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By Ben Johnson

Shopping Centers Today – October 2017

It will come as no surprise that grocery-anchored shopping centers have been a favorite among investors for many years. Still, not all such centers are created equal, asserts Joseph McKeska, a grocery real estate specialist who formed Oak Brook, Ill.–based Elkhorn Real Estate Partners, in March to provide advice to retailers and investors in the sector. McKeska brings some 25 years of experience to the venture, having been SuperValu’s head of real estate for 17 of those years, and, more recently, senior vice president of real estate at Southeastern Grocers.

Elkhorn Real Estate was formed in partnership with Melville, N.Y.–based A&G Realty Partners. McKeska has a history of collaboration with A&G co-founders Andrew Graiser and Emilio Amendola, who had also co-founded DJM Realty back in 1992. “I developed a really deep, strong relationship with them and an appreciation for how they approach retail real estate,” said McKeska. “They always take a much more strategic view and approach by evaluating real estate issues in light of the broader business goals and opportunities, rather than as more-one-off transactional situations.”

Evidently, that relationship has only grown stronger and deeper, leading ultimately to this latest initiative. “Given our alignment and philosophy, given my years of retail executive experience and then given the major shifts that are taking place in the retail landscape and … in grocery more specifically, we collectively determined that there was a need for our services and the need for these types of services was going to continue to grow,” said McKeska.

The timing for this venture is right, McKeska says, because the rampant store growth of the past has given way to a focus on omni-channel retail. “Optimizing your real estate assets and your real estate portfolios — both on the retailer side and on the investor side, given all the changes that are taking place in the marketplace, and the uncertainty — becomes that much more important,” he said. “Consolidation in the industry is going to increase, and I think that’s the general consensus. On a broader basis, there is going to be a lot of pressure on grocery retailers in at least the short-to-intermediate term because of the overall general competitiveness of the marketplace — of which the Amazon–Whole Foods deal is the obvious one. When you layer in the online and omni-channel challenges, the companies that are further advanced have a relative competitive advantage.”

These trends are obviously important to the owners of grocery-anchored centers. “Three or four years ago, I think, people felt like grocery was much more immune to online competition,” McKeska said. “It’s very complex, and it’s very opaque for the average investor who doesn’t understand the grocery market. That is where our platform will come in and help them navigate those waters, because we can provide a much deeper level of insight across the board.”

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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 jmckeska@elkhornp.com. The views expressed here are the author’s own.

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Whole Foods acquisition gives Amazon a physical footprint

By Joel Groover

Shopping Centers Today – August 2017

Amazon.com’s $13.7 billion acquisition of Whole Foods is a dramatic statement about the value of retail real estate, observers say, but that does not mean the landmark transaction is all good news for Amazon’s brick-and-mortar competitors and their landlords.

For starters, the deal could intensify store closures and the general decline among grocery chains that lack resources to compete as their sector increasingly goes omnichannel, says Joseph McKeska, co-founder and president of Oak Brook, IL – based Elkhorn Real Estate Partners. “This is only going to accelerate the ongoing consolidation and shakeout in the grocery sector,” he said. That means shopping center landlords in particular will need to be even more thoughtful and analytical about the grocery chains in their portfolios, says McKeska, who in the past headed real estate operations for Southeastern Grocers and Supervalu. “You want to pick the horses that are going to be the winners,” he said.

The deal gives Amazon access to nearly 500 stores it could use as warehouses or showrooms – all in affluent markets with existing or prospective customers of its Amazon Prime or Amazon Fresh services (the latter is now available in about 20 cities). Amazon could use its Whole Foods stores for returns or pickups of online purchases both grocery and nongrocery, which could ramp up competitive pressures in U.S. retailing among a host of chains, McKeska notes.

These benefits are part of the reason a major real estate move by Amazon was hardly unexpected in the grocery sector, McKeska says. “I am not surprised, per se, and I don’t think many grocery executives were shocked either,” he said. “It has been clear that at some point Amazon was going to need to get into the brick-and-mortar business on the grocery side if it was going to have any chance of making a significant dent in terms of growing its market share.”

The potential reverberations are profound and could affect the e-commerce market, the price of food and nonfood products in the U.S. and the pace of automation in retail, according to Todd Maute, a partner at New York City-based CBX, a brand agency and retail consulting firm. “It will be very interesting to see what happens in these stores,” Maute said. “Are we going to see Amazon try to automate the checkout process, which they’re already testing at their Amazon Go store in Seattle? Will they bring in pickup and drop­off stations, Amazon lockers and the like? This really could be the jumping-off point, not just for grocery to go omni-channel in a major way, but also for some pretty big changes in how we shop brick-and­-mortar stores.”

Maute, whose focus includes private-label products and branding, says Amazon’s private-label products could easily show up on Whole Foods shelves. Amazon could also leverage its economies of scale to bring down prices at the notoriously expensive retailer, putting more pressure on discounters and other competing chains. “Walmart, Kroger and Publix are all racing to develop click-and-collect capabilities,” he said. “Now they’re staring down the barrel of going head­to-head with Amazon on both price and, even more daunting, convenience.” (Kroger Co.’s stock plummeted by 9 percent the day after the Amazon-Whole Foods announcement.)

Maute will also be paying close attention to how the Whole Foods deal affects the use of the voice-activated Amazon Echo device. “I can see Amazon giving you a significant discount if you start ordering your groceries by voice as you stand in the kitchen, ” he said. “That’s the holy grail of what some people are calling ‘v-commerce’ – that is, voice commerce.

Some are already calling for the Federal Trade Commission to put a stop to the deal on antitrust grounds, but McKeska is skeptical. Brick-and-mortar grocery is a new business for Amazon, so this is hardly Coke buying Pepsi, he notes. “Knowing how the FTC looks at these things,” McKeska said, “I would be very surprised if there was any issue.”

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By Greg Trotter

Chicago Tribune – July 2017

Whole Foods Market’s cheaper, smaller-format 365 store concept that was scheduled to open in south suburban Evergreen Park in November likely will be delayed until sometime next year, according to village officials.

The larger question is whether Austin, Texas-based Whole Foods will continue opening 365 stores at all and, if so, at what pace once the company is owned by Amazon. The $13.7 billion planned acquisition of Whole Foods by Amazon is expected to close later this year.

Officially known as 365 by Whole Foods Market, the lower-cost concept was intended to appeal to shoppers on tighter budgets in an increasingly competitive grocery landscape. Only four 365 stores are currently open, but 22 more are in the pipeline, company executives have said. In some of those towns, there’s uncertainty on when and if the stores will open as planned.

Beyond the delay, Evergreen Park Mayor Jim Sexton said it’s now unclear whether Whole Foods will indeed open the 30,000-square-foot space in the redeveloped Evergreen Plaza as a 365 store or instead open a traditional Whole Foods store.

“I liked the (365) concept more, but if it ends up being a Whole Foods, so be it,” Sexton said.

Whole Foods spokeswoman Allison Phelps said she couldn’t say when the Evergreen Park store would open or what kind of store it will be until Amazon’s planned acquisition of Whole Foods closes.

“Our hands are tied. We’re in an extreme quiet period,” Phelps said.

Developer Lormax Stern didn’t respond to calls and emails.

Similar confusion reigns in Bloomington, Ind., where a 365 store initially was scheduled to open Aug. 1.

Alex Crowley, Bloomington’s director of economic and sustainable development, said he’s not holding his breath. There’s been little information from the developer Simon Property Group or from Whole Foods on when the store will open — or even if it will be a different retailer altogether, as is rumored to be the case there, he said.

“We’re flying a little bit in the dark here,” Crowley said.

Rod Vosper, vice president of new development at Simon, declined to comment.

And in Toledo, Ohio, the opening of a 365 store planned as the anchor tenant of a $140 million redevelopment in a popular retail corridor has been pushed back to next year, even as other mall tenants open for business.

Whole Foods informed Todelo officials of the delay before the announcement of the Amazon deal, said Brandon Sehlhorst, manager of real estate for Toledo.

“This is a big deal that Whole Foods is coming to town,” Sehlhorst said. “We remain hopeful.”

Whole Foods Market plans store for Evergreen Park
In a May earnings call with investors, Whole Foods CEO and co-founder John Mackey spoke optimistically about the 365 concept, even while acknowledging that two of the four stores open hadn’t performed to expectations. Going forward, the company planned to ramp up the number of openings while fine-tuning the model, Mackey said at the time.

“We take out so many costs. … It doesn’t have all the bells and whistles that Whole Foods has, but also has significantly lower capital cost,” Mackey said.

But, of course, things have changed since then. Many industry experts expect Amazon to help Whole Foods remove back-end costs and drive down prices even in the larger-format stores often dubbed “Whole Paycheck” by rueful shoppers.

Whole Foods has more than 460 stores in the U.S., Canada and the United Kingdom, according to the company’s website.

While the traditional Whole Foods stores yield larger profit margins, the smaller 365 stores provide a way to drive traffic and grow the store count, said Joseph McKeska, a former Jewel-Osco real estate executive who’s now president of Elkhorn Partners, an Oak Brook commercial real estate firm that specializes in retail.

“But does Amazon think it’s worth the investment of time, effort and money to grow that concept?” McKeska said. “That’s a big question mark.”

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Experts predict Amazon will use the Whole Foods stores, in part, as hubs for grocery pick-up and delivery, helping Amazon resolve the “last mile” dilemma.

By John Egan

National Real Estate Investor – June 2017

The proposed $13.7 billion acquisition of organic grocery retailer Whole Foods Market by e-commerce giant Amazon holds the potential to upset the grocery cart, so to speak. Yet retail real estate investors should cheer the Amazon-Whole Foods deal, experts say.

Experts predict Amazon will use the Whole Foods stores, in part, as hubs for grocery pick-up and delivery, helping Amazon resolve the “last mile” dilemma of how to get products from local shipping hubs to nearby customers. Without a substantial brick-and-mortar presence, Amazon has struggled to effectively operate its AmazonFresh grocery pick-up and delivery service. Industry observers also expect Amazon to improve efficiency at Whole Foods’ distribution centers by incorporating the e-commerce company’s technology.

The Amazon-Whole Foods deal presents an opportunity for retail real estate investors, according to Matthew Harding, president of retail real estate services firm Levin Management. The combo with the e-commerce behemoth will help lessen “this perceived threat that all brick-and-mortar retail will be dead by next January,” he says.

Amazon’s purchase of Whole Foods should instill confidence in retail real estate investors, especially those whose portfolios include grocery-anchored properties, Harding notes. “Grocery-anchored shopping centers have always been one of the more stable property types within retail,” he says.

While retailers in other categories, including Sears, Kmart, Payless ShoeSource and RadioShack, are collectively shuttering hundreds of stores as they lose ground to e-commerce players, the Amazon-Whole Foods deal underscores the vital role of brick-and-mortar in the future of retail, Harding says.

Although the acquisition will disrupt the grocery business, it will also create “arbitrage opportunities” to buy grocery-aligned properties, says Joe McKeska, president and co-founder of Elkhorn Real Estate Partners, which provides advisory and investment services for the retail real estate sector, including grocery properties. Elkhorn is a division of A&G Realty Partners, a commercial real estate advisory and investment group.

“I think there are opportunities,” McKeska says. “But I think you also have to be more selective and more careful and more thoughtful in terms of how you make those decisions.”

McKeska — previously a real estate executive at Southeastern Grocers, owner of the Winn-Dixie, BI-LO and Harvey’s chains — says that from a macro perspective, retail real estate investors will need to weigh which grocers are likely to survive the shake-up and which are likely to wither. From a micro perspective, investors should scrutinize grocery store locations and market share, he says.

“It’s a good time for investors to really take a hard look at what they have in their portfolio,” McKeska says, “and make sure that they are comfortable with the assets they have and that it fits their overall investment profile and risk profile accordingly, especially in light of all the changes that are taking place.”

Through the acquisition, Amazon will control Whole Foods’ 440 stores in the U.S., as well as its 11 regional distribution centers, according to the Wall Street Journal. Those will be coupled with Amazon’s two drive-up grocery stores and eight brick-and-mortar bookstores, as well as its more than 70 fulfillment centers nationwide.

The Amazon-Whole Foods marriage — whatever shape it takes — will force other players in the grocery business, like Albertsons and Kroger, to adapt to the new environment and accelerate their growth strategies, notes Harding.

“They’re in a competitive industry. They know that Amazon and other players like Jet.com have been encroaching on their business,” he says. “If anything, [the Amazon-Whole Foods deal] will increase the need to modernize and evolve. And not everyone will do that.”

Grocery retailers that fail to modernize will fall by the wayside, just as some players in other retail sectors already have, according to Harding. McKeska expects the Amazon-Whole Foods deal to be something of a catalyst for “a wave of consolidation” in the grocery industry.

That’s a view shared by executives at Kroger, the country’s second largest grocery chain and once a potential Whole Foods suitor. In a June 15 conference call with Wall Street analysts, Rodney McMullen, chairman and CEO of Kroger, said the grocery business is “probably at the front end of the next phase of consolidation.” Michael Schlotman, Kroger’s chief financial officer, added that the anticipated consolidation will allow the grocery chain to increase its footprint in existing markets.

As if Amazon’s full-bore move into the grocery business weren’t enough, pressure on grocery retailers, including big-box mainstays Costco, Target and Walmart, is also coming from two German grocers that are expanding aggressively in the United States.

Discount grocer Aldi plans to remodel 1,300 of its 1,600 stores in the U.S. by 2020, and to add 900 more stores stateside by the end of 2022. Over the next five years, Aldi aims to invest $5 billion in new and remodeled stores. Meanwhile, discount grocer Lidl opened its first U.S. store on June 15 and intends to roll out as many as 100 stores along the East Coast by the summer of 2018.

At the same time, regional grocers Publix and Wegmans are broadening their footprints on the East Coast.

Not that long ago, Whole Foods had its own ambitious plans for expansion. In 2013, executives unveiled a strategy to grow to 1,200 stores nationwide. Later on, Whole Foods introduced a low-cost, pared-down concept called 365.

But in February, Whole Foods — amid a prolonged sales slump — abandoned the 1,200-store goal and announced the closure of nine stores. In the wake of the Amazon bombshell, McKeska wonders what will happen to the 365 format, which operates only four stores.

Even so, McKeska doesn’t think an Amazon-owned Whole Foods will pull back on opening more locations or redeveloping older ones. “I would be surprised if Amazon puts the brakes on that,” he says.

However, food industry expert Phil Lempert suspects Amazon will at least temporarily halt the addition of Whole Foods locations to take stock of the grocer’s expansion plans. The acquisition is scheduled to close in the second half of 2017.

“They’ll need some time to properly evaluate expansion locations,” Lempert says, “and look at what markets are over-stored and under-stored before they make a move.”

For his part, Neil Stern, senior partner at retail consulting firm McMillan Doolittle, says that under the Amazon umbrella, Whole Foods might wind up shrinking its footprint, although he emphasizes that Whole Foods’ leases will be secured by a “very financially sound owner.”

“While Amazon has very deep pockets, my guess is their first priority is to create omnichannel synergies versus adding more stores,” Stern says.

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New competition, consumers who shop multiple stores are just a few of the issues grocery retailers are working through

Interview by Randall Shearin

Shopping Center Business – May 2017

A&G Realty Partners has been known for a number of years as a company that assists retailers with right-sizing portfolios. From lease workouts to excess space leasing, A&G’s clients have run the gamut across the retail spectrum. The company is creating a new division to assist in the grocery retail business. The division will be created through a joint venture with Oak Brook, Illinois-based Elkhorn Real Estate Partners and will be headed by Joe McKeska, a 25-year veteran of the grocery real estate business. The goal of the division is to help retail investors and retailers evaluate their portfolios, with an emphasis on grocery retail.

Shopping Center Business recently spoke with McKeska to get an understanding of the evolution of the grocery business today, where it is headed in the future, and how Elkhorn and A&G can assist clients to create strong real estate.

SCB: We are seeing a lot of changes in the grocery business around the country, both in terms of expansion and contraction. Tell us about the state of the grocery industry today.

MCKESKA: The grocery business is already very competitive, and is growing more so all the time. There are a number of new grocery formats and channels that are impacting the industry. This includes organic and high-end concepts entering various markets, including Sprouts and Fresh Thyme. On the discount end, Aldi continues to add new stores at an aggressive pace and while Walmart’s new store growth has slowed, they are still adding a number of new locations. In addition, there are brand new players such as Germany’s Lidl entering the U.S. on the East Coast and Southeast, where they will be adding several hundred stores over the next few years. Lastly, there has also been the continued growth of club stores such as Costco and in the number of non-grocery retailers who are adding food to drive sales and traffic, such as dollar stores.

SCB: Which areas of the country do you see the grocery industry most active right now?

MCKESKA: The Southeast and Eastern Seaboard areas are experiencing an in-ordinate amount of competition. This is due in large part to the fact that these areas are experiencing strong population growth with relatively strong economies and low unemployment rates. Also, many of these markets have been under-penetrated in terms of per capita grocery store square footage and the number of new store concepts available. Dallas is also a competitive market, with both H-E-B and Lidl acquiring real estate to enter the market at some point in the future.

SCB: What are some of the trends with real estate and grocery stores?

MCKESKA: Kroger is rolling out a larger format store — its Marketplace concept — in many of its markets. Most of the rest of the industry, however, is shrinking the size of their store formats. That is due to the continued fragmentation in the way consumers are shopping and the anticipation that the trend of certain traditional grocery categories moving online will accelerate in coming years. As an example, it is expected that more items like paper products, health and beauty care and many center store categories will increasingly move online, with a recent Food Marketing Institute and Nielsen study estimating that 40 percent of current center store sales could be made online by 2025. While traditional grocers have been expanding their fresh food departments to make up for the reduction in sales in these categories and to better compete with online merchants, this has not been making up for the loss of sales in non-fresh areas.

SCB: Is the grocery business bifurcated between the high end and the low end?

MCKESKA: Yes. As has been widely reported, the country has seen an increase in income stratification over the last few decades. In addition, we have had increasing multi-ethnicity, led by the growth in the Hispanic population as well as changes in generational shopping behaviors between baby boomers and millennials. There are a lot of issues happening socially that are resulting in fragmentation in the way that people shop for groceries, even before factoring in the impact of technology and e-commerce. While traditional grocers have been under pressure for some time, certain grocers are doing a nice job of adapting, such as the way Kroger customizes its stores to fit its neighborhoods and provides personalized offerings to attract shoppers. On the other hand, a number of traditional grocers have struggled to keep up, many of whom are seeing their sales flow to online competitors and price operators like Walmart and Aldi, or in higher income levels, chains like Whole Foods, Trader Joe’s and Sprouts.

SCB: How is the high end of the market performing?

MCKESKA: The high end of the market has become a lot more competitive over the past several years. There is opportunity, but the premium and natural/organic market, while still growing rapidly, remains a relatively small segment of the overall market. The premier example in this sector is Whole Foods Markets. As has been well documented, Whole Foods has struggled as of late. It is closing 29 stores and has backed off its goal of growing to 2,000 stores or more. Whole Foods is also rolling out its 365 stores that are more price focused while still heavily natural foods oriented. It used to be that people would drive several miles to go to a Whole Foods because it was one of the few options available to purchase high quality and a large variety of natural and organic groceries. Because of all the new entrants like Sprouts, and because traditional grocers have added a significant amount of organic and natural foods, consumers no longer have to travel as far as they used to for that type of offer. Accordingly, Whole Foods is now focusing on its core customer in order to get them to shop more frequently and spend more. They recognize that the days of getting people to travel a distance to shop with them are mostly over, given the multitude of additional natural and organic options consumers have in closer proximity to their homes.

SCB: Should grocery retailers be rethinking their real estate? How can they make their real estate portfolios better? How can they work with landlords to get to a better portfolio?

MCKESKA: Because of the rapidly changing nature of the grocery retail industry there will be winners and losers. The grocery retailers who are going to be the most proactive by investing in their business — including testing out new formats and concepts, investing in technology and digital, and growing their e-commerce capabilities — will be the ones most likely to be successful. Walmart and Kroger are doing a lot of work to create ‘click-and-collect’ locations at their stores and are aggressively testing and rolling out new technology. Traditional grocers over-all need to be proactive and aggressive when looking at their real estate footprint to identify opportunities to invest in those markets and assets that are strong performing so as to profitably maintain and grow their position in these markets and trade areas. By the same token, they may have to make some tough decisions relative to restructuring or pruning markets and/or assets when necessary. They need to be proactive by planning and acting well in advance of a decision being forced on them, such as chronically poor performance or a critical real estate event occurring.

SCB: Who are the formidable players in the grocery business today?

MCKESKA: There are a number of strong regional players, like H-E-B, who are expanding aggressively. I mentioned Lidl earlier, as well as Sprouts, who are both aggressively opening new stores. Trader Joe’s and Aldi are also still expanding. Aldi also has a program to remodel the majority of its stores over the next few years, which will expand the sales area for its fresh foods offering. Publix is also aggressively expanding into new markets as they move up the Eastern Seaboard. The number of new grocery stores overall, however, is slowing dramatically as evidenced by recent announcements from Kroger and Walmart relative to the reduction in the number of new stores they will be building in the future. Instead of aggressively adding new stores, these retailers are focused on strengthening their existing portfolios and improving the productivity of the square footage they have.

SCB: What are the threats to the grocery business today?

MCKESKA: The leading threat is the growth of online sales. In the past, investors have viewed grocery stores as being relatively immune to online sales, but I think that thought process is beginning to shift. It will take time, so it won’t happen as quickly as in other sectors of retail, such as clothing, electronics and soft goods. However, I do think the industry realizes it is coming and will dramatically impact their business in the coming years. In fact, the previously mentioned Food Marketing Institute and Nielsen study estimates that online food-at-home purchases will grow from an estimated 2 percent of the market today to 20 percent by 2025. This represents approximately $100 billion in annual sales and 3,900 brick-and-mortar grocery stores. While it is likely that a significant portion of this growth will come from brick-and-mortar stores adding e-commerce capabilities, the overall impact will be substantial nonetheless.

SCB: How are you working with grocery retailers to mitigate the issues that they have?

MCKESKA: Grocery chains are trying to take a thoughtful approach to developing multi-year real estate strategies in alignment with their longer-term business plans. This is not an easy thing to do these days because of the continual and accelerating shifts taking place in the industry. It is easier to invest in the stores that are doing well and refrain from investing in those that aren’t. Overlaying a broader strategy beginning company-wide, then narrowing down to each market, and finally to individual assets and adjusting investment priorities and return expectations once the portfolio is filtered through these lenses is a wiser approach. We are using this approach to really drill down as to why and where to invest in particular markets and stores.

SCB: Tell us a little bit about your career?

MCKESKA: I have been in the grocery business for close to 25 years in various executive level real estate positions. I started with American Stores in the mid-1990s and moved to Albertsons when they purchased American Stores in 1999. In 2006, Albertsons sold the company in pieces, with the majority of the grocery store assets being sold to SuperValu, where I ultimately ended up running all of real estate until most of the assets were sold to Albertsons LLC in 2013. Until mid-2016, I was head of real estate for Southeastern Grocers, which operates 750 stores under the Bi-Lo, Winn-Dixie, and Harvey’s brands.

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Changing shopper demographics, urban dwellers drive demand for prepared foods across Midwest.

By Kristin Hiller

Heartland Real Estate Business – May 2017

Today’s grocers are catering to the urban shopper and enhancing customer experience to stay competitive in the marketplace. Enter the “grocerant,” a hybrid of the grocery store and restaurant, where customers can pick up their groceries and stay for dinner too. Across the Midwest, the likes of Mariano’s and Whole Foods Market have begun to anchor mixed-use developments.

Whole Foods Market has become known for its salad bar and prepared foods at traditional locations. The retailer launched an additional chain of stores called 365 by Whole Foods to compete on a lower price level. Shoppers can use iPads to order sandwiches, pizza and rice bowls to go, according to JLL’s 2017 Grocer Tracker retail research report, which emphasizes that convenience is leading grocery trends.

Mayfair Collection, a shopping center developed by HSA Commercial in Wauwatosa, Wis., is now home to a Whole Foods that opened last year. The 47,563-square-foot store marked the second location for the Austin, Texas-based company in the Milwaukee area.

Geared toward the local customer, the Wauwatosa location features The Tosa Tavern, which offers local beers on tap with a beer growler refill station. Other specialty departments include a cheese shop, butcher shop, juice bar and seafood market.

Whole Foods locations nationwide offer a variety of prepared foods including delis, pizza ovens, BBQ stations, sushi bars and wine bars. In-store seating areas encourage customers to both shop and dine in.

Mariano’s maintains its own specialty brands within stores, such as Oki Sushi, Todd’s BBQ and Squeez’d juices.

Mariano’s opened a store at 3030 N. Broadway in Chicago last year to anchor a 137,618-square-foot shopping center. This year, the Wisconsin-based grocer will open locations in Des Plaines and Lombard, Ill.

In-store dining and takeout of prepared foods from grocers has increased nearly 30 percent since 2008, according to The NPD Group, a consumer and retail data company. Last year, the market for grocery prepared foods was estimated at $29 billion.

Changing shopper demographics have led to the heavy focus on pre-pared foods and in-store dining.

“Experience and convenience really accommodate the modern family where many households have two working members. They need that ease and quality,” says Sean Sharko, a first vice president with Marcus & Millichap in Chicago.
Mariano’s and Whole Foods are the two chains that do prepared foods best, according to Sharko. Mariano’s purchase by Kroger was big news in the Midwest because it enhanced the credit behind the operator.

For the most part, Mariano’s has dominated the grocery development in Chicago and the suburbs, according to Austin Weisenbeck, also a first vice president with Marcus & Millichap. This domination stems from its willingness to pay the higher rents associated with construction and land costs for prime locations. Jewel-Osco stores, for example, operate with significantly lower rents and older buildings.

“The days of someone building a freestanding grocery store out in the middle of a cornfield are finished. What I do think you’ll see is the re-positioning of stores,” says Michael Havdala, senior vice president with HSA Commercial.

Mixed-use, small-scale
Also impacting the grocery market is the migration to downtown office locations by companies, as more and more employees are opting to live downtown as well. These urban core residents influence the grocery items in demand by looking for quick and convenient options.

“We’re seeing more of the urban consumer who is apt to visit the grocery store two or three times a week and fill up a basket rather than shop for weeks at a time,” says Eric Sheaffer, an associate with CBRE in Minneapolis. “If you can walk to the grocery store, there’s no need to stock up and worry about spoilage.”

Grocers have to adapt to current shopper trends to stay on top of the market. For most, this means scaling down square footage size and zeroing in on the customer’s needs in a specific location. If shoppers are not purchasing many items per visit, grocers don’t need to consistently shelve as large a product offering.

“It doesn’t make sense to have a big superstore in an urban environment. The leasing and construction costs are exorbitantly high,” says Michele Krause, an attorney who specializes in retail and office leasing with Chicago-based Ginsberg Jacobs. “Instead, stores need to have a smaller, more comprehensive selection of what urban consumers want.”
Krause calls it the “urban renewal” of the Midwest, citing not just Chicago but Detroit, Cleveland and Columbus as markets experiencing the growth of the urban core coinciding with smaller grocery concepts.

Sheaffer agrees and emphasizes the adaptability now required of grocers in terms of development.

“Not only do most retailers want to get into smaller footprints, but urban settings often require them to do so. Retailers that want to be in an urban area are going to have to locate in a mixed-use space more often than not,” he says.
Kroger recently unveiled plans for a 35 percent reduction in new-store development, store expansions and relocations in 2017. The Cincinnati-based company’s latest 10-K report filed with the Securities and Exchange Commission lists just 55 new projects planned for the year, in comparison to the 100 listed in last year’s report. Kroger, along with other companies, plans to focus spending more so on remodels and digital initiatives.

Target’s “flexible format” stores have made a splash across the Mid-west, popping up in mixed-use developments. These stores are specially designed for densely populated areas. Last year, Target opened a 20,000-square-foot store in Chicago’s Hyde Park, the company’s fifth flexible format store in the Windy City. The small-scale store occupies the first floor of Vue53 Apartments and offers products catered toward University of Chicago students.

A recent release from the Minneapolis-based company’s website unveils plans for billions of dollars to be invested in repositioning and reimagining Target stores over the next three years. Target will invest heavily in digital efforts and enhancing pick up for online orders.

The retailer expects to completely remodel 110 stores across the country and open 30 new small-format stores in urban neighborhoods or college campuses this year. By 2019, Target plans to fully renovate 500 more stores nationwide.

Click and Collect
Spending capital on remodeling existing stores is a trend longtime grocery veteran Joe McKeska of Oak Brook, Ill.-based Elkhorn Real Estate Partners sees taking precedence over allocating funds for new development. The growth of online shopping is certainly one of the reasons grocers have to rethink and invest in their store formats.

“There is now considerable fragmentation in terms of the number of different channels and different retailers that people shop at on a weekly basis,” says McKeska. “Some of that is due to behavioral change, some is driven by new formats and concepts, and some is driven by the growth of online retailing.”

According to the Digitally Engaged Food Shopper Study compiled by Food Marketing Institute (FMI) and Nielsen, online grocery shopping could reach 20 percent of the food-at-home market by 2025, encompassing $100 billion in annual consumer sales. The growth is projected to be rapid, as the online sector represents just 2 percent of grocery retail currently. FMI advocates on behalf of the food retail industry while Nielsen studies consumer habits.

According to McKeska, this projection of 20 percent doesn’t necessarily encompass just online retailers. He suspects that a majority of these sales will come from traditional grocers expanding their e-commerce capabilities. For example, Kroger and Walmart are currently the biggest and fastest growing players in “click and collect,” where shoppers can order groceries online and pick up at the store.

Walmart is the most advanced in the omnichannel space, according to McKeska. The retailer also owns the majority of its store locations, meaning it can readily add online shopping supplements such as drive-up kiosks without having to get approvals from landlords or other shopping center tenants.

Walmart is currently testing a mobile app that allows shoppers to by-pass the checkout line by scanning items as they shop. Assuming its success, the app will likely become a standard feature in its stores nationwide, according to JLL.

“The grocers that invest in digital and e-commerce technologies are much more likely to be successful as the percentage of online grocery sales grows. If you’re investing now to get ahead of the game, then you’re more likely to survive long term,” says McKeska.

For the most part, sources remain optimistic about the future of the grocery sector in general.

“Grocery is still one of the darling investments for the institutions and even private capital,” says Sharko of Marcus & Millichap. “Necessity-based tenants who appear to be very healthy in the marketplace — that’s where investors want to put their dollars.”

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Retailers are positioning themselves as the online giant’s brick-and­-mortar ambitions unfold

By Joel Groover

Shopping Centers Today – May 2017

Speculation about the real estate role of Amazon.com is growing as more information emerges about its closely held plans for US stores. In metro Houston, to cite one market, brokers watch the local headlines for scoops on the Amazon rollout, and they tend to share any tidbits they happen to run across in the field, says Jason Baker, co­ founder of Houston-based brokerage firm Baker Katz, a member of X Team International. “I’ve been impressed with the way Amazon has kept its real estate plans quiet,” Baker said. “They’re evidently working on dozens of deals, but they have managed the process in such a way that the majority of the locations are still unknown.” In Houston the scuttlebutt is that Amazon is planning to open at least five grocery stores in suburban areas around the city, he says.

Amazon, which did not respond to interview requests for this story, is also leasing a significant amount of space for distribution centers that could be used to fill online orders and the shelves of any new Amazon store in metro Houston. “Without a doubt, Amazon has made a big commitment here from a distribution standpoint,” Baker said. “They just finished construction on 1 million square feet of new space, in addition to what they already have here, and they are evidently working on more.”

According to Bloomberg, which cites internal Amazon documents, Amazon is planning a national rollout of grocery stores next year and could ultimately open as many as 2,000 stores in one format or another. The company reportedly has ambitions to become a top U.S. grocer along the lines of Walmart or Kroger by 2025.That would be a significant development for leasing teams, brokers and landlords across the country, not to mention Amazon’s potential competitors and co-tenants.

But Amazon continues to experiment with brick-and-mortar concepts that could affect the industry in other ways as well, by means of signed leases at shopping centers and through disruptive new technologies, observers say. In addition to pop-up stores and order-pickup kiosks, these efforts include the Amazon Go test store in Seattle (which eliminates cashiers and checkout lines through so-called Just Walk Out shopping); Amazon Books (10 of these stores are open now, with an undisclosed number in the pipeline); and Amazon Restaurants, a service that allows diners to order food for home delivery from hundreds of restaurants. Already available in roughly 25 U.S. cities, Amazon Restaurants stands to drive additional sales at shopping centers that have restaurant tenants.

Amazon’s innovations tend to attract plenty of attention. But how seriously should retailers and developers take the likes of Amazon’s Prime Air drone-delivery program, or its Go store, which uses advanced tech to let shoppers grab stuff off the shelf and leave, no checkout required? The shopping center industry clearly has need to invest in new technologies and respond to change. says Rachel Elias Wein, president of WeinPlus, a real estate consulting firm. But Amazon’s spending famously outstrips its revenue growth, Wein points out, and such an approach would hardly be a fit for traditional grocers, retailers or developers, particularly those beholden to Wall Street. “Jeff Bezos [Amazon’s founder] thinks about new concepts differently,” Wein said. “Where many people choose an idea based on its likelihood of success, he makes his bets based on how big it could be if it were successful. It is an entirely different calculus.”

That is different, to be sure, and it is expensive to boot: In 2016 Amazon ramped up its capital expenditures to some $6.7 billion, up by 46 percent over the previous year. While the company has scored hits with moneymaking businesses like Prime and Amazon Web Services, Wein notes, the relevant question for retail real estate is whether any Amazon experiments that affect real estate will truly catch on. “Amazon Go, AmazonFresh, Amazon [Prime] Now – all of these new attempts may or may not work, ” she said. “But if any one of them takes off, it will be hugely impactful to retail.” With sensors, cameras and machine intelligence borrowed from the development of driverless cars, the Amazon Go initiative is likely to remain small-scale for now, Wein says. “Does Amazon Go make sense? Do we want to go shopping where we can’t find someone to ask for help? I’m not sure,” she said. “For the time being, the approach at Go is likely far too expensive to be profitable.”

Nonetheless, leaders in the U.S. grocery sector are certainly paying attention to the future possibility of stores without need of cashiers, says Joseph McKeska, co-founder and president of Oak Brook, Ill.- based Elkhorn Real Estate Partners. The newly launched firm, which helps grocers and retail real estate investors optimize their portfolios, is a joint venture with A&G Realty Partners. “There’s a lot of buzz about Amazon Go,” McKeska said. “It’s another example of changing dynamics and the disruption that is likely to take place in the industry in coming years.”

Even as Amazon experiments with opening brick-and-mortar stores, some of the nation’s top grocers, including Kroger and Walmart, are scaling back their own real estate expansions, in part to reinvest that money into their stores and ramp up their omnichannel capabilities, notes McKeska, who formerly headed real estate operations for Southeastern Grocers and, earlier in his career, SuperValu. “In the United States Walmart has gone from building 230 new stores in 2015, to 130 stores last year, to 55 this year,” he said. “Over the last four years, excluding acquisitions, Kroger grew its footprint, in terms of number of units, at about 0.4 percent per year. That is a pretty low organic growth rate.”

But by spending to remodel their stores and to develop and test new technologies, chains like Kroger and Walmart are positioning themselves to compete with the likes of Amazon, McKeska says. Kroger’s tech experiments reportedly include sensor-equipped shelves that push product suggestions and promotions to shoppers’ phones, and a faster-checkout initiative that uses a mobile app paired with a handheld wireless device. This latter system, dubbed Scan, Bag, Go, enables shoppers to scan items and put them in their carts as they walk through the score; Kroger reportedly wants to link this to mobile payment technology, which could cut cashiers out of the process much like Amazon Go.

Amazon has opened at least 16 click-and-collect kiosks on college campuses since 2015 in a bid to bring free same-day pickup to students who are Prime members. Meanwhile, its Prime Now service offers two-hour free delivery to members in at least 30 U.S. cities. According to McKeska, national grocers are feeling the pressure from these and other efforts and have responded with big investments of their own. “Grocers are developing their own digital and e-commerce capabilities,” he said. “Walmart, which has roughly 4,300 stores in the United States, now offers online pickup at 600 stores and it wants to double that by next year.” Kroger, meanwhile, offers its ClickList online-ordering and pickup program at about 440 of its roughly 2,800 stores. “Many of the ClickList facilities are neatly designed in that they include elements such as drive-through check-in kiosks and covered, dedicated parking stalls for order pickup,” McKeska said.

But grocers and other retailers are not yet paying enough attention to the powerful potential of Internet­ connected, voice-activated speakers such as those now sold by both Amazon and Google, according to Los Angeles-based technologist Brian Roemmele, founder of the tech­ focused Multiplex Magazine and CEO of Pay Finders. Users of Amazon’s Echo products can restock their kitchens simply by saying. “Alexa, order coffee,” or “Alexa, reorder paper towels.” But just as most retailers initially failed to see how the Internet could transform shopping, the national chains are once again allowing Amazon to take the lead on a revolution in commerce, Roemmele says. “The shortest distance from the store to your kitchen is the Echo device,” he said. “If you are in the consumer’s kitchen, you are literally in their home. I call it the ‘voice first revolution.'”

Retailers should be racing to figure out how to be a part of this revolution, most likely through strategic partnerships that leave the expensive development of hardware and infrastructure to third-party tech firms, Roemmele says. This past February, in fact, Google announced that Google Home users can now voice-shop retailers that belong to the Google Express program. That list includes Bed Bath & Beyond, Costco, PetSmart, Walgreens, Whole Foods Market and about 50 others.

Thanks to inevitable advances in artificial intelligence, Roemmele notes, devices like Amazon Echo and Google Home will intimately “know” their users’ sizes, favorite brands, restocking needs and more in ways that confer a competitive edge. The devices could also be used to enable purchases that involve brick-and-­mortar real estate: A shopper could tell Alexa to order some more socks for pickup at the Walmart kiosk on the way home from work. “It will know your intent and exactly what you mean by ‘socks,’” Roemmele said. “This is really a journey the retailers need to be on. Why wouldn’t you want to be in somebody’s kitchen?”

As McKeska sees it, competition from Amazon will be even more intense in the years to come, thanks to the continued growth of Echo. In particular, he says, shoppers will get in the habit of using voice commands to restock commoditized items found in the center of most grocery stores. Citing projections by the Food Marketing Institute and Nielsen, McKeska says that by 2025, online sales could account for up to 40 percent of food-at-home grocery purchases in the center store category. “Eventually, new homes will start to be built with some of this technology integrated into them,” he said. “You could see a day in which Alexa interacts with a shelf that has a sensor in it and then prompts you to order more paper towels because you’re running low.”

Even as retailers seek to respond to trends typified by Amazon, more developers are thinking harder about how their projects need to change to meet shopper needs in the omni­channel era, says architect Kevin M. Zak, a principal who specializes in retail and mixed-use projects for Cleveland-based Dorsky & Yue International. Poag Shopping Centers, for one, specifically asked Dorsky & Yue to think about these trends in the design of Poag’s 250,000-square­ foot expansion of Spring Creek Plaza, in Edmond, Okla. Initial plans for the creek-side project include green space, a cinema, restaurants, a grocery and apartments, Zak notes, but the architects are also studying how to integrate new realities such as click-and-collect into the design. “We’re sitting down with Poag’s leasing and development teams to design the center around all of the different ways people order and buy product, how they pick it up and that type of thing,” Zak said. “We want this center to be out ahead of these trends.” It is slated to break ground later this year.

Retailers and developers are also working to compete in an area in which Amazon has a clear edge: knowing customers well enough to give them personalized experiences, says Ron Tannenbaum, a Dorsky & Yue architect. “Thanks to search histories and past purchases, Amazon knows exactly who you are and how you shop,” he said. “But how does that translate into the [brick-and-­mortar] retail environment? How does that work in terms of being able to identify your customer or make recommendations?” While the answer certainly includes such technology as beacons that scan and analyze shoppers’ always-on cellphone signals, in some cases old-school approaches might actually work better, Tannenbaum says. “People going to brick-and-mortar stores are looking to experts, the people in the store, to provide recommendations,” he said. “They want to work with them.” And so retail developers are on the right track when they add concierge-type services to their properties, he says. By holding shoppers’ bags for later delivery to their cars or homes, or by processing shoppers’ returns so they do not have to walk to multiple retailers themselves, developers stand to bring more Amazon-like convenience to their centers.

Even Amazon’s brick-and-­mortar stores may offer clues for existing chains seeking to improve the customer experience or to ramp up convenience, Tannenbaum says. Amazon’s new bookstores, for example, are not focused on warehousing huge quantities of diverse titles along the lines of, say, Powell’s Books, in Portland, Ore. Instead, the Amazon stores carry a smaller selection of carefully chosen titles. The books are stocked with their covers facing out, much as they would appear on Amazon.com. Printouts of actual customer reviews often accompany the titles, under such signage as Highly Rated: 4.8 Stars & Above, or Books with More Than 10,000 Reviews on Amazon.com. Retailers are noticing these data-driven and customer-friendly efforts already, says Tannenbaum. “They are trying to adjust accordingly,” he said. “Amazon is a bit of a role model for the industry right now, even for brick-and-mortar.”

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