Shopping Center Business

MAY 2017

Shopping Center Business is the leading monthly business magazine for the retail real estate industry.

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GROCERY STORES 268 • 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 re- tail spectrum. The company is creating a new division to assist in the grocery re- tail business. The division will be created through a joint venture with Oak Brook, Illinois-based Elkhorn Real Estate Part- ners and will be headed by Joe McKeska, a 25-year veteran of the grocery real es- tate business. The goal of the division is to help retail investors and retailers evalu- ate their portfolios, with an emphasis on grocery retail. Shopping Center Business recently spoke with McKeska to get an under- standing 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 contrac- tion. 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 aggres- sive 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 Ger- many'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-gro- cery 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-pene- trated 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 mar- ket 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 shrink- ing 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 on- line 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 re- cent Food Marketing Institute and Niel- sen 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 de- partments to make up for the reduction in sales in these categories and to better compete with on-line 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 report- ed, the country has seen an increase in income stratification over the last few de- cades. 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 custom- izes 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 on-line 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, re- mains a relatively small segment of the overall market. The premier example in Grocery Retailers Face New Times New competition, consumers who shop multiple stores are just a few of the issues grocery retailers are working through. Interview by Randall Shearin

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