Stability Among the Chaos: Grocery Stores Prove Their Value as Anchors

Archived Articles on Pensacola Commercial Real Estate

Written by Sasha M Pardy (spardy@costar.com) January 13, 2010

Investors and Competitors Vy to Acquire Grocery Store Chains; Supermarket Retailers Continue to Grow Footprints; Stability of Category Buoys Neighborhood Centers

During this recession, several retail chains have filed bankruptcy and met the fate of liquidation, while others have attempted to sell their companies fruitlessly and been forced to close stores. This is not the case for the grocery sector, however. Whether healthy or bankrupt, grocery store chains have proven attractive investment targets with a number of them sold, or in the process of being acquired by competitors or private equity companies over the course of the last year.

The latest news comes from Buffalo, NY-based grocery store operator, Tops Friendly Markets, which intends to acquire most of the assets of bankrupt Penn Traffic, a grocery chain that has been in Chapter 11 since November. Tops has proposed an $85 million bid to acquire all of Penn Traffic's 79 stores, while Schenectady, NY-based Price Chopper has offered $54 million to take over 22 stores. Tops also said it would eliminate $100 million in unsecured claims against Penn Traffic's estate.

Penn Traffic had accepted the Price Chopper deal prior to receiving the offer Tops made, but the company now says it prefers the Tops deal. If Price Chopper's offer ended up going through, then Penn Traffic would liquidate the 57 stores that would remain. Price Chopper president and CEO, Neil Golub, told the Syracuse Post-Standard that he expects the Tops deal to be the one that ends up approved. The auction date has been pushed back to the end of this month.

By April of this year, Giant-Carlisle, a U.S. division of Netherlands-based supermarket conglomerate Ahold, expects to be the new owner of Ukrop's Super Markets. Specifically, Richmond, VA-based Ukrop's has agreed to sell 25 of its 27 stores to Ahold for $140 million. All of the Ukrop's stores are located in the greater Richmond and Williamsburg areas, so the acquisition would fill a void for Giant-Carlisle, as the retailer currently has no stores located within a 20-mile radius of the two cities.

A sale of family-owned Ukrop's has been in the works since July 2009. Supervalu, Harris Teeter, Ahold and an unidentified private equity group were all rumored to by vying to acquire the regional grocery store chain.

In October 2009, Belgian-based Delhaize, through its Food Lion division, entered into a non-binding agreement to acquire a substantial majority of the assets of bankrupt grocery retailer, BI-LO, for $425 million. BI-LO, which filed bankruptcy in March 2009, operated 214 stores in NC, SC, TN and GA.

BI-LO elected to go on without Delhaize, however, as in November 2009, Delhaize's offer was not part of BI-LO's bankruptcy exit plan. Instead, the company's current owner, Lone Star Funds, said it would provide $350 million to repay Bi-Lo's debts. While Delhaize's agreement is no longer valid, the grocer maintains that it is still "strongly interested in acquiring certain Bi-Lo assets if an opportunity" arises. BILO has yet to emerge from bankruptcy.

In October 2009, Boston-based Berkshire Partners, said Grocery Outlet, a California-based discount grocery chain with 135 stores, was becoming part of the firm's private equity portfolio. Terms of the transaction were not disclosed; however, the New York Post reported that Grocery Outlet was being courted by two private equity companies -- Oak Hill Capital Partners (owner of Duane Reade) and CCMP Capital Advisors (owner of Quizno's and Vitamin Shoppe). Grocery Outlet's sale price was reportedly set around $400 million.

In July 2009, Arizona-based grocer, Bashas', filed bankruptcy. Since, the company has closed 30 stores and now operates approximately 130 stores in its home state. In October, the Phoenix Business Journal reported that Bashas' was having success in renegotiating leases with its landlords -- a key factor in the grocer's ability to emerge from bankruptcy. Currently, Bashas' has a reorganization plan on file that calls for the Bashas' family to continue to run the business and emerge from bankruptcy this quarter.

Why have so many traditional retailers filing bankruptcy during this recession met the fate of liquidation while grocery store chains gone bankrupt have emerged or been bought by competitors? Part of this answer lies in the relative stability of the sector's sales track record and employment figures. According to the Census' December sales report, released Jan. 14, total retail sales at grocery stores for 2009 were flat in comparison to 2008. In contrast, sales for the entire retail industry (excluding motor vehicles and parts) were down 4.9% through the same period.

According to the Bureau of Labor Statistics, employment at grocery stores has been much more stable than the general retail trade throughout this recession as well. Pre-recession, grocery store/supermarket employment hit a high of 2.38 million in November 2007 -- two years later, employment in this sector is down 2.4% from that level. This decline is minimal in comparison to losses in the general retail sector. BLS statistics show that pre-recession, total retail employment hit a high of 15.59 million in November 2007 -- as of December 2009, retail sector employment is down 6.2% from this high.

With employment and sales results more stable than most other retail sectors, supermarket retailers continue to invest in their store portfolios through remodeling, expansion, acquisitions and new store openings.

Marcus & Millichap's Bernie Haddigan, managing director of the firm's National Retail Group said that while vacancy at the nation's shopping centers will most likely remain elevated for the next several quarters, "leasing momentum is picking up, particularly in big-box spaces as grocery stores target vacant parcels in high-traffic urban areas," said Haddigan in the firm's 2010 National Retail Outlook, released today. Take a look at this run-down of store growth activity taking place at some of the nation's largest grocery chains.

KROGER
As of Dec. 17, 2009, Kroger operated 2,469 supermarkets and multi-department stores in 31 states under several banners including Kroger, City Market, Dillons, Jay C, Food 4 Less, Fred Meyer, Fry’s, King Soopers, QFC, Ralphs and Smith’s. As of Nov. 7, 2009, Kroger had opened, acquired, expanded or relocated 35 grocery stores during the prior nine months, in addition to 125 major remodels, thereby increasing its store square footage by 1.2% year-over-year. In the coming year, expect about one-third less activity from Kroger, however, as the company is moderating its capital expenditure budget.

SUPERVALU
Supervalu currently operates 2,380 grocery stores -- 1,180 of those are discount format Save-A-Lot stores, while the company's traditional regional banners include Albertsons, Shaws, Star, Jewel-Osco, Acme, Cub Foods, Shoppers Food & Pharmacy, Shop 'n Save, Farm Fresh, Bigg's, Bristol Farms, Hornbachers, and Lucky.

With consumers focused on value during this recession, the company's focus has been and continues to be on growing its Save-A-Lot division, while other capital has been spent on remodeling its existing store base. Supervalu expects to have opened 45 to 50 new Save-A-Lot stores during fiscal 2010, which ends next month for the retailer. In fiscal 2011, Supervalu said it would step up its expansion plans, with intentions to add 100 new Save-A-Lot locations. The typical Save-A-Lot store is approximately 15,000 - 20,000 square feet.

SAFEWAY
Safeway has a network of about 1,730 stores in the U.S. with brands including Safeway, Dominick's, Genuardi's, Randall's, Tom Thumb, Carrs, Vons, and Pavilions. Like its major competitors, Safeway has also been primarily focusing its capital on remodeling stores -- the retailer opened 10 new "lifestyle format" stores during 2009. Most of the grocer's stores are approximately 35,000 square feet, however, the new stores it has been opening in the lifestyle format are approximately 55,000 square feet.

DELHAIZE
As of the close of its fiscal fourth quarter, the Delhaize Group operated 1,607 supermarkets in the U.S. under banners Food Lion, Hannaford, Sweetbay, Bloom, Harvey's and Bottom Dollar Food. During 2009, the company opened 30 new U.S. stores and completed a substantial number of remodels.

In December, Delhaize announced a new strategic plan, which includes tripling new store openings under its discount grocery banner, Bottom Dollar, in the U.S. over the next three years. With 28 current Bottom Dollar stores in its portfolio, the company already has 11 new store openings listed on its website -- by the end of this year, the chain could grow to 50 stores. According to CoStar Tenant, the typical Bottom Dollar Food store is 40,000 square feet.

On January 14, Delhaize announced a plan to consolidate U.S. operations and grow the U.S. business. In 2010, Delhaize plans to remodel 50 stores and open 50 new U.S. stores, which includes the aforementioned Bottom Dollar store openings.

PUBLIX
As of the end of 2009, Publix operated 1,014 supermarkets in Florida, Georgia, South Carolina, Alabama and Tennessee. The retailer opened 35 new supermarkets during the year. In July 2008, Publix acquired 49 stores from Albertsons and it has since been spending much of its capex budget on remodeling and rebranding the stores.

In 2010, Publix projects the opening of 27 new stores. The grocer opens new stores in four different prototype sizes of 28,000; 39,000; 45,000; and 54,000 square feet. The company is in a test period for two alternative format stores as well. It currently has four stores open under its Hispanic format banner, Publix Sabor, and has opened three stores under the Publix Greenwise Market banner, an upscale format focused on organic and natural foods.

ALDI
German discount grocery chain, ALDI, opened 100 new U.S. stores in 2008 and another 80 in 2009. In March 2009, the retailer hit its 1000th U.S. store milestone. In 2010, the company plans to open 25 new stores, primarily in Texas. ALDI's prototype store is a stand-alone building of 17,385 square feet located on a major thoroughfare near traditional grocery stores.

AHOLD
In the US, Ahold operated 716 grocery stores under banner Stop & Shop, Giant and Martin's as of the close of its fiscal third quarter, representing an increase of 12 net new stores in the prior 12 months. A similar number of new store openings are expected in the coming year. Ahold's typical U.S. store is 50,000 square feet.

In addition to organic growth, Ahold's store count will grow by 25 stores in 2010, as it is set to close on the acquisition of the Richmond, VA-based Ukrop's supermarket chain this spring.

WHOLE FOODS
Whole Foods Market opened 15 new stores during its fiscal 2009 year (ended in September), to operate 286 stores across the country under banners Whole Foods and Wild Oats. Whole Foods' new store pipeline includes 13 new stores in 2010, 17 in 2011, and 15 in 2012; however, this number will increase as Whole Foods continues to sign new leases for future store development. The average size of a new store in this pipeline is 44,800 square feet.

GIANT EAGLE
Giant Eagle currently operates 223 grocery stores in PA, OH, WV and MD. The retailers opened three new stores during 2009, including the third in a test of a discount format, dubbed "ValuKing." The company's stores are typically 75,000 to 85,000 square feet, but ValuKing stores are typically 30,000 square feet. Not only has the grocery category continued to open new stores; but, as much of the capital expenditure budgets of these grocers has been going towards remodeling and improving their existing store base, the majority of grocery-anchored neighborhood centers in this country have been able to keep their anchor stores -- an issue most other shopping center types have struggled with throughout the last two years, a trend supported by an analysis using CoStar Property Analytics.

We looked at neighborhood centers across the nation as defined by the International Council of Shopping Centers: a neighborhood center is an open-air shopping center of 30,000 to 150,000 square feet that is anchored by a supermarket or drug store, where that anchor typically comprises 30% to 50% of the center's entire square footage.

According to Costar's information, neighborhood centers, like nearly all shopping center types, have suffered increasing vacancy throughout this recession; with the total vacancy rate at these centers has increased from 8.1% to 10.3% since the recession started. However, this newly vacant space is primarily being created from small shop tenants closing up shop at neighborhood centers, as opposed to supermarket anchor tenants vacating space.

CoStar data shows that only 10% of the nation's neighborhood shopping centers currently have a vacant anchor space (contiguous vacancies of 15,000+ sq. ft.) -- this level of anchor vacancy remained the same throughout 2009 and has remained generally static since 2001, wavering only between 9.8% and 10% over the course of time. This data shows that in general, the presence of an open and operating grocery store at a neighborhood center has remained relatively consistent, even in recessionary periods.

In a number of recently-released reports, retail real estate executives have also cited the stability of grocery anchor tenants and their resulting impact on neighborhood centers.

In its recently-released 2010 Retail Real Estate Forecast report, Grubb & Ellis said that while vacancy increased markedly at neighborhood and community centers during 2009, "Grocery-anchored neighborhood centers are the best performers in the retail pantheon, particularly those in mature trade areas."

In a press release this week, CB Richard Ellis' director of forecasting, Jon Southard, under the Econometric Advisors division said that the pace at which availability of retail space is rising has slowed consistently over the last three quarters. Consumers' "growing optimism and willingness to return to necessities spending" has enabled neighborhood shopping centers to "experience the lowest increase in availability rates in two years," said Southard adding these signs point toward recovery for retail real estate. Jim Koury, managing director of Jones Lang LaSalle's retail investment sales practice recently said his firm is seeing an improvement in the investment sales market, starting with solid interest in grocery-anchored neighborhood centers. "Contrary to current conventional wisdom, we are experiencing growing demand for a wide range of retail properties; [however,] supermarket-anchored properties continue to garner the most interest" from risk-averse investors, said Koury.

In a special report released in late December by CB Richard Ellis titled, "The Upside of the Downturn: Opportunities in Commercial Property Investments," Jim Costello, principal and director of investment strategy said that there is investor demand for high-quality cash-flowing assets in the current market. He added that stable neighborhood centers anchored by grocery and drug store tenants "will experience very little of the current pain in the market" during 2010. He added that such centers up for sale will be able to hold strong on pricing, in contrast to centers on the "high-end of the market."

Archived Articles on Pensacola Commercial Real Estate