BALTIMORE — Although warned of rising costs for materials and the likelihood of complex new legislation governing construction, supermarket builders and designers who gathered here last week were upbeat behind talk of new formats to invent and new technologies to employ.
“The grocery store of the future is not about thinking 10 years ahead. It's about inventing the future,” Thom Blischok, president of Information Resources Inc., Chicago, said in a presentation at Food Marketing Institute's Retail Store Development Conference at the Renaissance Harborplace Hotel here. “Personally, I think there is more untapped opportunity to reach the consumer than there has ever been before. I have never seen a retail environment more dynamic than today.”
Blischok predicted an explosion of small-format “express stores” and urged retailers to reevaluate their current store designs with an eye toward making them more relevant and less cluttered. With Tesco prepared to unleash the first of its small-format stores on the West Coast, Blischok predicted the number of express stores from all retailers would grow from around 20 today to more than 4,000 by 2010.
The move to smaller stores will accompany an even greater variety of store formats in the future, Blischok added — a trend that will challenge the grocery channel. While consumers typically shopped three outlets for food in 2003 and shop five different stores today, shoppers in 2010 will shop as many as eight locations, he predicted.
“The good news is that the consumer will love it,” Blischok said. “The bad news is that it means that $35 billion in sales will be moving to other channels.”
Retailers publicly and privately discussed their own plans for format innovations. One retailer, who asked not to be identified, said savings generated from rounds of cost reductions in recent years are now being invested into development of new store concepts. “It's a good time to be in this [store design and development] business,” the retailer said.
Building material costs, which have skyrocketed since 2003, are unlikely to come down and should continue to experience frequent price spikes, John Strong, a professor of economics at the College of William and Mary, Williamsburg, Va., said in another presentation.
Strong explained how credit market woes, a weak dollar, and inflation in China have put the world economy under stress, while an explosion in retail square footage since 1990 has eliminated the “tailwind” that historically pushed retail sales growth slightly ahead of household income growth. After outperforming household income growth for 50 years, retail sales and household income have grown at around the same rate since 1995, he said.
China's explosive growth has resulted in greater demand for products inside the nation — the country used half the world's supply of cement in 1995, for example — and resulting energy and labor costs are contributing to rising inflation.
“There's a cost to being the world's factory,” Strong said. “They've become a huge consumer, and inflation is as high as it's been in 10 years. They've gone from being an exporter of deflation to an exporter of inflation.”
For builders in the U.S., that means the “costs for everything from concrete to rebar to glass to drywall are up dramatically from 2003 levels,” and unlikely to return to those levels ever again, Strong said. This will result in lower returns for new store construction and favor a trend toward remodelings, he said.
“With costs high, you have to be careful about decisions — but don't delay making them,” Strong recommended. “Delays are also going to be costly.”
While the slowing economy is likely to slow down merger activity and private equity, retailers with cash on their balance sheets may find “deals” in the real estate market, Strong said. Rising energy costs will also spark demand for alternatives.
Alexis Karolides, a principal with the Rocky Mountain Institute, Boulder, Colo., in a presentation urged retailers to investigate green buildings before legislation requires them to. She noted that several bills concerning carbon output were currently before Congress. Karolides cited examples of several retailers around the world that realized economic benefits as a result of employing green building strategies.
