Northeast Real Estate Business

NOV-DEC 2015

Northeast Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Northeast United States.

Issue link:

Contents of this Issue


Page 36 of 64

36 • November/December 2015 • Northeast Real Estate Business R E TA I L S N A P S H O T: B O S T O N While demand for all types of re- tail product has been strong over the past few years, investors continue to have a strong appetite for Boston area grocery-anchored shopping centers in 2015 despite meaningful changes to the food distribution industry. The competitive landscape for tra- ditional supermarkets is evolving as value-oriented grocers such as Mar- ket Basket, Walmart, Trader Joe's, Aldi, and Save-A-Lot lure away price- conscious customers, while service- oriented formats such as Wegmans, Whole Foods and Roche Brothers are expanding and gaining market share with more affuent customers. These chains achieve success by targeting the low- and high-end niches of the market. According to IBISWorld, the online grocery sales industry is projected to increase approximately 9.5 percent annually to become a $9.4 billion in- dustry by 2017. Companies such as Amazon and Walmart are increas- ing their capabilities for selling food and beverages online, and Ahold's Peapod service continues to expand in an effort to maintain its position as the leading Internet grocer. The food distribution industry has been further saturated by big-box retailers and national pharmacy chains offer- ing a growing selection of packaged goods and dairy products. These non- traditional grocers and e-commerce providers derive much of their profts from non-food items, allowing them to challenge the already thin margins of traditional grocers. Traditional supermarkets have been forced to adapt to compete with the infux of grocery options. Not sur- prisingly, the supermarket sector has been one of the most active markets for mergers and acquisitions as retail- ers recognize that is it easier to gain market share and economies-of-scale through acquisition than through organic growth. The recent Ahold- Delhaize merger consolidates four established supermarket chains in the U.S.: Stop & Shop (131 stores in Massachusetts), Giant, Food Lion, and Hannaford (25 stores in Massa- chusetts). The merger allows the par- ent company to lower operating and purchasing costs to keep up with the increasing competition. Similarly, ear- lier this year, under an investor group led by Cerberus Capital Management, Albertsons acquired all outstanding shares of Safeway Inc. The merger consolidates a network of more than 2,200 stores under one umbrella, in- cluding New England chains Shaw's (51 stores in Massachusetts) and Star Market (17 stores in Massachusetts). On October 4, Albertsons set pricing for its initial public offering at $1.9 bil- lion in an SEC fling with plans to use the proceeds to pay down debt and fund future growth plans. While the latest mergers serve as great short-term strategies for these grocers to lower overhead costs, it has never been more competitive for supermarkets as retailers continue to strategize and compete for market share in new ways. Market Basket (46 stores in Massachusetts), one of the Boston area's most popular grocers, has been very successful at deliver- ing low prices and substantial prof- its by operating with low corporate overhead and leverage levels, buy- ing a consistent array of products, and maintaining an experienced and extremely loyal non-union work- force. Whole Foods' new value-con- cept chain, which will be introduced within the year, comes after the com- pany has been scrutinized for its high prices. Rather than altering its origi- nal business model, Whole Foods has chosen to introduce a distinct value- conscious chain called 365, which tar- gets customers on the other end of the spectrum. Likewise, Ahold, Stop & Shop's parent, just opened a new, gro- cery concept called bfresh in a former Staples store on Harvard Avenue in Allston, Massachusetts, in September. The smaller scale store differs from the traditional Stop & Shop stores in the area, and is designed to offer fresh produce and a wide range of take-out options to draw the area's large stu- dent population. The recent surge in residential de- velopment in Boston has grocers vy- ing for their share of emerging 24/7 neighborhoods. With more than 8,459 recently completed residential apart- ment units in the downtown/outer urban Boston market and an addition- al 5,468 units slated for delivery over the next 18 months, grocery retailers are sprouting nearby to meet the in- creased demand. With limited tradi- tional grocery-retail space available in these areas, big-name grocers are either replacing local and regional grocers or signing on to anchor large redevelop- ments in order to secure their share of the market. Whole Foods has utilized both strategies to increase its pres- ence in Boston by replacing Johnnie's Foodmaster in Brookline, Charles- town and Somerville, and opening its new anchor store at the former Boston Herald site in the South End. Other examples include Roche Bros.' new store in the historic Filene's Basement redevelopment, Star Market's recently signed lease to operate a store in the mixed-used North Station project, and Wegmans' plans to anchor the rehabil- itation of historic Landmark Center in the Fenway neighborhood. The new stores in these urban locations cater to a customer that is likely to buy fewer items on a typical shopping trip by emphasizing smaller portions, fresh produce and prepared foods. Traditional grocers like Stop & Shop, Hannaford and Shaw's have domi- nated the Boston area grocery market for years offering middle-of-the-road prices and modest services/prepared foods. However their competitors' ag- gressive focus on either the value or service-oriented format is forcing tra- ditional grocers to rethink their mar- keting strategy. We have already seen them adapt to meet changing consum- er tastes with more organic food op- tions, health-conscious sections and allergy-friendly aisles. While the growing diversity of su- permarket formats presents a healthy choice for consumers, it also creates an environment where grocers are constantly battling for market share. And while the changing dynamics in the grocery sector have some inves- tors wary, the changes do not seem to deter them from paying aggressive prices for the highest volume stores in the best locations. Recently, niche grocers like Whole Foods have com- manded the lowest cap rates (sub-5 percent), but all grocery-anchored shopping centers continue to garner signifcant investor interest. The supermarket sector has been one of the most active markets for mergers and acquisitions as retailers look to gain market share and economies of scale. Jim Koury Senior Managing Director, HFF BOSTON'S BATTLE OF THE GROCERS ACQUISITION-EXPANSION • DEBT T0 EQUITY SBA - USDA - CMBS LaSalle BNS Capital Markets of Chicago 35 East Wacker Drive Suite 900 Chicago, Illinois 60601 CHARLOTTE CHICAGO ATLANTA 844-238-8538 844-238-8539 708-996-4416

Articles in this issue

Links on this page

Archives of this issue

view archives of Northeast Real Estate Business - NOV-DEC 2015