By Joseph McKeska
Real Estate Forum – August 2017
Amazon’s $13.7-billion acquisition of Whole Foods has sparked a lot of speculation among observers of the grocery and tech sectors. Those with the most creative imaginations have wondered whether, in a few years, Whole Foods stores will be transformed into check-out-less hubs of omnichannel activity—places where shoppers drop by for pickups and returns of online orders; visit click-and-collect stations, or even watch drones fly off the roof toting Horizon Organic Milk to nearby neighborhoods. Yet apart from all of this speculation, the blockbuster deal at the very least further calls into question an idea that has endured for years among developers and investors in grocery-anchored shopping centers—namely, that this sector is a relatively stable, “safe harbor” rooted in the reality that “everybody has to eat.”
For anyone who invests in grocery-anchored real estate—whether a publicly traded shopping center REIT, private developers or your local neurologist and his tennis buddies—it is important to recognize that the calculus required to maximize returns and minimize risk has changed dramatically from the simpler times that prevailed in preceding decades.
The Amazon-Whole Foods deal only underscores the accelerating consolidation and general disruption that has marked grocery for the last several years. To adapt, developers and investors need to be more thoughtful and analytical about the types and nature of the grocery stores in their portfolios. If picking winners in this sector used to be relatively easy—by, for example, closely watching financial strength and performance and new store growth and merger and acquisition trends—those days are gone. Today’s chains are racing to stay ahead of the curve in the face of wide-spread channel fragmentation and disintermediation, along with intense competition and a raft of uncertainties, of which Amazon’s acquisition of Whole Foods is only one.
Even as Amazon cements its online delivery deal with Sprouts Farmers Market, Publix just announced it aims to expand its online delivery service to about 1,100 stores over the next four years in partnership with Instacart. Meanwhile, Kroger and Walmart continue to aggressively experiment with and expand new technologies designed to offer more convenient in-store shopping, home delivery options, and hybrid services such as click-and-collect. In fact, most of the large, publicly traded grocers in the United States are shifting their capital spending to move in this direction. Generally, they are not spending less capital overall—they’re simply spending less on net new store growth.
Longer term, the grocery-anchored sector is likely to confront many other changes. Already, some shoppers are beginning to use voice-activated devices such as Amazon’s Echo, as well as push-button, Wi-Fi connected devices such as Amazon’s Dash Buttons, to restock their kitchens. It is too early to tell whether third-party online delivery services such as Blue Apron, which certainly could affect the grocery sector if they reach scale, will fizzle or catch on. But to be sure, winners and losers will eventually emerge both among these online players as well as from the crowded field of non-traditional specialty channels, including hard discount, ethnic, and natural/organic.
To keep pace with these tumultuous times, it is important for developers and investors to understand the market at multiple levels—macro, micro and everything in between. They need to ramp up their overall level of analysis to make the right decisions about whether to buy, sell or hold. The goal should be to develop an integrated, data-driven pathway toward maximizing the value of all real estate assets in the portfolio.
Strategic portfolio reviews, in particular, need to happen more frequently. With higher-quality data and deeper insights at investors’ fingertips, developing a clear portfolio and investment strategy as well as detailed plans for each asset to maximize value, becomes more logical and seamless. Armed with deeper insights from the use of “big data,” forward-thinking developers and investors can have more confidence as they seek to determine when and how to respond to the rapid changes taking place. This entails marrying well-defined strategy with grocery market and trade area dynamics, along with the possibilities and limitations that exist relative to any individual real estate asset. This is true whether involving value-add, redevelopment, acquisition or disposition opportunities.
The phrase “people always have to eat” is certainly true. But in the years ahead, shoppers will be able to satisfy their hunger or quench their thirst by choosing from a dizzying array of options. Clearly, the race is on to make the grocery shopping experience as quick, easy and convenient as possible; yet people also still demand high-quality and authentic social and food experiences.
Joseph McKeska is co-founder and president of Oak Brook, IL-based Elkhorn Real Estate Partners, a division of A&G Realty Partners. He may be contacted at firstname.lastname@example.org. The views expressed here are the author’s own.
By Joseph McKeska