Low-cost, low-price stores highlight cautious return to capital spending
It turns out supermarket retailers rode the economic downturn just like their shoppers did. Shocked at the severity of the recession and uncertain about its length or depth, they slashed capital budgets and in some cases underspent them last year.
Publicly available estimates of capital spending in 2010 show that food retailers, again like their shoppers, are preparing to reach a little deeper into their pockets than last year — but not nearly at the speed they did before the recession struck (see table). And while the projects on the drawing board continue a trend toward store remodels over new store builds, an exception is in the discount arena, where some companies have relatively robust plans to grow this year. This group includes companies like Delhaize, which is accelerating the rollout of its discount Bottom Dollar concept, and Wakefern/ShopRite, which has been active in expanding its PriceRite discount model.
A&P's Food Basics and Sobeys' reconfigured FreshCo are other discount banners that could see growth this year. This trend points not only to the consumer opportunity in the discount arena, sources said, but to the importance of retailers making their development dollars count, since discount stores require a strict adherence to a budget not only in operation, but in development.
“Over the last two years, it seemed like everybody was looking over their shoulder and out to the future at the same time,” said Tom Henken, vice president and director of design for API Plus, a retail design and branding firm based in Tampa, Fla. “Everyone knows there are great deals in real estate, but everybody's been cautious.”
Henken said he sees 2010 as a year in which retailers make a return to some projects they'd slowed down on in the past. “There's been a number of projects that have started up, and we've gotten pretty far along in the process before all of a sudden, it's put off to next year. This is looking like that year.
“We came back from Christmas break and the phone was ringing off the hook,” he added. “Maybe retailers got tired of waiting for the economy to change or they'd seen enough signals that things are starting to loosen up. But the difference since Jan. 3 this year to the same time last year has been fairly dramatic.”
Among the projects keeping API busy is Food Lion and its Bottom Dollar format. Food Lion officials said they expect to double the number of Bottom Dollar stores this year.
Advances in “value engineering” and a commitment to total efficiency help to make Bottom Dollar stores cost from 20% to 25% less to build per square foot than a Food Lion store, said Henken, and that's after recent changes that reduced cost of the latter by 15%, he said.
Perhaps the most noticeable efficiency at Bottom Dollar is locating the produce inside a cooler, allowing it to perform double duty as prep space and sales space, Henken said. The area also serves as a “wall” within the store, one of the few that would be found in an effort to limit the amount of construction required to build the store.
“We don't build any walls where we can use equipment instead,” Henken explained. “We do very little construction. Out of the entire interior, there might be 100 linear feet of interior partition walls, and that's mostly for the bathrooms and offices.”
The design also steers clear of areas likely to create labor and shrink such as deli and bakery, and utilizes alternatives to more expensive materials wherever possible, such as self-hardening finishes in the cooler rather than ceramic tile, Henken said.
Some savings are designed to pay off over the longer term, such as efficient equipment designed to save energy, he added. Lighting at Bottom Dollar stores, for example, are highly efficient, generating less heat than previous generations of equipment and thereby proving long-term savings on HVAC costs, Henken said.
Improvements in lighting optics have allowed lights to be installed parallel to, rather than perpendicular to, aisles without sacrificing illumination, Henken added.
“It was almost the norm for fluorescent lighting to run perpendicular to the sales aisles just because it was a way of getting more even illumination over the store,” he said. “But the optics on fluorescent lighting has really improved over the last few years, allowing us to do lighting down the aisles where the lens gives you a nice, even lighting across the face of the product, and doesn't waste any on the top.”
A glut of available properties on the market — thanks in part to a recession that knocked out big-box specialty retailers like Linens n' Things and Circuit City — has also created the potential for a cheap rollout for small discount grocery stores, sources said. But conversion costs — and the question of who can pay for them — have tempered the enthusiasm somewhat.
“Certainly, the bigger, healthier guys who need less help from the landlord for making improvements have a good opportunity,” said Andy Graiser, co-chief executive officer of DJM Realty, an excess space specialist based in Melville, N.Y., that is handling disposition of Circuit City stores. “In exchange, they're getting an incredibly advantageous rent structure.”
Graiser noted that while Circuit City stores in particular tend to possess some of the right characteristics for a small food retailer, including parking, some physical attributes are less desirable — for example, a lack of windows. Henken noted converting any existing box from another use to a supermarket, even a discount box, requires a hefty initial investment.
“Some of these fixes can get pretty expensive, and neither the retailer nor the landlord are getting a lot of financing help, so it's kind of slowed things down,” Graiser told SN. “The markets are starting to open up a little bit again, but it's still in the early stages.”
Privately funded Sprouts Farmers Markets, a Phoenix based natural-food retailer, has been “very fortunate to take advantage of the demise of Circuit City and Linens n' Things,” Doug Sanders, its president and chief operating officer, told SN in a recent interview. That chain has largely used second-generation real estate to fund its growth to more than 50 stores — about half in the last 18 months.
Elsewhere, retailers said they would use capital investments to upgrade existing stores this year, continuing a longstanding trend.
John Rishton, CEO of Ahold, in a conference call said the chain would increase capital spending by 40% this year to around $1.4 billion worldwide, even as some competitors pull back. Rishton said the funds would go in part toward completing a three-year renovation plan at its Giant-Landover stores and accelerating a renovation program at Stop & Shop.
Craig Herkert, Rishton's counterpart at Supervalu, recently defended his plan to spend Supervalu's $700 million capital budget on renovations. That spend is down slightly from 2009 figures.
“I think the landscape is littered with companies who did not invest in their physical assets, and so we will continue to invest appropriately in our physical assets to ensure that, quite frankly, things like refrigeration break over time. They need to be replaced.”