Lured by financial incentives, supermarket operators take a closer look at nontraditional retail spaces
Healthy supermarket operators that are seeking to expand have no shortage of sites from which to choose.
The economic downturn has created a vast array of retail vacancies around the country, creating opportunities for supermarket operators willing to adopt a previously used space, whether it was used for food retailing or had been put to some other use.
Design and construction experts say that with proper planning, a little flexibility on the part of supermarket operators and some incentives from landlords who are desperate for tenants, it is possible to efficiently convert a space to a supermarket use in some cases.
Flexibility and advance planning are also key to the efficient takeover of existing supermarket sites — as has been the case with the recent conversions of vacated Penn Traffic and Shaw's locations in the Northeast.
“It's definitely easier to take a conforming space from a competitor and convert it, because there are so many things there that already work for you,” said Tim Morrison, a principal at Little Diversified Architectural Consulting, Charlotte. “Usually there is parking there already, there is circulation that works for you at the front of the building, and access to a loading dock that is already in place.
“If you take over a shoe store, for example, there is a lot more work that has to be done than if you take over an existing supermarket.”
T.R. “Ted” Benning III, president of Atlanta-based Benning Construction Co., which has been building supermarkets for 30 years, said converting a non-supermarket retail space to a supermarket operation can be almost as costly as building a brand-new store.
“The No. 1 problem — or opportunity, depending how you want to look at it — that a typical grocery store chain has going into an existing space is that it is an existing space,” he said. “Its length and width and column spacing might not fit the typical prototype of whatever that chain happens to be, so the fixture plan for that retrofit has to be designed on a custom basis for that space.”
In a typical renovation of that type, he said, the majority of the floor slab has to be redone to accommodate such fixtures as checkout stands, deli cases, coolers and freezers.
“Sometimes the only thing that can be saved is the shell,” he said. “Even the front door sometimes is not where it needs to be, and that has to be relocated.”
Despite the increased work that can be involved with conversions of non-supermarket spaces, sometimes the deals being offered now are so good that supermarkets are willing to take them anyway, experts explained.
“Sometimes they are getting these places at such a great price, it would be almost foolish not to take it,” said Jason Loucks, senior project manager at Little.
A recent report by real estate research firm Reis Inc. showed that shopping center vacancies in the second quarter were at their highest rate — 10.9% for neighborhood and community centers — since 1991, when the vacancy rate for those properties hit 11%. Asking rates at those spaces fell by 0.3%, and effective rents by 0.5%, the report said.
Those financial incentives for filling existing spaces must be weighed against the considerable costs that can be incurred in taking over existing spaces, experts explained.
“What's happening is that a lot of these spaces are so cheap, companies are willing to take a nonconforming space, and they put the burden on the architects and engineers to make it work,” said Morrison of Little. “About five years ago, everyone was much more strict about looking for space to expand where they could fit their prototype into. But now, we are asked to take nonconforming retail space and try to make it work for supermarkets.”
Among the considerable costs that can be incurred in taking over non-supermarket spaces are such items as rooftop equipment, parking lot expansion, grease interceptors, loading docks and power supplies.
“When someone takes over a nonconforming space, one of the first things they are going to look at is the structure of the building, because making improvements to the structure is one of the most costly things you have to do,” Morrison said, citing as an example the possibility that a structure might need to be upgraded to handle the weight of rooftop refrigeration units.
Another common expense can be the addition of a loading dock — if the existing structure does not have one, a scissor lift might need to be added, which some operators prefer not to use. In addition, some structures, particularly in urban areas, have basements or second floors that need to be dealt with.
“Does this supermarket have a history of being able to accommodate loading on one level and a supermarket on another level?” Morrison said. “It might require having some sort of a lift or a freight elevator, requiring handling product twice — from an operations standpoint, that is something that has to be taken into consideration.”
If the existing store is to be expanded, that may also require the addition of parking spaces, Morrison pointed out.
Loucks said supermarket operators generally start out with a “laundry list” of features they would like a converted property to have, and the architects and engineers look at the site to try to determine what is feasible.
“We will go out and look at the space with the whole design team — along with structural and mechanical engineers, plumbing and electrical engineers — and do a hands-on assessment of existing conditions,” Loucks explained. “Then the client has to decide how flexible they are going to be with regard to their prototype.”
Increasingly, operators are becoming more flexible, he said, although large chains with adequate resources and experience might be more likely to push for stores to be as conforming as possible to their traditional prototypes.
One of the keys to a successful and efficient transformation of an existing structure, Morrison and Loucks pointed out, is conducting a thorough audit of the existing facility beforehand to uncover any “hidden pieces of the puzzle” that can be a lot more costly to fix when the project is further along.
“One thing I can't stress enough is getting an accurate audit right away in the renovation process,” said Loucks. “An accurate audit is going to save you so much money and time down the road — if you don't spend the time and effort getting an accurate audit of the existing conditions before you go in there and start putting the design together, you will be spending three times the cost of doing the audit just for the cost of unforeseen conditions.”
In addition, an audit of the existing structure might help the retailer decide that the space would in fact be too costly to renovate.
“Once they look at a nonconforming space they might have had their eye on, they might be a little surprised when they see what it is going to cost to get it up to snuff — to deal with structural issues or the utility issues, or the docking issues,” Morrison explained. “There have been times when I have said, ‘It would make more sense to demolish this building and start with a brand new building on that site if they can do it,’ when you look at everything they have to do to get a 20-, 30- or 40-year-old building into conformity.”
One way operators are trying to keep a lid on costs in recent years, he said, is by investing more on branding the interior of the store and doing less exterior work.
“Rarely do you see someone adding a new form or a new tower on the exterior of the store, like you might have seen five or 10 years ago,” Morrison said. “Now the changes are largely cosmetic.”
Although he noted that converting existing structures can be costly, Benning of Benning Construction said that sometimes the right opportunities make it worthwhile.
CONVERTING A MACY'S
His company, for example, has been working on converting an existing three-story Macy's in Atlanta into a MegaMart, which is slated to be a flagship food store for the Korean operator when it opens within the next few months.
The store is located in what Benning described as a second-generation mall that had previously been one of the area's premier shopping venues. It will include a 75,000-square-foot Asian food store on the ground floor, another 75,000 square feet of specialty merchandise on the second floor, and a headquarters with offices on the third floor.
“They have done a great job of taking an old department store and turning it into a drop-dead good-looking Asian-style store,” he said, citing the prime location of the project in an emerging Asian community. “It's a beautiful place, and their timing is perfect.”
About 45% of the ground-floor slab had to be replaced in order to accommodate the food store. “It has been a total retrofit,” Benning said.
He noted that MegaMart spent more than a year carefully planning the layout before construction even began.
“Their approach has been a very methodical, reasoned approach to understanding each area of the store and then designing it to that,” he explained.
He agreed that supermarket operators need to plan carefully ahead of time to minimize the costs of converting an existing space to a supermarket use.
“I think the key to a successful retrofit is to spend a good deal of time on the front end studying operations and studying how that store is going to work,” he said. “A plan that is well thought out, that has input from operations and merchandising, and also has input from all the design professionals that have to make the shoe fit on that foot, is going to have a better chance of being successful.”
Although Benning emphasized that the costs of retrofitting a supermarket into an existing space can be 80% or more of the costs of building a new store from the ground up, in general there are time savings involved. It can take half as long to build a supermarket in an existing space as it does to build a brand-new structure, he said.
In general it is much easier to convert existing supermarkets to new banners, provided the operators are flexible enough.
In upstate New York, Tops Friendly Markets has been busily converting 48 of the stores it acquired from Penn Traffic earlier this year to the Tops banner, a process it hopes to complete by the end of this year.
Tops is approaching the conversions in phases, according to executives at the chain, which is based in Williamsville, N.Y.
“When we first took over these stores we did not think we were going to convert them all in one year,” said John Persons, senior vice president of operations, in an interview with SN. “We thought it was going to be a longer process.”
After analyzing feedback from customers in the individual markets where the stores were operating, Tops determined that “customers were looking for a change,” he said, which precipitated the decision to transform all of the locations to the Tops banner.
The first phase of the effort, which encompassed stores in western New York, has largely been completed, with the exception of a few major remodels. Other phases are set to be completed over the next few months.
Dividing the stores up geographically by region helped make the conversions more efficient and allowed the company to make a bigger splash in each market as it promotes the new banner, Persons explained.
“We are not looking at 48 different grand opening promotion calendars, and 48 individual grand opening ads or mailers,” he said. “We can use the whole market for a grand opening celebration, and that has borne out some efficiencies for us.”
Tom Fitzgerald, vice president of real estate and construction, said the company has been able to bid out large chunks of its design construction needs to a small number of companies. The signs for all the new stores, for example, are being handled by a single supplier.
Tops is also buying fixtures and equipment in volume through a consortium group, which is providing some cost savings, he said.
“The problem is finding enough refrigeration people and crews to install them,” he said. “The good thing is that we are installing in phases, so we are able to move crews along as necessary.”
The stores in most cases are being spruced up and given new internal signs and the traditional Tops red and earth-tone color schemes, along with other elements that are being added to make the stores more like traditional Tops supermarkets.
Tim Hortons coffee kiosks, which Persons said are “very successful” at Tops, are being placed in all the converted stores, and bulk foods and organic and natural offerings are also being added.
In addition, Tops is also bringing back service meat and seafood departments in many locations, he said.
“Those are a successful part of our offering — we pride ourselves on having the freshest meat in town, cut right in the store, vs. what everyone else has,” Persons said.
In many instances, the stores had the service-department equipment in storage because they had offered the service departments in the past, while in others, new equipment had to be purchased to add the service departments.
In most instances, Tops has elected to leave the position of the departments as they were rather than relocate them, Fitzgerald explained.
“If you have bakery on one side and deli on the other, it makes sense to just leave them,” he said. “We tried to remodel within the existing department wherever we can, and in some cases where they didn't have departments, we just tried to add them in wherever we could fit them and where appropriate.”
Many of the acquired Penn Traffic locations — which operated under the Quality, P&C and Bi-Lo banners — were smaller than the typical Tops stores. Tops supermarkets can range up to as big as 115,000 square feet, or about twice the size of the largest of the acquired locations, but Tops has also had experience operating some smaller stores in its own chain.
“We think that small format is what is appropriate for a lot of the smaller towns that those stores are in,” said Persons. “We don't need a 65,000-square-foot store in a community that only has 3,000 or 4,000 people.”
Many of the elements that are being incorporated into the Tops conversions were developed by Tops for another converted store it has been working on in Spencerport, N.Y., near Rochester.
“Tom [Fitzgerald] and others designed a really nice, updated, modern store, and we took a lot of those learnings and applied them to these new stores,” said Persons.
The 40,000-square-foot store in Spencerport, which had previously been an IGA but has been vacant for about five years, is slated to reopen as a Tops next month.
SHOPRITES IN CONNECTICUT
In nearby Connecticut, individual ShopRite operators have also been quickly converting the 11 Shaw's stores that were acquired there earlier this year.
For those locations, the stores also upgraded the service departments, and added more promotional displays to conform to the high-volume, promotional activity of a typical ShopRite, said Ray Miller, a longtime executive at ShopRite parent company Wakefern Food Corp. who became an independent ShopRite operator through the acquisition of the Enfield, Conn., location.
“The Shaw's was basically a pretty good operation, but we tend to be a higher-volume operation,” he said. “We took the basic store Shaw's had and added things to it — we upgraded the bakery, foods to go, appetizers, seafood and produce.”
Other ShopRite conversions that have taken place recently in Connecticut also include ShopRite's catering offering and its ShopRite from Home online delivery service.