Supermarkets are facing complex challenges in the real-estate realm, spurred on by consolidation and the steady growth of other retail channels.
The issues include a shortage of available sites and a sharp rise in construction costs. There's also pressure to expand square footage and offerings as other types of operators grow their products and services.
Supermarket operators, faced with changes that include the onset of supercenters and multiservice supermarkets that offer conveniences such as dry cleaning, banking and drive-through pharmacies, are finding it more difficult these days to locate and acquire appropriate sites, retailers, real-estate executives and analysts tell SN. The overwhelming response, it appears, is that companies have become less rigid in their planning and are willing to adjust the scope of units to fit the site.
"There's a lot more flexibility being shown," according to analyst Jonathan Ziegler of Solomon Smith Barney in San Francisco. "I'm really intrigued by it."
According to Ziegler, "one of my favorite examples is Albertson's," based in Boise, Idaho. While Albertson's rarely strayed from building units that average 48,700 square feet in size, lately, "They've shown they really know how to make a 27,000-square-foot box hum," Ziegler said.
"I just think management is really waking up and realizing it does behoove you to look at different formats," he added. "I think there are examples all over the place. Kroger buying Fred Meyer shows a lot of flexibility. The fact that Wal-Mart," which has supercenters that range from 109,000 to 192,000 square feet, "is experimenting with a 40,000 format" -- the Neighborhood Store -- is another example of flexibility, he said. Gerald Divaris, president of Divaris Real Estate & Realty Resources in Virginia Beach, Va., and a former supermarket operator himself, said, "because supermarkets have new competitors in the arena, the direct response is growth in the size of the traditional supermarket.
"They have to have these added features and now you're seeing things like a cafe in the Jitney-Jungles, Harris Teeters and Hannafords; meal centers, fueling stations, small complementary shops like hair salons and dry cleaning. That also forces them to cut costs in other areas, so a lot of supermarkets have turned more to outsourcing building management," including all interior and exterior maintenance, for example, "so they can pay more attention to what's going on inside." When it comes to demonstrating flexibility, "I've always been a big fan of Food Lion," Ziegler said. Another analyst, Gary Giblen, managing director for FAC Equities in New York, said flexibility is being demonstrated in supermarket chains' willingness to "go with different kinds of formats. Food Lion is going with small, all-metro downtown stores; Pathmark is perusing urban sites in neglected, underserved areas." Salisbury, N.C.-based Food Lion is adding 81 stores this year and another 80 in 1999. And while its largest prototype is 38,000 square feet -- "typically smaller than some other chains where big for them is 45,000 to 50,000 square feet," according to spokeswoman Chris Ahearn -- it still represents a shift to a larger format with more conveniences. Ahearn said that, with increased competition, "that makes it more difficult to find sites." Food Lion's growth "will be primarily in suburban" areas with "some inner-city" construction slated as well. The chain is also planning to renovate 140 units next year, including the expansion of 12 Kash n' Karry stores in Florida and the remodeling of 10 others. At the same time, 20 Food Lion stores will be closed.
"We're just looking at what's profitable and where the population has shifted," Ahearn said. If flexibility is in, one chain going against the grain, Giblen said, is Pleasanton, Calif.-based Safeway, which he described as "more rigid in their discipline."
Two others are Save Mart Supermarkets, Modesto, Calif., and Minyard Food Stores, Coppell, Texas. At Save Mart, which has plans to open five new stores a year, "the majority of stores will [be the size of] our prototype," approximately 49,000 square feet, according to Jim Watt, vice president of real estate. "Our plan, generally, is to upgrade existing stores and add new ones where we think the opportunities exist." However, even chains that may be less flexible than others are willing to bend sometimes. "In one case, in Modesto, where we didn't think the trade area warranted a larger store," the company decided to build a 37,000-square-foot unit, Watt said.
While Watt said there are no plans to build any exceptionally large units, "all the new stores" will be big enough to feature in-store "amenities" such as banks, pharmacies and "bakery-delis." In addition, "all the stores we build today will have 50% more space devoted to a greater emphasis on perishables -- especially produce, more health-food selections and more prepared foods, which is, without a doubt, one of the more important areas. We actually prepare pizzas in our stores, something we did not do before."
Consolidation, Watt said, "definitely puts a premium on companies like ourselves that are mid-sized to get in condition and meet a potential onslaught from the large competitors. Everyone's concern is that the big players out there are really big. The fundamentals are still the same but you have to have the products on the shelves and at the right price."
When it comes to site selection, "we are not very flexible," said Debbie Ellis, vice president for public relations at Minyard Food Stores. "We want the absolute best sites in the world and will be first in line to get the best corner early."
Minyard Food Stores, which operate 85 stores under three banners, including Carnival Food Stores and Sack 'N Save Warehouse Food Stores, has units that feature in-store banking, restaurants, dry cleaning, pharmacies and flower shops.
Some of its new units will feature fueling stations. "We're doing everything we can to offer" one-stop convenience, Ellis said.
Ellis added that the company "is willing to lose money for a while" when setting up a new unit as long is it means building it in a location it absolutely wants.
Being a regional player does not come without its advantages when vying for real estate. According to Giblen, a benefit to smaller companies is "the ability to move quickly."
Giblen explained that "Regional operators tell me they have a real advantage over multiregional operators," who have more layers of bureaucracy. For example, there is Fred Meyer Inc., Portland, Ore., which is in the process of being acquired by Cincinnati-based Kroger Co. "If they [Fred Meyer] want to build a store in Oregon, it might have to be signed off on in Cincinnati, which could take longer," and potentially scuttle a deal for a coveted site.
For Grand Union Co., Wayne, N.J., expansion plans signal the emergence from a dark period that bottomed out with Chapter 11 restructuring. "Until [now], we had no capital," said spokesman Don Vaillancourt. "Now we have capital available for an aggressive campaign" of development.
With $60 million budgeted through the end of this year, "we're rolling out that program now," according to Vaillancourt, and that means a spate of "new stores, expansion and the renovation of existing stores. Obviously, we're looking at the emerging trends around the country."
According to him, "part of our philosophy is to be flexible. If we find a proper location, we don't want to be rigid if it's smaller than what we had in mind. Conversely, if we find a good piece of property to build a large store [in an area slated for a smaller one] we want to do that as well."
With $300 million for development earmarked for the next five years, Grand Union, Vaillancourt said, is "finding great cooperation with developers. We're able to make very good deals. Our stores are very contemporary to appeal to young shoppers as well as older shoppers," Vaillancourt said, and will range in size from 35,000 to 45,000 or 55,000 square feet, "depending on demographics and locations."
Another issue facing the industry -- and one that would seem more detrimental to smaller operators -- is the cost of real estate and construction. "Prices are definitely going up," Watt said.
According to Watt, "It's been a fairly substantial increase because of demand and the robust economy. The tendency is for prices not to go down as quickly."
He added that "Construction costs have gone up dramatically due to the expansion boom. Contractors are having a hard time finding subcontractors, making it exceptionally expensive, especially in the [San Francisco/Oakland] Bay area where it has gone through the roof.
"I would say construction costs have gone up 20% in the last year. Everyone's earnings are strong and there's a lot of optimism out there but there has been some moderation in that optimism lately."
Jim Conine, senior vice president of Minyard Property, Minyard Food Stores' real-estate division, agrees. "Over the last three to four years, construction costs have gone up 30%," he said.
Not only that, but "I think you're getting a lot less for the money. Construction is not nearly as professional as it was." The reason, Conine said, is "It's very difficult for contractors to get quality workers."
He also said that, in addition to labor, another construction headache has been "getting enough concrete. There's a real shortage of raw materials and it has really been challenging when we built our last two or three [stores] to get concrete on time.
"We had a big store we were building in Dallas and we actually had to slide the opening back a few months because of the construction not getting done. We've also had a couple of situations where structurally we had serious problems. Three years ago, you didn't have to worry about it."
