Sponsored By

STRONG VALUE PROPOSITION

What effect will the biggest real estate deal of the year in the retail food industry have on the price of prime supermarket locations?In July, Albertson's, Boise, Idaho, said it was going to close 165 stores throughout the 26 states where it operates during the next 12 to 24 months. The company has been close-mouthed about which stores those might be.Industry observers told SN the Albertson's sale

David Ghitelman

November 19, 2001

7 Min Read
Supermarket News logo in a gray background | Supermarket News

DAVID GHITELMAN

What effect will the biggest real estate deal of the year in the retail food industry have on the price of prime supermarket locations?

In July, Albertson's, Boise, Idaho, said it was going to close 165 stores throughout the 26 states where it operates during the next 12 to 24 months. The company has been close-mouthed about which stores those might be.

Industry observers told SN the Albertson's sale of its unwanted stores will probably be the biggest real estate transaction -- or, more likely, series of transactions -- of 2001-2002. There is some disagreement about how the company will proceed to rid itself of this property, whether it will simply shed underperforming stores or exit entire markets where it has been unable to become the first- or second-place chain in town.

But there is virtually no dispute that the process will have little impact on the price of supermarket real estate.

The U.S. economy has limped through two consecutive quarters of declining revenues. Apparel retailers are gearing up for the gloomiest holiday season of the past decade. Now, one of the nation's largest supermarket chains is looking to sell or close more than 100 stores across the country.

And the price of prime supermarket real estate remains as high as ever, with little likelihood that it will decline anytime soon, observers told SN.

What keeps that price so high is supply and demand, observers said. There is a limited supply of good locations and, it would seem, a nearly infinite demand for it.

"There is not much class A supermarket real estate available," Burt Flickinger 3rd, managing director, Reach Marketing, a Westport, Conn.-based retail consultancy, told SN.

"It is a very supply-constrained environment," explained Brian Smith, Los Angeles-based managing director of Pacific-region real estate investments at Regency Centers. Based in Jacksonville, Fla., Regency Centers is owner, operator and developer of supermarket-anchored shopping centers.

Smith told SN, "In southern California, you have 20 million people, very little land available and high barriers to entry.

"Over the next 25 years, we're going to have tremendous population growth here. The equivalent of two Chicagos are expected to move to southern California, and there's no reason to expect people are going to move out.

"That means there's going to be continued strong demand -- and land out here is scarce."

That's why good sites are in demand and heavily researched.

"Supermarket site selection is a much more advanced discipline" than retail site selection in general, Flickinger explained. "Supermarket sites are much more researched."

Smith described some of the research that goes into his company's efforts to hunt out suitable locations.

Sometimes he scouts out stores where business is good. "We look at existing successful stores that are undersized, a store that doesn't generate all the sales it could if it were larger," he said. Then, he would search out a larger parcel of land for that store to expand in.

Sometimes he investigates areas where there are no stores. "We look for holes where they don't have any coverage," he said.

And other times, he explores places where there are no or not many people -- yet. "In the suburbs, we look for those areas that are experiencing tremendous population growth. "Assembling sites is usually quite difficult, but when you can do it there's tremendous interest."

Still, Smith noted that what was a good supermarket location a few years ago could become less desirable over time.

"As southern California grew, we often used to see grocers putting stores at freeway interchanges," he said. "Then, as the population increased, the supermarkets would relocate and get closer into the residential neighborhoods."

In urban areas, a shopping center frequently can survive the departure of a supermarket anchor. "With all the traffic they have, the retailers can do fine if the grocer left."

In rural areas, in contrast, the departure of a supermarket anchor can result in the death of a center. "If you lose the grocer there, then you lose the only source of shopper traffic," Smith said. "That's why my company tries to avoid dealing with them."

Also, space that works well for other retailers is often unusable for supermarkets. "Often, the ceilings are too high," said Flickinger. "The buildings are too deep or too wide, or the sites do not have good co-anchor tenants."

Occasionally, however, stores from other retail channels are suitable for conversion to supermarkets. "Some supermarkets are recycling Hechingers and Builder Square," he said, citing two now-defunct Home Depot competitors. "Also, some Bradlees and Ames sites are being successfully recycled as supermarket sites."

What's more, even when the economy heads south, supermarkets have tended to thrive. "In recessionary times, supermarkets and drug stores are the two channels in retailing where sales go up," said Flickinger.

Observed Gary Giblen, director of research and senior vice president, C L King Associates, New York, "Supermarkets don't lose foot traffic because of the economy."

Matt Ostrower, real estate analyst, Morgan Stanley Dean Witter, New York, summed up the situation as follows: "We don't see any change in the demand characteristics for supermarket real estate," he told SN. "The economy has not dramatically changed demand for supermarkets, and we are seeing some pretty significant stability in the price for supermarkets."

In contrast to the price of supermarket real estate, flux is the norm when it comes to supermarket consolidation and asset sales. Commented Ostrower, "Grocery store dynamics are constantly changing."

The biggest change on the horizon is how Albertson's will proceed with the announced disposal of those 165 stores.

While the company has been mum on the subject, industry observers have been free with their assessment of what the company should do.

"They might consider exiting whole markets," suggested Giblen.

However, Giblen said he was not convinced that this would be Albertson's strategy. "That hasn't been the focus," he said. "They're taking a scattershot approach across their entire store base. That's a major strategic flaw. It's well proven in the annals of retail that is not the way to accomplish a turnaround. By doing that, you weaken your economies of scale.

"It's equally well-proven that the proper approach is to exit market areas and redirect your money into areas where you are better positioned."

In the case of Albertson's, Jonathan Ziegler, San Francisco-based managing director at Deutsche Banc Alex. Brown, New York, said, "These guys would have a lot higher earning power if they withdraw from a bunch of marginal markets."

And several observers told SN that they believe that not only has Albertson's decided to withdraw from a few marginal markets, but they know which marginal markets the company intends to pull out of.

Ostrower told SN he believes the company intends to leave four markets: Austin, Texas; Colorado Springs, Colo.; Houston; and parts of Tennessee. He said his source was a client active in commercial real estate.

According to the 2001 edition of the Directory of Supermarket, Grocery & Convenience Store Chains, Albertson's is the third-ranked chain in the Austin market, with 14 stores and a 12.6% market share; third in Colorado Springs, with six stores and a 12% market share; fifth in Houston, with 38 stores and a 8.1% market share; and third in Nashville, Tenn., with nine stores and an 8.8% market share. (Elsewhere in Tennessee, Albertson's is in a stronger position; in Memphis, it is second, with 16 stores and a 15.9% market share.)

Should Albertson's withdraw from entire markets, the move will make life easier for commercial realtors. "It's good for my guys," Ostrower said.

Most supermarket leases contain no-compete clauses that bar landlords from renting to supermarket company A when supermarket company B closes a store but remains active in the same market, Ostrower explained. "Most supermarkets tend to have very long-term leases," he said. "That gives them the ability to keep a space dark."

Ziegler pointed out that from a retail position it is also hard to sell stores if a company intends to remain in market. "If you're going to sell stores, you want to sell them to a non-competitor," he said. "If you sell them to Wal-Mart, then you have to compete with more Wal-Marts. If you sell them to Kroger, then you have to compete with more Krogers." Andrew Wolf, equity analyst, BB&T Capital Markets, Richmond, Va., also said he expected Albertson's to pull out of some markets completely.

He observed that in several places the company could leave, the stores would make attractive in-market acquisitions.

He described Albertson's Houston units as examples of "very new stores with good real estate."

Other markets, however, he was less optimistic about and recalled what happened when A&P left Richmond several years ago. "A&P sold its stores to Food Lion," he said. "A&P had very rundown stores there, and less than half of those stores reopened."

Stay up-to-date on the latest food retail news and trends
Subscribe to free eNewsletters from Supermarket News

You May Also Like