Expansion on aisle 3: How and why grocery stores decide to add more locations
With more than 38,000 brick-and-mortar stores nationwide and increased emphasis on digital shopping, a look at the strategies to build or relocate
There are more than 38,000 grocery stores nationwide, according to statistics compiled by the Food Marketing Institute — and new stores seem to be popping up every month.
Since there is an array of online shopping choices, and home delivery and ecommerce shopping are getting more popular, are more brick-and-mortar stores needed?
Some say that the changes in the larger market present a need.
“To say the grocery store sector for 2017 is in flux is an understatement,” John Sechser, senior vice president at Transwestern, told Food Dive. “Safeway/Albertsons is still facing many challenges for branding, management and product assimilation. Specialty grocers have entered the market to capitalize on the ‘health’ niche that Whole Foods had captive for so long. Meanwhile, new entrants into the market are ‘right-sizing’ their stores and downsizing in some cases with new concepts.”
Sechser estimates that as many as 1,000 new stores could open in the year ahead. While there are no hard and fast rules for where and how new stores should locate, the larger reach of a store that that bills itself as a specialty retailer can make some feel more free to add new brick-and-mortar locations.
“Generally speaking, it takes 15,000 people in one market with no major competition for a standard size grocer to be interested in an area,” he said. “Specialty stores tend to expand the trade area … and they feel they can compete on service, differentiation of product and location. Thus, they feel less impacted by the general grocer mentality.”
Keith Daniels, a partner at Carl Marks Advisors, said there is always saturation risk in grocery because markets can only expand at the same rate of population growth.
“New stores are just adding competition fighting over the same consumer dollar,” he told Food Dive by email. “Where opportunity lies with these new stores is in offering the consumer something better that allows them to take market share from competition — convenience, price, selection of product.”
“New stores are just adding competition fighting over the same consumer dollar. Where opportunity lies with these new stores is in offering the consumer something better that allows them to take market share from competition — convenience, price, selection of product.”
Partner, Carl Marks Advisors
Gary Saarenvitra, CEO of Daisy Intelligence, said some markets can sustain more competitive retailers because there are more households with larger spending potential.
“The two primary drivers of grocery/food spend are the number of members in the household ... and household income,” he told Food Dive.
Greg Wank, partner in charge of the food and beverage group of accounting firm Anchin, Block & Anchin, said recent mergers and acquisitions have changed the grocery landscape, and now supermarkets are looking at other ways to grow.
“I think retailers are looking for more strategic investments and more regional opportunities,” he told Food Dive. “With the European retailers [like Aldi and Lidl] looking to come in, that’s also changing the landscape.”
With big box retailers and e-commerce stores like Amazon gaining more market share, Wank cautioned that opening a new physical location isn’t always the best move—especially in an area where there’s already an established presence of major grocery stores. Still, some stores come into an area because feel their service, selections or prices are one-of-a-kind.
“Wegmans, for example, thinks they are such a unique supermarket experience and so authentic, that they don’t see themselves competing with a traditional supermarket,” Wank said. “They are really focused on younger brands and more interesting products that drive better margin.”
Leading the pack
James Cook, director of retail research at commercial real estate company JLL, said that more than 440 grocery stores opened in the U.S. last year, adding 18.8 million square feet of space. This is slightly more than in recent years.
In its latest Grocery Tracker report, JLL found that 27% of new grocery stores opened in Texas and California alone. Aldi and Grocery Outlet dominated in California, while Kroger and H-E-B continued their push into Texas.
“By comparison, the next three largest states in terms of new space were North Carolina, Virginia, and New Jersey, which each accounted for just 5% of total space delivered in 2016,” he told Food Dive. “Aldi and Whole Foods were the biggest movers in the sector, opening the most stores by count.”
JLL predicts the number of new grocery stores opening their doors in 2017 will likely be down from last year. However, numbers should climb again in 2018 as Lidl makes a strong push along the East Coast.
Finding a new home
Many concerns and challenges factor into grocery stores’ decisions to choose new locations, both to relocate and expand.
Wank said nothing is as important as the demographics of the area. Investing in research to understand a store’s customer is vital for success. And while a new store tends to have heavy traffic in its first month, keeping those shoppers coming back is key.
“You need to have a consistent base to keep them continuing to shop at your store, as opposed to going back where they just came from,” he said. “Research can help sustain a supermarket model for a neighborhood.”
“You need to have a consistent base to keep them continuing to shop at your store, as opposed to going back where they just came from. Research can help sustain a supermarket model for a neighborhood.”
Partner in charge of food and beverage group, Anchin, Block & Anchin
Sechser said retailers should consider the critical mass of their preferred demographic in that area. These include competition from other retailers; economics of the area; traffic patterns, parking and visibility of the location; local media coverage; and recent and planned residential growth.
“In addition to household population and income, retailers will typically have a set of consumer lifestyle profiles that are their customer base,” Saarenvitra said. “Retailers will look for these lifestyle demographic characteristics in their prospective markets. Typically, other demographic factors that retailers would look for would be education, ethnicity and employment.”
Retailers should also look at specific site characteristics, like visibility from nearby roads, access into and out of the specific location to and from nearby roads, the amount of parking, size of the prospective site and the presence of other major retail brands that would draw customers.
Daisy Intelligence’s system takes many of those things into consideration. It looks at the location of consumer households, other retail chains, the time it takes consumers to drive to every potential retail location in the market, traffic from commuters and shoppers, household demographics, and physical characteristics of every site.
“Given the increased pressure on pricing due to large retailers getting smarter and more efficient, real estate decisions for mid-market players become even more crucial to get correct,” Saarenvitra said.
As a researcher, Cook has put a lot of time into studying the traits that grocers look for. It usually boils down to population numbers.
“All people need groceries,” he said. “Clearly, if you’re a high-end grocer like Whole Foods or Wegmans, you’re also going to be looking at median and average incomes and home values.”
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