Own a Grocery-Anchored Strip Center? You May Want to Consider This.

Grocery stores have been a bright spot for strip mall REITs during the COVID-19 pandemic.  BTIG consultants say there’s one step REITs can take to help their grocers further cement their status as anchors and to smooth the transition to online delivery.

That’s the addition of microfulfillment centers—a trend that is growing in the industry—into the backs of grocery stores. The $2 million-$3 million investment “could fix critical gaps in online grocery fulfillment, increase store productivity, and make REIT shopping centers even more critical real estate,” BTIG analysts Michael Gorman and James Sullivan say in recent research note.

Before COVID-19, grocery was an area of retail that had proven resistant to e-commerce trends, with only 2%-6% of sales being conducted online. The pandemic has changed that, with some estimates now as high as 40%. “We think that the COVID-19 pandemic and resulting stay-at-home orders have the potential to act as a ‘forced adoption’ event for online grocery and potentially change other shopping habits,” the consultants write. “A more permanent shift to online grocery shopping could mean more risk to strip center results and valuations relative to historical norms,” they conclude.

Many consumers are now trying online grocery for the first time. “However, the volume is showing stress with canceled orders, out of stock items, substitutions, and delivery delays,” Gorman and Sullivan write.  “For online grocery to sustain a larger share, there needs to be better infrastructure.”

Instead of clunky third-party apps and “pickers” roaming aisles to select items from store shelves, grocers ought to be building out 10,000-12,000 MFCs. They can be retrofitted to existing buildings and made operational within weeks, the consultants say.

They will provide a more accurate picture of real-time inventory, cutting down on frustrating replacements or cancellation. “The relatively small investment of $2-$3 [million] allows the store to fulfill an average online order in approximately 5 minutes compared to the current 1 hour,” the consultants write. “It is the difference between online as a costly service vs. a profitable business.”

Walmart is experimenting with MFCs from multiple providers, the consultants say. Albertsons is working with provider Takeoff Technologies, and Kroger is working with Ocado on large-scale distribution centers. They expect about one MFC for every four or five of the country’s 40,000 grocery stores.

REITs ought to help get the ball rolling by investing along with the grocers, the consultants say.

“We think REITs need to be proactive partners in this initiative, since not every store will need an MFC. This capex should generate positive returns given the [internal rate of return] on MFCs, and protect long-term [same-store net operating income] growth for those properties.”