapidly changing, said panel moderator Matthew M. May, president of May Realty Advisors, based in Los Angeles. He noted that even gas station chains like Kroger in California are adding grocery sections to pull in more customers.
“As the economy has gone south, people have been trying to figure out how to spend their almighty dollar and to stretch it people have been shopping around. That’s caused real havoc in the traditional grocery store market,” said Michael F. Mallon, president and principal of Mallon and Associates Inc., a Chicago-based retail real estate firm specializing in grocery stores that is currently a development partner with Aldi. “We’ve owned this market for 100 years, with 300-plus stores and 70 percent market share. But in last five years, our market share is down to 30 percent.”
According to Mallon, because there is limited growth in the marketplace, more players coming in and more opportunities for people to buy groceries elsewhere, “That affects value in grocery-anchored shopping centers.… The traditional grocer is in trouble.”
Having started in 1985 with 1,000 stores, Walgreen Co. is about to open its 8,000th store, said Michael Krasucki, vice president of real estate with Walgreen Co., who is based in Chicago. Currently, the chain is looking at expanding by opening university and tourist stores and will consider any size site—“We’re looking at 25,000-sq.-ft. stores and 8,000-sq.-ft. stores,” he said—and is opening its second flagship in Chicago this month.
“When we bought out Duane Reade in Manhattan last year, it opened eyes toward what could be done with smaller stores and flagship stores,” Krasucki said. “Plus, our battles with Express Scripts Inc. forced us look at our front of store in growing our pharmacy business and finding value in any type of location.”
Bloomfield, Mich.-based O’Keefe & Associates retailers site selection specialist Michael Deighan has provided Trader Joe's markets site selection analysis and lease brokerage in its expansion in 11 states. He told conference attendees that Trader Joe’s is continuing to open an average of 25 to 30 new stores per year, each with a 12,000-sq.-ft. standard footprint, and prefers build-to-suit leases. With an average of $2,000 per sq. ft. in sales, the chain is debt free, and focuses only on highly concentrated urban populations with a predominance of educated households.
“That means in Chicago we can open 20 to 30 stores, but in Springfield, Ill. we can open only one store,” Deighan said. “We get a lot of calls from revitalized downtowns or downtowns that are trying to revitalize and we tell them, ‘Get yourself 30,000 to 40,000 people and you’ll have a better chance. You’ve got to have the density and the households within that density that are willing to go out and spend dollars on quality groceries on a daily basis.”
At the other end of the grocery chain spectrum, discount grocer Aldi is expanding gradually but is still one of the strongest chains in the U.S. in terms of growth, Mallon noted. The chain began in the U.S. in Iowa in 1976, and now has 1,200 stores in 31 states and 5,000 stores worldwide.
“We open 80 to 100 new stores a year and have been doing that conservatively over past five years,” Mallon said. In Chicago’s metro area alone, Aldi will open eight new this year and 11 next year with a prototype that is currently 16,000 sq. ft.
“Clearly, Aldi has changed,” Mallon said. “We took corner locations in low- to moderate-income areas and had maybe 400 items in store. Now we like Main on Main locations and freestanding stores, we love to build ourselves but also enjoy ground leases, and we carry some 1,400 SKUs—meat, beer and wine, produce. Our prototype is changing constantly and Aldi will go anywhere. Give me 30,000 to 40,000 people within a trading area and if I haven’t got a store out there, I should.”
Asked about the impetus behind the new grocery sections at Walgreens, Krasucki said, “The question isn’t whether Walgreens has a grocery store—the question is who doesn’t? Everybody’s selling groceries these days. Now we have home improvement centers in Wisconsin selling groceries. There’s lots of competition.”
Deighan was reluctant to write off traditional anchor grocery stores. “There’s still plenty of value out there and will continue to be value in those locations where there’s a high barrier to entry and the density areas when things infill, even if you do have groups coming in and killing some of your categories,” he said.
Whether retailers are open to extending leases largely depends upon the location of a given store.
Walgreen Co. is willing to work in a variety of ways to extend leases, said Deighan. That includes many stores within the chain’s freestanding program, which began 25 years ago, some of which are now being extended for condensation or for rent reduction. Walgreen Co. is also willing to convert deals to triple-net deals.
“We’re renovating our chain, and calling it a ‘well experience conversion,’” he explained. “We have 450 stores here in Chicago and we are converting 50 to 100 in next two to three years. We’ll invest in the stores and potentially get TI dollars or give rent reductions. This is a total revamp of our look—we’re trying to reinvent the drugstore business industry and create great value out of our properties.”
Trader Joe’s is close to the vest on anything they do and what it’s going to cost, said Deighan. Lease extensions are only taken “when it’s in Trader Joe’s best interest first,” he explained. “Usually we instigate it, whether it’s that we want to expand our space, get rid of a percentage rent clause or there is a parking issue. It takes one to two weeks to deal with this even though it takes 12 to 18 months to get a deal done.”
Deighan said that Trader Joe’s leases are generally 10 years with four-to-five-year options. “Sometimes we reset for 10 years if, say, we’ve done a parking revamp, but it’s not in the cards to do a lease longer than that,” he said. And with good reason. “We’ve only closed five stores in 28 years and only two to three of them were in bad locations,” he added.
At Walgreen Co., there are sales reporting requirements for retailers, said Krasucki. He advises potential owners and developers to spend some time in the marketplace and talk to a variety of people before submitting a proposal. “There’s a lot of information out there, more readily available than it ever has been,” he said. “Spend a lot of time talking with vendors and people in the marketplace and you can get a pretty good feel in terms of how a store is performing rather quickly.”
Walgreen Co. began its freestanding program with 20-year deals and 40-year options, Krasucki said, then ratcheted that up to 25 years, but now has returned to 20-year commitments. “We’re not seeing any difficulty getting those deals done,” he said. “We’re going into existing space looking at 10, maybe 15 years. At this point, 20 years is our standard commitment.”
So how do potential owners and developers get on top of the stack of those being considered for sites for new Aldi, Trader Joe’s or Walgreens stores?
“I’m always surprised at the calls and emails I get from potential owners and developers who haven’t done their homework,” said Mallon. “If you’re going to submit a proposal for us to go to a site, it’s important that you know exactly where our stores are and where our competition is. An educated owner or developer should provide me that … and if it’s something of interest or not, I’ll let you know quickly. Be patient but be persistent.”