COVER STORY: Sites for sore eyes
Back in the 1970s it was common for supermarket executives to pile into a van, drive to a potential store site, and size up the deal in mere minutes. "They'd use the old gut feel," recalls Matt Casey, a former supermarket executive who now owns a premier real estate research group based in Pennsylvania.
That kind of instinctive site selection today might be equated to a game of Russian roulette, considering the number of retailers competing for prime sites, often in over-stored areas. With the likes of Wal-Mart, Target, Whole Foods, dollar stores, warehouse clubs, and others in the running, supermarkets need to do their homework like never before when it comes to staking out new areas for growth. The more they know about a potential marketing area -- including the presence of competition, demographic makeup, and possibilities for expansion -- the better prepared they'll be to jump quickly on new opportunities.
It's not that prospective sites aren't out there. Bankruptcies and retrenchments continue to open up space in many parts of the country. But the stakes are definitely higher. The costs of construction and leasing will continue to rise, as will just about everything else connected to new store growth. The challenge is prompting operators to become sharper and more creative real estate players than ever.
Casey maintains that site selection may be no more important than it was 20 years ago: "You're still dealing with millions of dollars per location." The change, however, is in its complexity, he says. "It's just more difficult, so you need to be more diligent in your research than in the old days. There are so many more things to look at today."
For one, demographic analyses must go hand in hand with basic population reports as retailers pay closer attention than ever to the customers they'll be serving.
"It used to be that when retailers looked for a new location, that implied considering mainly population, road pattern, and the competitive environment," notes Joe Gilchrist, director of real estate at Clemens Family Markets in Kulpsville, Pa. "Today you have the addition of looking at how the format you have fits with that population. There's more of a link between the real estate and marketing functions. And that requires corporate discipline."
Clemens, for example, operates three distinct formats to serve various consumer groups in Pennsylvania: Clemens Markets, a traditional format; Foodsource, a smaller gourmet/specialty store; and Save-A-Lot (the company is the licensee for those stores in the southeastern part of the state).
"One format cannot fit all places," Gilchrist continues. "We recognize that Clemens Markets is the format for most of the area, but there are certain high-income areas where there isn't a lot of space, where instead of getting a 50,000- or 60,000-square-foot store, we can put in a 20,000-square-foot specialty market."
Risky business
For many retailers site selection is a more closely watched budget line these days, too. "Real estate uses more of a capital budget than anything else in a retail environment," Gilchrist notes. "It can make or break a company. If you make the wrong decision on a real estate matter, it can be disastrous."
Some of the more conservative, penny-pinching supermarket operators have consequently slowed down their new store growth. According to the Food Marketing Institute, the proportion of newly constructed stores has been on the decline for several years.
However, new stores are still essential to industry growth, observers agree; retailers just need to be careful to apply what Casey calls "smart growth." "You can't build new stores for the sake of pleasing Wall Street or telling your stockholders that you built 24 new stores last year," he says. "If it isn't smart growth in the right location, then it isn't worth it."
Plenty of chains and independents are strategically mapping out new stores in both established markets and new areas, and some are getting rather creative at it. Pittsburgh-based Giant Eagle, for example, uses tried-and-true sites in shopping centers, but also more unusual properties, such as the Waterfront development, a residential lifestyle center in Pittsburgh that was formerly the site of a steel mill. The Waterfront project was presented to the company by Frank Kass of Continental Development in Columbus, Ohio, notes Shelly Sponholz, s.v.p. of real estate and asset management at Giant Eagle. "One of the primary goals of our real estate department is to foster relationships that will help make Giant Eagle the 'supermarket retailer of choice' for new developments throughout the region," she says.
Networking with developers and community officials is crucial today, Clemens' Gilchrist observes. "You need to keep those contacts up and build your relationships so that your name is at the top of the list when a developer is planning a shopping center." Along with that, however, "supermarket operators have to be proactive in going out on their own, looking at tax maps and zoning maps, and picking a location that suits them," he says.
When scouting new locations, retailers should be thinking beyond just one site, Gilchrist continues. "Back 10 or 15 years ago, retailers were more site-specific, meaning that they tended to evaluate each site on its own merits. Today you should really take a comprehensive view of a region when you're planning for expansion. You don't want to take a site that may prevent you from taking other sites."
Don't misjudge the competition
As retailers do the background work, they must be attuned to what the competition is up to, Casey and others note. "Retailers need to scour the marketplace, visit the planning boards, and talk to the development community. They need to know if there's a Wal-Mart supercenter proposed two miles away. If they don't see what their competition is up to, they could make a multimillion-dollar mistake. I've seen it happen time and time again," Casey says.
Often chains underestimate the competition in an area, particularly the independent operators, he adds. "A lot of times ego gets in the way. They assume their competitor will have to close once they open a store there.
"The independent operator may be owned by a family that's been in the business for 72 years. You don't know what their financial picture looks like," he continues.
Bruce Kamph, v.p. of strategic development at Dallas-based BridgePoint Solutions Group, agrees. "A common perception has been that the independent grocer is the weakest link in a market. In many cases nothing could be further from the truth. The independent is usually tied closely to the community, has been there for two or more generations, and has a history of reacting to the changing needs of the market."
As for sizing up Wal-Mart, few would argue against its stature as a competitive threat. But some supermarkets are still choosing to build near Wal-Mart stores, especially those who feel they have a strong point of differentiation. In Oxford, Pa., Redner's Markets, Inc. recently broke ground for a 56,000-square-foot upscale Warehouse Market that will be across the street from a power center including a Wal-Mart supercenter. "Redner's is an outstanding supermarket that's well positioned for the future," says Carlton Smith, managing member of Prime Sites Realty, which works with Redner's to develop new sites. "You can't hide from Wal-Mart, and you can't run from them. Sooner or later they'll come to your doorstep."
West Coast retailers and developers can certainly relate as Wal-Mart beefs up its store base in states such as Nevada, Arizona, and, most recently, California. "We don't buy or develop a property unless we can make an educated guess on where Wal-Mart's going," says Patrick Donahue, president of Donahue Schriber, a Costa Mesa, Calif.-based developer and acquirer of neighborhood shopping centers. "Having said that, we just bought a property in Gilbert, Ariz. across the street from a Wal-Mart supercenter, and we're going to build a Henry's Marketplace, which is a concept of Wild Oats. We're very optimistic that it will compete effectively in that marketplace, because it has a tremendous differentiation. So it's not that you don't compete against Wal-Mart, but to go in without your eyes open would be a big mistake."
The anchor still holds
In addition to Wal-Mart, there are lots of other competitors that could encroach on a retailer's space, both literally and figuratively. Yet sometimes those players aren't on grocers' radar screens. "I know market research consultants who don't even visit the Costco's, BJ's, and Sam's Clubs when they're evaluating a location for a supermarket," Casey observes. "Many of these clubs average $200,000-plus in the meat department alone. You have to recognize them as competitors."
Some shopping center developers that include supermarkets as anchors are reconfiguring their tenant bases to brace for the competition. "The Wal-Mart threat would behoove developers to have as little local store space as possible, emphasizing the importance of the anchor tenant, which is the supermarket in our case," says Chaim Katzman, chairman and c.e.o. of Equity One, Inc., a real estate investment trust based in North Miami Beach, Fla. "I think we'll see more and more freestanding supermarkets, or supermarkets with a minimum amount of stores. At the other extreme we'll see community centers with three, four, or five anchors put together to create critical mass to compete successfully against the Wal-Marts of the world."
Lease agreements have also been affected by competition, adds Claudia Steeb, managing director at the Pittsburgh office of Holliday Fenoglio Fowler (HFF), one of the country's largest commercial real estate capital intermediaries. "Supermarkets are being a lot more careful about how they're structuring leases and what they're allowing in terms of exclusivity." Landlords have gotten smarter, too, she notes. "You don't see as many landlords doing 25-year fixed-rent leases. Twenty years ago, you did."
Some supermarkets have opted to own their own shopping centers and therefore have more control over the tenant mix. St. Louis-based Dierbergs Markets, Inc. has owned its own real estate for the past eight years, according to the company's director of real estate, Jerry Ebest. Not surprisingly, the company relies heavily on demographics and new homes when looking for potential sites, but its outlook is a bit different from that of other retailers.
"We look at real estate as a profit center and as a way to enhance our stores. One of our philosophies is that we want customers to think of Dierbergs first if they're going to be grocery shopping. But at the same time, we want them to think about our centers. If we have enough attractive tenants in our centers, customers will want to stop and shop there. The best tenants to us are obviously those that pay rent and have the probability of being successful, but, more importantly, are viewed by the customers as significant to their shopping interests," says Ebest.
As is the nature of shopping centers -- regardless of whether a supermarket owns them -- there's sure to be some degree of site swapping as companies go out of business or decide to sell off sites that have been unprofitable. In the past decade names such as Bradlees, Jamesway, and, more recently, Kmart have been equated with available real estate. Atlanta-based home improvement company Home Depot, for example, recently announced that it has agreed to buy as many as 24 stores from Kmart Holding Corp. for $365 million. "I'm certain that any astute supermarket company has a list of the Kmarts in their trade areas that may potentially close," Casey says. "If they don't have that list, shame on them, because they're behind their peers."
Creative thinking
As cost-cutting retailers such as Winn-Dixie pare their portfolios, other opportunities will arise. Giant Eagle, for example, recently acquired nine former Big Bear locations from Penn Traffic Co. in the Columbus, Ohio market area. "This strategic acquisition supported and enhanced our existing supermarket base in Columbus, which consisted of five locations that were developed from the ground up," notes Sponholz.
To some degree, however, reuse of retail properties is beginning to play out, especially in denser, over-stored areas such as parts of the Northeast. As a result developers have been thinking even further outside the box. "Being creative today would include environmental cleanup sites and teardowns of nonretail, industrial buildings," observes Smith of Prime Sites. "We're starting to see churches sell properties, for example. While you'd need to tear that down for retail, we're currently looking at a church property for a smaller center that would include a convenience store and drug store."
One retailer operating in the New England area got dibs on a center built at the site of a former car-manufacturing facility, according to HFF's Steeb. "The site was developed into a small shopping center with a supermarket, home improvement store, and office supply store, and also included a gas station and bank out front. The companies had to go through environmental testing and cleanup, which was a long process, but they had the time. It was a strong location right on a major thoroughfare through the area," she says.
Chains operating on the West Coast are also starting to explore less conventional locations, particularly infill locations in dense areas where population base is largely in place and demographics are known. "The infill is more complicated for grocers because it involves different operational issues," observes Mark Whitfield, e.v.p. of development at Donahue Schriber. "They have to be much more creative and much more specific to the site and location. You may have to consider a conveyor belt for the carts, or parking on the second level or rooftop.
"With the small operating margins grocers say they operate under, they haven't created a formula for doing that type of project on an infill basis," Whitfield continues. "But they're all looking at it right now."
A number of retailers throughout the country are grappling with how they might better serve inner cities, which many observers consider to have untapped potential. Cities such as Philadelphia are launching initiatives that would offer tax advantages for supermarkets coming into urban areas. Still, since inner cities are equated with higher operating costs, some supermarkets are choosing to stay away.
For those willing to rise to the challenge, one Seattle-based architect who specializes in store design says his firm, NBBJ, is exploring ideas for how to make inner-city retailing more successful. "There's a great need to have excellent, well-stocked, workable grocery stores in downtown environments. We'd like to see stores like Whole Foods adapt their concepts into smaller spaces that could fit in urban locations," notes Andrew McCune. "One idea is that there might be a circuit of various grocery stores that shares a distribution infrastructure. In that sense they wouldn't have to necessarily have all the groceries, all the shelves, and all the square footage in one place. They'd benefit from a greater selection without having to dedicate so much space to it."
Building costs build up
Nonetheless, even if ideas such as McCune's help retailers control operating costs, other challenges lie ahead in terms of site selection, namely higher building costs. "Since we're a world economy, we're being impacted dramatically by the oil crisis," notes Clemens' Gilchrist. "The price of steel has jumped so much it has added at least 10 percent to the cost of getting one of our units built.
"Looking into the future, not only are we going to have rising rents, we're going to have rising costs of construction," he adds. "When you think of oil, just think of parking lots -- the asphalt. From a development standpoint all retailers should be cognizant of that, moving forward."
It's a lot to think about, indeed. But whether it's building costs, population estimates, demographics, or all of the above, the more retailers know, the better prepared they are to find the sites that best suit their stores and to snatch up those locations before their competitors do.
That kind of instinctive site selection today might be equated to a game of Russian roulette, considering the number of retailers competing for prime sites, often in over-stored areas. With the likes of Wal-Mart, Target, Whole Foods, dollar stores, warehouse clubs, and others in the running, supermarkets need to do their homework like never before when it comes to staking out new areas for growth. The more they know about a potential marketing area -- including the presence of competition, demographic makeup, and possibilities for expansion -- the better prepared they'll be to jump quickly on new opportunities.
It's not that prospective sites aren't out there. Bankruptcies and retrenchments continue to open up space in many parts of the country. But the stakes are definitely higher. The costs of construction and leasing will continue to rise, as will just about everything else connected to new store growth. The challenge is prompting operators to become sharper and more creative real estate players than ever.
Casey maintains that site selection may be no more important than it was 20 years ago: "You're still dealing with millions of dollars per location." The change, however, is in its complexity, he says. "It's just more difficult, so you need to be more diligent in your research than in the old days. There are so many more things to look at today."
For one, demographic analyses must go hand in hand with basic population reports as retailers pay closer attention than ever to the customers they'll be serving.
"It used to be that when retailers looked for a new location, that implied considering mainly population, road pattern, and the competitive environment," notes Joe Gilchrist, director of real estate at Clemens Family Markets in Kulpsville, Pa. "Today you have the addition of looking at how the format you have fits with that population. There's more of a link between the real estate and marketing functions. And that requires corporate discipline."
Clemens, for example, operates three distinct formats to serve various consumer groups in Pennsylvania: Clemens Markets, a traditional format; Foodsource, a smaller gourmet/specialty store; and Save-A-Lot (the company is the licensee for those stores in the southeastern part of the state).
"One format cannot fit all places," Gilchrist continues. "We recognize that Clemens Markets is the format for most of the area, but there are certain high-income areas where there isn't a lot of space, where instead of getting a 50,000- or 60,000-square-foot store, we can put in a 20,000-square-foot specialty market."
Risky business
For many retailers site selection is a more closely watched budget line these days, too. "Real estate uses more of a capital budget than anything else in a retail environment," Gilchrist notes. "It can make or break a company. If you make the wrong decision on a real estate matter, it can be disastrous."
Some of the more conservative, penny-pinching supermarket operators have consequently slowed down their new store growth. According to the Food Marketing Institute, the proportion of newly constructed stores has been on the decline for several years.
However, new stores are still essential to industry growth, observers agree; retailers just need to be careful to apply what Casey calls "smart growth." "You can't build new stores for the sake of pleasing Wall Street or telling your stockholders that you built 24 new stores last year," he says. "If it isn't smart growth in the right location, then it isn't worth it."
Plenty of chains and independents are strategically mapping out new stores in both established markets and new areas, and some are getting rather creative at it. Pittsburgh-based Giant Eagle, for example, uses tried-and-true sites in shopping centers, but also more unusual properties, such as the Waterfront development, a residential lifestyle center in Pittsburgh that was formerly the site of a steel mill. The Waterfront project was presented to the company by Frank Kass of Continental Development in Columbus, Ohio, notes Shelly Sponholz, s.v.p. of real estate and asset management at Giant Eagle. "One of the primary goals of our real estate department is to foster relationships that will help make Giant Eagle the 'supermarket retailer of choice' for new developments throughout the region," she says.
Networking with developers and community officials is crucial today, Clemens' Gilchrist observes. "You need to keep those contacts up and build your relationships so that your name is at the top of the list when a developer is planning a shopping center." Along with that, however, "supermarket operators have to be proactive in going out on their own, looking at tax maps and zoning maps, and picking a location that suits them," he says.
When scouting new locations, retailers should be thinking beyond just one site, Gilchrist continues. "Back 10 or 15 years ago, retailers were more site-specific, meaning that they tended to evaluate each site on its own merits. Today you should really take a comprehensive view of a region when you're planning for expansion. You don't want to take a site that may prevent you from taking other sites."
Don't misjudge the competition
As retailers do the background work, they must be attuned to what the competition is up to, Casey and others note. "Retailers need to scour the marketplace, visit the planning boards, and talk to the development community. They need to know if there's a Wal-Mart supercenter proposed two miles away. If they don't see what their competition is up to, they could make a multimillion-dollar mistake. I've seen it happen time and time again," Casey says.
Often chains underestimate the competition in an area, particularly the independent operators, he adds. "A lot of times ego gets in the way. They assume their competitor will have to close once they open a store there.
"The independent operator may be owned by a family that's been in the business for 72 years. You don't know what their financial picture looks like," he continues.
Bruce Kamph, v.p. of strategic development at Dallas-based BridgePoint Solutions Group, agrees. "A common perception has been that the independent grocer is the weakest link in a market. In many cases nothing could be further from the truth. The independent is usually tied closely to the community, has been there for two or more generations, and has a history of reacting to the changing needs of the market."
As for sizing up Wal-Mart, few would argue against its stature as a competitive threat. But some supermarkets are still choosing to build near Wal-Mart stores, especially those who feel they have a strong point of differentiation. In Oxford, Pa., Redner's Markets, Inc. recently broke ground for a 56,000-square-foot upscale Warehouse Market that will be across the street from a power center including a Wal-Mart supercenter. "Redner's is an outstanding supermarket that's well positioned for the future," says Carlton Smith, managing member of Prime Sites Realty, which works with Redner's to develop new sites. "You can't hide from Wal-Mart, and you can't run from them. Sooner or later they'll come to your doorstep."
West Coast retailers and developers can certainly relate as Wal-Mart beefs up its store base in states such as Nevada, Arizona, and, most recently, California. "We don't buy or develop a property unless we can make an educated guess on where Wal-Mart's going," says Patrick Donahue, president of Donahue Schriber, a Costa Mesa, Calif.-based developer and acquirer of neighborhood shopping centers. "Having said that, we just bought a property in Gilbert, Ariz. across the street from a Wal-Mart supercenter, and we're going to build a Henry's Marketplace, which is a concept of Wild Oats. We're very optimistic that it will compete effectively in that marketplace, because it has a tremendous differentiation. So it's not that you don't compete against Wal-Mart, but to go in without your eyes open would be a big mistake."
The anchor still holds
In addition to Wal-Mart, there are lots of other competitors that could encroach on a retailer's space, both literally and figuratively. Yet sometimes those players aren't on grocers' radar screens. "I know market research consultants who don't even visit the Costco's, BJ's, and Sam's Clubs when they're evaluating a location for a supermarket," Casey observes. "Many of these clubs average $200,000-plus in the meat department alone. You have to recognize them as competitors."
Some shopping center developers that include supermarkets as anchors are reconfiguring their tenant bases to brace for the competition. "The Wal-Mart threat would behoove developers to have as little local store space as possible, emphasizing the importance of the anchor tenant, which is the supermarket in our case," says Chaim Katzman, chairman and c.e.o. of Equity One, Inc., a real estate investment trust based in North Miami Beach, Fla. "I think we'll see more and more freestanding supermarkets, or supermarkets with a minimum amount of stores. At the other extreme we'll see community centers with three, four, or five anchors put together to create critical mass to compete successfully against the Wal-Marts of the world."
Lease agreements have also been affected by competition, adds Claudia Steeb, managing director at the Pittsburgh office of Holliday Fenoglio Fowler (HFF), one of the country's largest commercial real estate capital intermediaries. "Supermarkets are being a lot more careful about how they're structuring leases and what they're allowing in terms of exclusivity." Landlords have gotten smarter, too, she notes. "You don't see as many landlords doing 25-year fixed-rent leases. Twenty years ago, you did."
Some supermarkets have opted to own their own shopping centers and therefore have more control over the tenant mix. St. Louis-based Dierbergs Markets, Inc. has owned its own real estate for the past eight years, according to the company's director of real estate, Jerry Ebest. Not surprisingly, the company relies heavily on demographics and new homes when looking for potential sites, but its outlook is a bit different from that of other retailers.
"We look at real estate as a profit center and as a way to enhance our stores. One of our philosophies is that we want customers to think of Dierbergs first if they're going to be grocery shopping. But at the same time, we want them to think about our centers. If we have enough attractive tenants in our centers, customers will want to stop and shop there. The best tenants to us are obviously those that pay rent and have the probability of being successful, but, more importantly, are viewed by the customers as significant to their shopping interests," says Ebest.
As is the nature of shopping centers -- regardless of whether a supermarket owns them -- there's sure to be some degree of site swapping as companies go out of business or decide to sell off sites that have been unprofitable. In the past decade names such as Bradlees, Jamesway, and, more recently, Kmart have been equated with available real estate. Atlanta-based home improvement company Home Depot, for example, recently announced that it has agreed to buy as many as 24 stores from Kmart Holding Corp. for $365 million. "I'm certain that any astute supermarket company has a list of the Kmarts in their trade areas that may potentially close," Casey says. "If they don't have that list, shame on them, because they're behind their peers."
Creative thinking
As cost-cutting retailers such as Winn-Dixie pare their portfolios, other opportunities will arise. Giant Eagle, for example, recently acquired nine former Big Bear locations from Penn Traffic Co. in the Columbus, Ohio market area. "This strategic acquisition supported and enhanced our existing supermarket base in Columbus, which consisted of five locations that were developed from the ground up," notes Sponholz.
To some degree, however, reuse of retail properties is beginning to play out, especially in denser, over-stored areas such as parts of the Northeast. As a result developers have been thinking even further outside the box. "Being creative today would include environmental cleanup sites and teardowns of nonretail, industrial buildings," observes Smith of Prime Sites. "We're starting to see churches sell properties, for example. While you'd need to tear that down for retail, we're currently looking at a church property for a smaller center that would include a convenience store and drug store."
One retailer operating in the New England area got dibs on a center built at the site of a former car-manufacturing facility, according to HFF's Steeb. "The site was developed into a small shopping center with a supermarket, home improvement store, and office supply store, and also included a gas station and bank out front. The companies had to go through environmental testing and cleanup, which was a long process, but they had the time. It was a strong location right on a major thoroughfare through the area," she says.
Chains operating on the West Coast are also starting to explore less conventional locations, particularly infill locations in dense areas where population base is largely in place and demographics are known. "The infill is more complicated for grocers because it involves different operational issues," observes Mark Whitfield, e.v.p. of development at Donahue Schriber. "They have to be much more creative and much more specific to the site and location. You may have to consider a conveyor belt for the carts, or parking on the second level or rooftop.
"With the small operating margins grocers say they operate under, they haven't created a formula for doing that type of project on an infill basis," Whitfield continues. "But they're all looking at it right now."
A number of retailers throughout the country are grappling with how they might better serve inner cities, which many observers consider to have untapped potential. Cities such as Philadelphia are launching initiatives that would offer tax advantages for supermarkets coming into urban areas. Still, since inner cities are equated with higher operating costs, some supermarkets are choosing to stay away.
For those willing to rise to the challenge, one Seattle-based architect who specializes in store design says his firm, NBBJ, is exploring ideas for how to make inner-city retailing more successful. "There's a great need to have excellent, well-stocked, workable grocery stores in downtown environments. We'd like to see stores like Whole Foods adapt their concepts into smaller spaces that could fit in urban locations," notes Andrew McCune. "One idea is that there might be a circuit of various grocery stores that shares a distribution infrastructure. In that sense they wouldn't have to necessarily have all the groceries, all the shelves, and all the square footage in one place. They'd benefit from a greater selection without having to dedicate so much space to it."
Building costs build up
Nonetheless, even if ideas such as McCune's help retailers control operating costs, other challenges lie ahead in terms of site selection, namely higher building costs. "Since we're a world economy, we're being impacted dramatically by the oil crisis," notes Clemens' Gilchrist. "The price of steel has jumped so much it has added at least 10 percent to the cost of getting one of our units built.
"Looking into the future, not only are we going to have rising rents, we're going to have rising costs of construction," he adds. "When you think of oil, just think of parking lots -- the asphalt. From a development standpoint all retailers should be cognizant of that, moving forward."
It's a lot to think about, indeed. But whether it's building costs, population estimates, demographics, or all of the above, the more retailers know, the better prepared they are to find the sites that best suit their stores and to snatch up those locations before their competitors do.