Weathering the Storm 2009

SN STAFF

Like the hurricanes that seem to punish the state year after year, the current economic recession has Florida in its sights.

A perennial leader in housing and population growth, the Sunshine State has clouded over as the building boom became a bust. In a state where “growth” was an industry unto itself, suddenly the saws and hammers are silent as retirees are rethinking their ability to relocate to Florida's balmy climes.

Along with the residential growth that had long fueled Florida's economy, the state's retail sector, including supermarkets, grew hand in hand. Just last month, Lakeland-based Publix Super Markets, the state's dominant grocery chain, opened its 1,000th location — after averaging nearly 40 new stores per year for the past decade.

But that milestone has been overshadowed by the toll of the economy on Publix's performance, as last week the company reported that its profits fell by 8% for 2008, after a rare decline in comparable-store sales in the fourth quarter. Still, the company remains among the most aggressive in terms of development, with 40 stores in the pipeline this year.

“The Florida grocery market is very interesting — it has been dominated by Publix for so long,” said Rick McAllister, president and chief executive officer of the Florida Retail Federation in Tallahassee. “Wal-Mart is probably the most successful non-native grocery company, and they still have a very small market share compared with Publix.”

Florida native Winn-Dixie is seeking to rebound from bankruptcy.

Jacksonville-based Winn-Dixie, the other major regional chain that is native to Florida, is seeking to recover from a bankruptcy filing with an aggressive remodeling program.

“Winn-Dixie has been attempting to stabilize, and I think doing a pretty good job of it,” McAllister said. “They have right-sized their company, and are doing the right things that they need to do.”

Sweetbay, the Tampa-based division of Belgian multinational operator Delhaize Group, recently closed seven locations, leaving it with 108, and it has taken a more aggressive stand on its pricing message. But sales trends have improved, and the company is still eyeing three new-store openings in Florida this year: one each in Tampa, Tarpon Springs and Clermont.

In addition, limited-assortment discounters Aldi — which just entered the state last year — and Save-A-Lot both have a growing presence in Florida. Costco Wholesale is slated to enter two new Florida markets this year — Tampa and Jacksonville — and rival BJ's Wholesale operates several locations in the state. Minneapolis-based Target Corp. has found Floridians so receptive to its supercenters that it chose the state to house its first self-distribution center for perishables.

Neither Kroger Co. nor Safeway has a presence, however, and the only remnants of Albertsons are the 36 stores operated by privately owned Albertsons LLC, which sold most of its locations to Publix last year. It recently closed four stores — Orlando, Ocala, Tallahassee and West Palm Beach — although it continues to operate a distribution center in Plant City and a regional headquarters office in Lake Mary.

Whole Foods Market, after putting the brakes on its expansion nationally, acquired a larger presence in Florida with the 2007 acquisition of Wild Oats, but some of its Florida projects have been put on hold, according to reports.

Reports throughout the state indicate that developers are delaying or canceling projects, and retail closures have left commercial property vacancies at record levels.

“If you look at the inventory of homes, it's still horrendously high, and we've got a long way to go before we can even think about real growth,” said McAllister of FRF. “In terms of retail store growth, I think everyone is very cautious right now. We've seen a lot of retail projects being completed last year and the early part of this year, but my guess is that most real estate departments have got the brakes on right now, until they see exactly where this recession and economic downturn is headed.”

Lonnie Peterson, chairman of Cuhaci & Peterson Architects, Orlando, which recently inked a deal to remodel five Winn-Dixie stores in the Jacksonville area, said the emphasis among supermarket operators has shifted toward remodels rather than new-store development.

“In general, the pace of new grocery store development in this economy has, of course, slowed significantly,” he told SN last week. “Basically, with very little new residential growth, especially in new suburban areas, the need for new stores has declined. As a result, unless a tenant is totally new to the area, there are few new locations being developed. Currently, we are seeing a lot more remodel, renovation, repositioning and redevelopment projects than we see new construction.”

With the current environment driving lower construction costs and faster turnarounds, Peterson suggested that market conditions are ideal for remodeling work right now.

Despite the challenges of the economy — which has also been impacted by a sharp decline in tourism — observers noted that supermarkets overall are faring better than other retail channels in Florida.

“Those stores that have grocery are without question performing better than any other retail segment in the state,” said McAllister. “People still have to eat. And while we hear anecdotally that people are sizing down, or choosing lesser-name brands and private label, the fact is grocery stores are still generating revenues. It continues to be a strong market. If you ask them, they say things are tough, but relative to other segments, they are doing OK.”

Central Florida on Cusp

The food retail scene in Central Florida is poised for change, but it's likely to be a slow and painful transition, observers say.

The real estate woes that have already blasted the residential housing market are beginning to batter commercial real estate, while the tourism industry — a huge component of Orlando's economy — is taking a hit from a recession that has now gone worldwide. The implications for food retailers are mixed, observers say, with the general belief that those with strong existing market share and strong reputations for service or value are best prepared to survive the times, and, if they play it well, come out of it with better market share and better reputations.

Growing in the Central Florida market remains an unlikely scenario until the economy sorts itself out, observers added — and by then may require a completely new approach from retailers and developers.

“The market is very slow now,” said David Marks, president of Marketplace Advisors, an Orlando-based real estate analysis firm. “It's affecting retailers across the board from an operations perspective, and it's making them rethink their whole growth strategy.”

The change is somewhat profound in Central Florida, which but for a few minor bumps in the road has been on a straight growth trajectory for 20 years, Marks explained. Many retailers used to operating under these conditions are finding their business models ineffective now that the markets are contracting.

“Retailers have a lot of fixed costs, and the profits tend to be in the last bits of the business, so if your [sales] numbers are down you can become unprofitable very easily,” Marks said. “I think a lot of business models that worked in general in the old economy aren't working in the current conditions.”

Marks said he believes the future will belong to more-efficient operators with business models built to withstand tough conditions. Specifically, he has been impressed with Aldi, which has defied the slowdown with a heavy rollout of new stores in Central Florida starting last year.

“If you asked me a year ago, I'd have told you the last thing Central Florida needed was another low-cost grocery store, with Wal-Mart being as big here as it is,” Marks said. “But they've come in with something innovative. It's a small, no-frills concept, with good values, that people can get into and out of easily. It seems to be hitting the nail on the head. It's a pretty small niche player in terms of the overall market, but I think it's a winner.”

It helps that Aldi, based in Batavia, Ill., tends to own and construct its own freestanding buildings. The commercial real estate market has virtually ground to a halt as developers can't get financing for new projects — or in many cases even write the business plans that might, Marks added.

“It's hard to do a pro forma on a neighborhood center today,” Marks said. “How do you underwrite the local shops, in terms of the rent you can get, or value the outparcels? At the same time, you're seeing a risk premium — investors are saying they want a better return on their investment — so cap rates are going up while returns are coming down. There's a disconnect, and it's going to take some time to get it all sorted out.”

Sean Snaith, director of the Center for Economic Competitiveness at the University of Central Florida, Orlando, told SN he estimates that Florida — mainly because of the volume of housing inventory on the market — will likely take longer to pull out of the recession than the U.S. economy as a whole.

“The outlook for 2009 is pretty grim across the state,” Snaith said. “We're forecasting that the national recession could come to an end by the end of 2009 but that Florida won't begin to emerge until the middle part of 2010. That's all a function of the housing surplus.”

Snaith said that Central Florida, with a base of jobs in health care and tourism, has had a softer landing than many areas of the state. “We've got segments of the economy that provided a safety net,” he said, “but there are places like Flagler County and Fort Myers where housing was the economy, and when the boom went bust they took a pretty severe tumble.”

While the troubling conditions are likely driving many shoppers away from restaurants and into supermarkets, Snaith notes that the traditional drivers of store growth in Florida — new rooftops and population growth — simply aren't around right now. This will spark a contraction in retail shopping outlets and additional store closures, he said.

“We are going to witness a commercial real estate tsunami along the lines of what happened in residential real estate,” Snaith said. “A lot of strip malls around this [Orlando] area sit half-empty, and bankruptcies of big boxes like Circuit City are putting pressure on the smaller retailers. I don't think we've seen the worst of it yet.”

Publix Still Dominant

Among traditional supermarkets in Central Florida, Publix remains dominant. Despite recently reported declines in quarterly and annual earnings, and a sales pace considerably slower than its recent history, the retailer is adding size and scale through the addition of Albertsons stores it acquired last year, and through some new store builds.

“They're still doing deals, and wisely so,” John Crossman, president of developer Crossman & Co., Orlando, told SN. “They're doing deals only in markets with established populations and true growth.”

The economy is also likely to be rougher on Publix's competitors than on Publix. Sources said they were unsure about the future of the remaining Albertsons sites, noting the loss of scale would compromise the chain's ability to withstand the economic slowdown, and make a sale to a single operator unlikely. And while Winn-Dixie has reported progress in taking on the same “quality/service” niche as Publix, particularly in its renovated stores, sources said one signal of Publix's strength in Central Florida is the relative lack of direct competitors in the market.

Crossman noted that the market difficulties, as severe as they are, aren't likely to last indefinitely. Florida's attractions aren't going anywhere.

“Every time there is a bad winter in the Northeast and Midwest, I think that's good for Florida. The Baby Boomers are still going to be retiring. They may push it out some, but there will still be a good number returning each year, and we know Florida is going to be pretty high on their lists.

“If I were in the Upper Midwest or Detroit, I might not feel the same way,” he added. “With no disrespect to Detroit, I don't know how to fix it. But Central Florida in five years? I think it will be doing really well.”

Spotlight on South Florida

It's been a tough year for retailers in South Florida, but there are signs the future may look a lot better.

At the end of 2007 the economy was on fire, Gene Newman, a real estate developer with Newman Commercial Properties, Jupiter, Fla., told SN.

“Residential growth and commercial growth were booming, with home values appreciating at 25% to 35% to even 40% within a year's time — the best it had been in four or five years. People with one home were taking out a second mortgage to buy a second and a third home, with the expectation the values would appreciate enough to flip them.

“And on the commercial side, we had 1.5 million square feet under development, with 100% occupancy and great interest rates and cash flow.

“Consumers are not spending the way they were, and that's having a dramatic effect on the retail industry top to bottom,” Newman said.

Yet the challenges of today are setting the stage for the opportunities of tomorrow, said Doron Valero, managing director for Global Fund Investments, Miami Beach.

Unemployment is closing in on 6% in the region; tourism is down; and the housing market is “dead, with 10,000 condominiums available in Dade County alone,” he said.

“But shopping centers anchored by supermarkets are doing better than power centers right now, because they provide necessities and services people use, whether there's a recession or not. So supermarkets will weather the storm,” Valero said.

Vacancies in shopping centers are running around 10% to 15% “at the good centers,” he pointed out, “but the good news for retailers is, rentals in shopping centers are coming down after increasing for years to levels that made no sense.

“So this is a healthy market correction that's two years past due,” he said. “And while there will be casualties, at the end of it retail real estate in South Florida will come back healthier because it will be available at lower and much more affordable rates.”

With several national tenants closing stores or going out of business, boxes of 20,000 to 30,000 square feet are becoming available at very reasonable rates, Valero noted, “and it will definitely be a tenants' world for the next few years.”

He said he believes most of those boxes may be too small for most supermarkets, “though they could accommodate an Aldi,” Valero pointed out, “and Trader Joe's is looking aggressively to enter the state.”

Publix, with 200-plus stores and a market share exceeding 50% in South Florida, is by far the dominant player in the region.

According to another real estate source based in South Florida, “Publix is still the supermarket of choice because it has such good credit, plus there's a perception it's easier to lease space to other stores in a center anchored by Publix.”

However, Winn-Dixie — which operates just under 100 stores and has a 12.5% market share — has the potential to be a strong alternative player in South Florida, the real estate observer noted.

“Miami-Dade and Monroe County to the south, which encompasses the Florida Keys, have historically been two of Winn-Dixie's best markets, and the chain believes those areas will be a good launching point for its revamped format and aggressive marketing effort. It believes those parts of South Florida are where it will get the biggest bang for its buck.”

According to Valero, the availability of urban sites at lower costs could coincide with Winn-Dixie's expansion plans if and when it decides to build new stores.

“Once the economy corrects itself, there will be room in urban areas for supermarkets to buy an old building, demolish it and build a new store, which until recently was way too expensive to do,” he said. “But with the price of real estate coming down and the cost of construction down 20% to 25% from a year ago, it begins to look more feasible for some supermarket operators.”

According to one developer, the area's largest independent operator, Sedano's — with 28 stores and a 4% market share — is doing well. With Hispanics accounting for about 56% of the Miami-Dade population, Sedano's continues to cater to South Florida's Latin population, although it's also becoming more conducive to Anglo shoppers, he said.

Independents OK

Among South Florida independents, business has been good lately, said Cal Miller, president and CEO of Associated Grocers of Florida, the Miami-based member-owned cooperative.

“Certainly, consumers are cutting back on what they buy — opting for sirloin steak instead of filet mignon — and buying more private label, but sales volume is holding firm, and many of our members are slightly up for AG's fiscal year that started in August,” he told SN.

The reason, he said, is that more people are eating at home rather than going to restaurants.

John Anderson, principal at John Anderson & Co., Weston, Fla., offered a similar opinion.

“Business for independents was soft during the spring and summer, given the dip in the tourist trade, and they were looking for their numbers to go down some more this year. But within the last 60 days, business has turned around, particularly in resort areas along the South Florida coasts, and right now it's as strong as it was a year ago.

“Even in Key West, where hotel vacancies were very high last year, supermarket business among independents is recovering,” Anderson said.

“My guess is, the tourists coming down here are being more careful with their money, so they're renting places with kitchenettes and doing more of their own cooking instead of eating out,” he explained.

According to Aurelio Vasquez, communications manager for the Beacon Council, an economic development agency, the saving factor for Miami-Dade is its diversified local economy.

“Miami-Dade was the last county in Florida to feel the effects of the recession, and we expect to be the first ones to recover because we are not entirely dependent on one industry,” she said.

Vasquez said the recent stimulus package is also helping Miami-Dade “by fast-tracking construction projects in the community, which will hopefully alleviate the job losses in the construction industry.”

She said the area had 26,691 housing foreclosures in 2007 and 56,656 in 2008.

Retailers have cut back accordingly, she noted.

“For the first time in five years, leasing activity has also slowed, and tenants are asking for rental reductions of 10% to 20%, reduced annual escalations, and improvement allowances — and many landlords are willing to oblige to retain existing tenants and attract credit-worthy tenants.”

In the Panhandle and other areas of North Florida, the economic impact has been similar to the rest of the state, according to McAllister.

“The Panhandle is not too different from the rest of Florida, with the exception that it's less populated,” he said, noting that the area also has not seen as much growth as other parts of the state from “niche” operators, such as stores geared to serve Hispanics.

“We do have Fresh Market stores, and Wal-Mart is continuing to grow — they are opening stores in the Panhandle at the same clip as you would expect.”

Publix's acquisition of 49 Albertsons stores in the state last year included 15 in North Florida. Four of those were in Escambia County in the Panhandle, marking Publix's first stores in that market.

In Jacksonville, meanwhile, reports indicate that development has slowed on several projects in the area.

“Very simply, the markets are so uncertain right now and the credit markets nonexistent, so the projects cannot move forward,” said Ron Barton, executive director of the Jacksonville Economic Development Commission, in a recent article in the Florida Times-Union.

Among the projects that are on hold is a development in nearby San Marco that is slated to include a new Publix, the article noted.

Remodels in the market are moving forward, however, said Peterson of Cuhaci & Peterson Architects.

At the Winn-Dixie stores that his firm is remodeling, changes include “a new entry feature generating more visibility to the passerby” and a new interior decor, including paint, wall covering, graphics and floor finishes “to brighten up the entire store and provide a more pleasant shopping experience.”

“One of my favorite things is that the floral department is moved up front next to the main entrance; that immediately says to the customer that we appreciate you being here,” Peterson said. “It makes the entire store seem more fresh and inviting.”

Energy efficiency is also a priority at the remodels, incorporated in new cases and refrigeration equipment, and the addition of LED accent lighting above produce and meat displays.

McAllister of FRF said he expects the state's economy to rebound in 2010.

“It depends on what other shoe drops in this economy, but certainly all the efforts, both at the federal level and the state level, will help,” he said. “From a grocery standpoint, most of the money from tax breaks [in the federal stimulus plan] will be spent in grocery, restaurants and retail stores. That's got to help.

“And every job that's created helps the grocery business, so if in fact there are 3½ to 4 million new jobs created nationally, Florida will get its share of those, and that will help consumer spending. So I think there are some things to feel positive about.

“I just think we have to be patient and not expect the economy to tap-dance itself quickly back to where it was.”
— Reporting by Elliot Zwiebach, Jon Springer and Mark Hamstra