IAN RITTER: What kind of impact will the Safeway-Albertsons merger have on the industry? Do you foresee a lot of vacancies as a result? If so, can they get backfilled?
TED FRUMKIN: This is just a continuation of the consolidation we’ve seen in our industry. The traditional grocers have been faced with increasingly strong competition for food dollars from big box retailers like Walmart and Target, specialty grocers like Sprouts, drug stores and dollar stores. This, coupled with the continued growth of the natural/organic sector, is fundamentally changing the way consumers think about grocery shopping. It is a natural progression for retailers like Sprouts to consider backfilling any opportunities created by this consolidation. From Sprouts’ perspective, it will create opportunities in markets that otherwise would be more difficult to penetrate. However, we know that there will likely be competition among retailers for any sites that come onto the market.
FERNANDO De LEON: Inevitably there will be vacancies as a result of spacing and concept similarity. They’re both middle-market grocers. The specialty grocers on one end, and the value concepts on the other, are driving this consolidation. We’ve backfilled Albertsons boxes, and what we found is that retailers are looking for smaller footprints with more efficient prototypes, so we are having to demise spaces and build expensive landlord work letters and tenant improvements, all of which necessitate higher rents. This is in the context of fewer backfill prospects every year.
MICHAEL PHILLIPS: If there were a lot of new building going on, this would be more worrisome. Since we don’t have a lot of new supply coming on in the next couple years, absorption will be significant, and most of them are good locations where landlords will get control of that space. That will mitigate a lot of dislocation.
BILL ROSE: Mike Cohen, you’re financing a lot of properties. When you look at these, do you care who the grocer is?
MICHAEL COHEN: At Citi, we look for fundamentally sound real estate and are aggressive when we see an opportunity for grocery-anchored centers. We want to know the grocers in that market. Who is number one? Are they new to the market? Who are they replacing? We also want to know where the Walmart Super Centers, the SuperTargets and some of the lower-priced options are. We’re definitely keyed in on knowing their sales or projected sales. We do see a lot of anchors with short lease terms remaining but with options and structure around that. When looking at smaller grocery store formats or new stores to the marketplace, we’re typically looking at the remainder of the center and to see the tenant mix and traffic counts.
FRUMKIN: I agree that consumers today expect more from their food—and from their retailer. The tremendous growth in the natural/organic space is being fueled by the macro-shift in consumer behavior towards health and wellness and their gradual move away from the highly processed foods offered from the supermarkets. At Sprouts, we prioritize service and education, because there’s a lot to know about natural foods, so engaging the customer is key to our success. And our Healthy Living for Less philosophy appeals to a broad segment of consumers from varying demographics and income levels—not just an affluent segment of the market.
RITTER: So can the middle-market grocer compete, or is it getting squeezed out?
ROSE: You’ve got a traditional grocer, Kroger, and now a Safeway-Albertsons. They represent 10% and 6% of the current marketplace, while Walmart combined is about 29% of the marketplace. The nice thing is we now have these specialty grocers that provide gourmet, fresh whole-food-type, fresh-to-market and vitamin/health-oriented products. That’s really where the growth is in the business, and it’s really great for landlords who want to continue to improve upon their merchandising mix in their open-air centers.
PHILLIPS: The new concepts that address the diversity in the customer base are the ones that are successful, and that’s through the entire spectrum of price-to-quality to service. Retailers are looking at what the customer wants, and the customer is looking at the retailer and saying, “this does not meet our needs.” So it’s a cycle that is healthy for the industry. One of the things about retail is if you don’t keep up, and you’re not strong with the customer and meet their needs, you probably won’t be around very long, and that’s what has happened in the migration toward specialty.
De LEON: The middle-market grocers need to define their identity and update their brand or risk losing market share. Trader Joe’s, Whole Foods and Sprouts have cult-like followings, and it makes it hard to compete for the grocers that have commoditized the food-distribution business. People are growing concerned about the quality of food that they consume. They’re not blind to obesity rates and the lifetime of health problems. The education process will take a while, but long term, I don’t know how you can reverse this new consciousness.
RITTER: Coldwater Creek is liquidating. There seems to be a lot of concern about some of the mall apparel chains not doing enough to draw in customers. Is this true?
ROSE: If you’re not reinventing and constantly pursuing the trends in the market, you’re going to dry up. One of my favorite examples in apparel is Bonobos. This concept is directed toward men who are very busy: “Measure me, and then, when I need product, sell it to me.” It’s very experiential and meets the demand curve. Most importantly, it’s a multichannel delivery. It has both bricks and mortar and e-tailing, and that combination is paramount for any landlord to have in their shopping center. If the retailer doesn’t have a multichannel delivery system, they’ll probably go by the wayside.
PHILLIPS: The traditional retailers, particularly in men’s ready to wear, are missing the blending of technology and the product at the actual site. One of the secrets for Apple, and the reason they’re so successful, is that it blends social networking with bricks-and-mortar presentations. Right now a lot of the retailers are close to that. Macy’s has been spending a lot of time understanding and incorporating it into the stores. It doesn’t necessarily mean that you’re going to cater to a younger customer. It just means that you’re going to address what the customer wants and how the customer is actually shopping in the 21st century.
RAHUL SEHGAL: We’re looking at things from a slightly different perspective. I spend a lot of time focusing on the retail-sales index, and clothing has done well. When you look at certain sectors like electronics, appliances stores, building materials and garden equipment, we still haven’t seen a recovery. We’re looking at a more permanent shift in the way consumers are spending, as there’s a mesh between social media and brick and mortar. For those items that tend to be more of a commodity, there is less of a chance that they will recover with the overall economy.
ROSE: Everybody seems to be over-concerned about the impact of the Internet. It’s the exact opposite. The Internet is spurring retail-sales growth. It’s making it possible for us to buy a product online, and if we don’t like it, return it in the store and find something better. The Internet will continue to drive retail sales and be a greater impact for more store growth. In open-air shopping centers, the greatest thing is that we’re providing goods and services that predominantly can’t be delivered over the Internet.