SHOPPING THE APPLE

JON SPRINGER

NEW YORK — High rents and high style have changed the rules of the food retailing game here.

For years a city of small neighborhood shops and family-run chains valuing convenience, New York's escalating affluence and expensive tastes have in recent years attracted high-end, destination-style operators to its landscape, putting traditional grocery stores under pressure to bolster their own offerings without sacrificing their neighborhood appeal. But that's only the part of the picture, observers say.

Especially in Manhattan but also in parts of the outer boroughs, limited availability of real estate — and no shortage of users anxious to tap into the city's wealthy residents — have put rents virtually out of reach, food retailers said. That's turned some into real estate concerns of their own, and sent others looking at far-flung locations for growth. Staying in the game, they say, requires constant massaging of their offerings to remain relevant in a city that's especially receptive to the new and the stylish.

And more new, stylish retailers are on the way.

“Being competitive in New York in some ways isn't that hard because everyone you compete with faces the same pressures too,” Nick D'Agostino III, chief executive officer of D'Agostino's Supermarkets, Larchmont, N.Y. “It's expensive here, so the challenge is to make your customers feel comfortable with what they are spending. A lot of that has to do with service, and some of that is making shoppers feel that there's an advantage in coming to shop at your stores.”

With 15 of its 18 stores located in Manhattan, D'Agostino's is one of the few remaining family-run chains in the city. The company was founded in 1932 and possesses an iconic image and a legacy of service and quality that Nick D'Agostino III, its third-generation leader, hopes to continue. But skyrocketing rents and an influx of competitors like Whole Foods have been difficult challenges, said D'Agostino, whose store base has grown smaller in recent years.

“You have to try to run your business a little differently in order to pay the rents we're paying,” he explained. “You have to work on your costs and you have to maintain your gross profits. You have to explain to customers from outside the city that there's a cost to being here. The same way it costs more to have an apartment in the city, it costs more to buy groceries in the city. That's part of living in New York.”

In a city with expanding choices, D'Agostino's is especially interested in retaining its loyal shoppers, he added. The chain offers everyday discounts on a slate of regular and natural/organic items and is several years into a Greenpoints program D'Agostino described as very successful.

“The cost of real estate is what it is,” D'Agostino said. “But if this continues, at some point you're going to be the only one left, and you'll do a lot of business.”

COMPETING FOR SITES

One of D'Agostino's chief conventional competitors, Gristedes, indeed has been shrinking. John Catsimatidis, who operates Gristedes' parent company, the Red Apple Group, and is considering a run for mayor of New York in 2009, has made no secret of the fact that rising real estate values has at times made his company more valuable as a store bank than a retailer. A year ago, Red Apple sold eight Gristedes store sites to the Duane Reade drug chain, and today Red Apple operates 36 stores, down from 46 four year ago.

Catsimatidis fingers bank branches as the major contributor to increased rents for supermarkets but said recent economic events could slow their appetite for expansion.

“If I'm fighting JP Morgan for locations, JP Morgan wins,” Catsimatidis said. “Banks were big competitors for real estate with us. They were taking valuable corners and bidding the rents up to $200 a square foot. But now we see their business is going bad, they're freezing expansion plans, so there may be more opportunity for us.”

When Whole Foods blasted into the market with its flagship Columbus Circle store in 2004, and Internet grocer FreshDirect gained favor with some of the city's wealthy shoppers at around the same time, conventionals had a difficult time coming up with a counterattack, Catsimatidis admitted. Like D'Agostino, Gristedes felt its first responsibility was to hang onto its shoppers by continuing to provide the “full shop” that some of its competitors did not.

“I think there will always be a place for the store that supplies all of the needs of the people,” Catsimatidis said. “But as far as the mix is concerned, there is change. For instance, you reduce the size of your soda departments and increase the space you have allotted for water. That's intuitively obvious. Where we haven't made a decision is whether to merchandise organic products separately or to spread them throughout the store.

“If more people are coming in asking for organics, you have to provide them,” he added. “But we have 20,000 products in our stores and you don't want to send them on a hunting expedition.”

The real estate market affects supermarkets in the city more than their counterparts in the suburbs because the dense city environment integrates properties and mixes uses naturally. Developers generally don't need supermarkets as a “draw” to a project and so tend to be less willing to make deals that are attractive to them, observers said.

“New York is probably the only place in the country where you see Walgreens and CVS buying supermarket sites to expand,” said Burt P. Flickinger III, managing partner of Strategic Resource Group, New York. “Manhattan is a very large market with a tremendous amount of discretionary, disposable income, and so it's attractive to any number of users.”

Even when a supermarket can secure a site, getting acceptable rent terms has become more difficult, D'Agostino added.

“As much as paying so much more per square foot is difficult, what's more difficult is that landlords are not interested in granting long-term leases, and supermarkets are long-term businesses,” he said. “It's a fairly expensive business to put in and it can take awhile to build the business. Your profits may not come until five years or 10 years, so if you don't have a 20-year lease it can be very difficult to justify investing in this business.

“I think some landlords are worried the market will go up and they'll lose the ability to charge more. Others just seem to like to turn space over. We can't do that. We're not a restaurant.”

Few if any chains are free of the pressures of rising real estate costs in New York City. Fairway Market's newest store in Brooklyn, for example, owes its existence in part to a lack of affordable options in established neighborhoods, Fairway CEO Howard Glickberg told SN.

Fairway's Brooklyn store is located in a 50,000-square-foot restored waterfront warehouse in post-industrial Red Hook, a setting that is spectacular and spacious, but decidedly out-of-the-way.

“We had to move out there because the rent was affordable,” Glickberg said. “We could never have opened a store that size in a high-rent district. So we had to get a place with parking and go after a different customer base.”

Drawing shoppers from burgeoning tony neighborhoods surrounding Red Hook, the Brooklyn Fairway has been a great success since opening two years ago, Glickberg said, though it's a far cry from the fruit stand targeting locals at 74th Street in Manhattan that gave birth to the chain, now with four stores and eyeing more.

Glickberg said the “old-line neighborhood stores” have been hit the hardest by the influx of well-funded and productive stores like Whole Foods into the Manhattan landscape. Fairway, which received an infusion of capital from Connecticut investor Sterling Investment Partners last year, is looking for growth in and around the city, with Paramus, N.J., reportedly next on the schedule.

“It costs a fortune to have a business now — it's crazy,” Glickberg said. “Between insurance, utilities, garbage pickup, it's very difficult to earn a living. One of the things Whole Foods has going for it is that it can afford the rents.”

RAISING THE BAR

Whole Foods, the Austin, Texas-based retailer that brought a bit of theater to its natural/organic positioning, helped bring up the level of competitors across the city, its competitors agree.

But responses haven't proved easy. The Food Emporium, A&P's 29-store chain with 16 Manhattan locations, found a rigorous makeover to a “gourmet concept” at its Bridgemarket store in late 2006 cost it appeal with some neighborhood shoppers and required officials to rebuild Center Store selections that were sacrificed in the initial renovation.

More recent store renovations at Food Emporium — including the debut of a new “food2go” offering at two locations — have been considerably more successful in helping the chain polish its upscale heritage, officials said.

The food2go concept, launched late last year in the upper level of the retailer's location at 50th Street and 8th Avenue in Manhattan, provides Midtown workers and local residents with a variety of sandwiches, salads, pizzas and soups, and includes a coffee bar, a sushi bar and a counter for chocolates and desserts. There is seating on site in a sleek, colorful and stylish setting that recalls the dramatic presentations and lighting of the “gourmet” repositioning of the rest of the chain, officials said.

Foodies in New York in the meantime are looking forward to the planned debut later this year of Eataly, an “artisan” food market based on the concept of the same name launched to rave reviews in Turin, Italy.

The New York location, which according to reports would occupy a 10,000-square-foot space in a newly constructed Midtown building, would be about one-third of the size of the Turin flagship. That store, founded by Oscar Farinetti, relies on alliances with small-scale producers known for outstanding quality, and has been embraced by the “Slow Food” movement.

New concepts and dramatic presentation will be hallmarks of a new store set to open later this spring from the owners of Amish Market, a family-owned fine foods purveyor based in Manhattan that's been growing into ever-larger spaces in the outer boroughs. The company's next stop is set for the ground floor of a high-rise luxury apartment complex in Long Island City, Queens. According to Ovidio Teja, a team leader at the company the store concept will be so new that officials have not yet settled on a name for the store.

“This store will be a totally new concept for us,” Teja told SN. “We will try to be 100% natural and organic, and be environmentally friendly in every way, from the types of refrigeration equipment we use to the material we use to cover the walls.”

For Amish Market, which started as a tiny market on the West Side of Manhattan, the 22,000-square-foot Long Island City store will be the largest in the chain and follows a handsome new store in the Atlas Park center in Hyde Park, Queens, that opened last year. Teja said the chain has learned from competitors in the city and from company management, which has encouraged its employees to travel to food and food retailing shows to improve their game.

“I believe competition is great if you're a good businessman,” Teja said. “It's not so good if you're not a good businessman. But I admire Whole Foods and all they have accomplished. And one day, I'd like to be better than them.”