When Amazon announced its acquisition of Whole Foods last week, the real estate market was in awe. With questions bouncing around about the future of grocery and the combination of online and brick-and-mortar grocery, we wondered how this would affect owners and investors of grocery-anchored retail. Joe Dykstra, EVP of Westwood Financial Corp., and Randy Banchik, co-CEO of Westwood Financial Corp., sat down with us for an exclusive interview to get discuss their reaction to the acquisition, how this is affecting existing properties and how the change could affect the firm's acquisition strategy.

GlobeSt.com: As an owner of retail properties, what is your initial reaction to Amazon's purchase of Whole Foods?

Joe Dykstra: Amazon launched its online grocery offering in 2007. Ten years later, today, all e-grocery accounts for less than 2% of the total US grocery sales. I think that is incredibly important. If you think about the news that was generated out of the announcement on Friday, and if you think of that in the context that 2% of grocery sales happen online, it is mind-boggling. What this means to me is that Amazon—the killer of all categories—has just indicated that a physical presence is imperative to get groceries to customers' doorsteps. This is the last mile solution that we have all been talking about for the last few years. The fact is that groceries have been difficult to sell online and deliver to the doorstep cost effectively. The fact is that it is a 1% to 3% margin game, and in that margin, it is difficult to absorb the cost. So, when people ask me if I am surprised, candidly, no, I am not surprised. They were going to buy someone, because after 10 years, this purchase admitted failure of an only online home delivery service.

Randy Banchik: The largest ecommerce provider in the world has moved toward brick and mortar to accomplish what they couldn't with brick and mortar alone. This is great for our business and for consumers as a whole. Amazon is constantly striving to use technology to improve their logistics, reduce cost and improve convenience. They couldn't reduce cost for delivery, but they maybe able to do that through a brick-and-mortar presence. That helps all of us, and the smartest grocers are responding in their own manner. Kroger is responding with their click list, for example. This is a way that we can continue to add convenience and efficiency to our shopping experience.

GlobeSt.com: How will this affect your current properties?

Dykstra: The physical properties will need to absorb site plan changes to accommodate click lists, pick-up or easy and convenient trucks from the stores to load groceries for drop off at homes. Most grocery stores are not set up to easily accommodate a click list or pick-up and drop-off concept, so site plans will need to evolve. In some cases, properties will need to be substantially reconfigured. It won't be easy or inexpensive.

GlobeSt.com: Do you have an example?

Banchik: We have an example of that at a property in the Southeast with a Kroger. We put in a new tenant space, but we left additional space carved out for Kroger to stage their click-list. There are some retrofit projects as well that they will need to do inside the store because the way that the click list works is they have their own staff do the shopping and they stay out a couple of hours ahead of their customer. As landlords, it is our job to be responsive to them and provide them that flexibility so that they can get spaces that they need to stage and get the spaces that the need from the parking field to provide convenience to their customers.

GlobeSt.com: What is the cost associated with this?

Banchik: What we are essentially doing is carving out the space as part of a tenant improvement, so the cost is really not consequential.

GlobeSt.com: Are all grocers going to be looking for ways to stay competitive with this new hybrid platform?

Dykstra: They short answer is yes, but capital is a commodity. The bigger companies with the better balance sheets will have an advantage, and they will have capital to make changes. Landlords will need capital to make changes, and their will be a lot of pricing pressure. There will be pricing pressure from Amazon as well as pricing pressure from hard discounters that are entering the US. The combination of additional capital expenses and pricing pressure are going to be absorbed by the bigger and better grocery chains. The companies with smaller stores and weaker balance sheets are going to be at a huge disadvantage.

GlobeSt.com: How will this affect your acquisition strategy for new properties?

Dykstra: We generally have an acquisition strategy that we want to buy uniquely great properties and Internet resistant assets that can reinvent themselves as our business evolves. There are clearly fewer great locations than there are average locations, so it is harder to find these opportunities. So, it is harder to deploy capital. I think the impact of that is that for the best properties, in spite of the grocery store risk that everyone is talking about, the best properties will trade at lower cap rates and lower yields. We own hard assets, so if you are a disciplined investor bad news should be good news because you are buying properties that in five years or tens years, you will still feel good owning the property. The best real estate will always survive. I am a firm believer that high-quality real estate will always perform well. We are talking hard assets. Why does capital chase brick-and-mortar and land? Because it survives the test of time. It is more high touch than ever before. They want an experience, and that is one of the great attractions of Whole Foods. The better quality real estate will survive, but the properties that don't have a way to identify themselves and brand themselves will always have harder time to survive and be profitable. The problem is that those opportunities are harder to buy because more people want to buy them and the pricing is higher. For acquisitions, it is harder to execute and harder to deploy capital because there are fewer uniquely great properties to buy.

GlobeSt.com: Will this merger have a major impact on the grocery retail market?

Dykstra: No one is convinced that home delivery will work on a broad scale. We have the conversation a lot in our shop about where home delivery works. It works in Manhattan, where they have Fresh Direct that has been doing it for years and everyone loves it. They have some unique challenges and opportunities in that city. It works in West Los Angeles, where it is highly dense. As soon as you lose that highly dense environment. Think of Oklahoma City, Las Vegas, Denver, Kansas City—I am not sure that home delivery works on scale in those cities, and I am not sure that the people in those cities can absorb the cost, because it is going to show up somewhere. It isn't free. I am not convinced that on scale it will be successful, but I believe that it will be successful in really dense urban markets.

Instant Insights /

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