More Real Estate Opportunities Open Up

ELLIOT ZWIEBACH

For supermarkets looking for additional locations, it's a renter's market out there.

“There's a lot of opportunities coming to the marketplace,” one active player told SN.

Despite the challenges of opening in recycled locations, as described in the July 26 issue of SN, several operators have found the abundance of available real estate is too affordable to pass up. And with a rash of recent supermarket closings announced, and additional locations on the market from a wave of bankruptcies in the past 18 months, more and more such properties can be found.

“Even if the recession ends, the effects will still linger and there are not likely to be many changes in shopping patterns during that extended period, so the supply of available boxes will continue to increase,” David W. Schoeder, principal at The Food Partners, Washington, D.C., told SN. “As a result, we'll probably see less new-store construction over the next few years and more companies taking over spaces formerly occupied by someone else.”

Supermarkets have always recycled each other's stores, based on the theory that a site that may not work for one will work for another.

Among the grocery companies looking to expand in recycled spaces is Wakefern Food Corp., Keasbey, N.J., the nation's largest grocery cooperative, whose members have opened supermarkets in a former Linens 'n Things, which stopped operating stores in 2008, and Expo Design Centers, which went out of business last year.

In the last few months, Wakefern has opened multiple stores in “second-generation” real estate, spokeswoman Karen Meleta said, including 11 stores in former Shaw's locations in Connecticut (10 of which were converted to the ShopRite banner and one to the PriceRite banner).

“When it comes to looking at second-generation real estate — real estate that has served another purpose and that can be converted to a supermarket — it's all about location,” Meleta told SN. “All the secondary real estate that's available presents additional opportunities that might not have existed before, particularly in markets where space is tight — but the location has to be right for us to be interested.”

On the other side of the U.S., Mi Pueblo Food Centers, San Jose, Calif., has built its business on recycled locations, with most of its 17 stores having started life flying other banners, Bonnie Tragni, director of real estate, told SN.

Those businesses include Circuit City, Safeway, Albertsons “and a grocery store that became a Rite-Aid that will become a Mi Pueblo,” Tragni noted.

Industry observers said Mi Pueblo plans to expand to at least six former Circuit City locations, though Tragni declined comment.

She said the company likes recycled stores “because many are in neighborhoods we want to be in that have been abandoned by the chains, predominantly Hispanic areas, and also because they offer a much more attractive financial package than developing a project from the ground up.”

As a result, the Mi Pueblos are not cookie-cutter stores, Tragni said. “They are somewhat different from site-to-site in terms of their physical design, but not in terms of the welcoming atmosphere we offer our customers.”

Given Mi Pueblo's interest in stores serving a specific demographic, “we've passed up some locations that were available,” she said.

Meanwhile, Kroger Co., Cincinnati, is reportedly planning to open a Food 4 Less early next year in Chicago Heights at a former Dominick's location that had been closed for 10 years.

And Fresh & Easy Neighborhood Market has installed nearly half of its 150-plus stores in former chain grocery stores or drug stores.

“There are a lot of opportunities available at existing boxes, particularly in some of the more urban areas of Southern California,” Brendan Wonnacott, director of communications for the El Segundo, Calif-based division of London-based Tesco.

When it started opening its U.S. stores in 2007, the majority were retrofits “because that enabled us to open a lot of stores more quickly,” he added. “But since then it's about 50-50 new to recycled.”

One of the Northern California stores it plans to open early next year, in San Jose, will be in a former Albertsons, and another, in Danville, will be at a former Longs Drug Store, he said.

Sunflower Farmers Markets and Sprouts — two health-oriented chains — are both finding success moving into previously occupied boxes that were otherwise vacant.

Sunflower, based in Phoenix, relies on recycled real estate to keep things simpler and less expensive, according to founder Mike Gilliland, who also founded Wild Oats.

In developing Sunflower, he's trying to correct some of the mistakes he felt he made in his previous business, he told the Arizona Food Industry Journal. In search of “decent growth, but not crazy growth,” Sunflower has opened 29 stores in seven years — three-quarters of which are operating in recycled locations, Gilliland noted. “We keep the overhead low, buy used equipment and not a lot of fancy fixtures,” he said.

In other examples of recycling real estate:

Trader Joe's Market, Monrovia, Calif., has reportedly leased former Wild Oats locations in Portland, Maine, and Nashville, Tenn., for new units, and it leased a 20,000-square-foot slice of a former Barnes & Noble in New York's Chelsea district for its second Manhattan location.

• In downtown Pittsburgh, an IGA operator plans to transform a 4,300-square-foot former McDonald's into a fresh- and prepared-food store. “It's not going to be big and it's not going to be fancy, but it is going to be fast and it's going to be friendly,” one of the store's investors said.

• Another upscale operator — The Fresh Grocer, Philadelphia — has been taking small stores of 20,000 to 25,000 square feet “located on the wrong side of the tracks” — all located near several of the city's universities — and converting them to fresh stores “that attract a very diverse clientele — affluent to poor, from all different races,” an industry observer told SN.

The Fresh Grocer will reportedly expand its operations in October to Maryland, in a portion of a former Kmart in Glen-Burnie, the observer said.

Available properties are coming in different ways:

• Empty stores resulting from supermarket bankruptcies in the past year — including Bashas', Chandler, Ariz., which shuttered more than 40 units; Bi-Lo, Mauldin, S.C.; Penn Traffic, Syracuse, N.Y.; Bruno's, Birmingham, Ala.; and Affiliated Foods Southwest, Little Rock, Ark. — that have made space available at stores whose leases were rejected.

• Closures by existing chains of underperforming assets — for example, 30 Winn-Dixie locations in the Southeast, and 25 A&P stores in New York, New Jersey, Connecticut and Maryland.

• Closures of assets that have been ordered to be divested — including many Wild Oats locations now controlled by Whole Foods; and seven units of Tops Friendly Markets.