Retail Investment Outlook: A Closer Look at Grocery Through a Pandemic Lens
The retail sector remains one of the most dynamic and fiercely competitive. The industry is shaped and reshaped by shifting consumer buying preferences, at the same time the category continues to face challenges from competitors, ecommerce and the effects of a pandemic that reset the strategies of retailers across the country. An inflection point was reached for the grocery-anchored retail investment sector over the past 18 months, a massive shift in buying habits that is reflected in the strategies emerging today.
Savvy investors understand they must track and monitor both the markets in which they invest, as well as the grocery retailers themselves to uncover the best opportunities. Typically, grocery operators react and adapt quickly to the opportunities and challenges faced. Yet, when the pandemic initially hit in 2020, grocery retailers found it hard to anticipate the elevated activity, then ramp up to handle the increased buying and ultimately to maintain the growth beyond the surge purchasing. But it was obvious from the outset, even from field visits, that grocery was thriving.
The pandemic reinforced a conviction that investors have long held, that grocery is essential, and virtually recession proof. That fact was evident in the top performances experienced by just about every grocery retailer and grocery-anchored retail center since the pandemic started. Many grocery chains and operators experienced record revenues as the category redefined its position as the “essential” retail category. Most conventional grocers experienced as much as an estimated 35% increase in revenue during the peak months of the pandemic when compared to the previous year.
While revenues reached record highs last year, income dragged in comparison, as grocers were forced to spend considerably more on such areas as store labor, cleaning or hazard pay. Another factor to consider was the fact that grocery operators were simultaneously forced to address and invest in ecommerce platforms at a faster pace than any period prior to the pandemic to keep pace with demand.
Even before Covid hit, ecommerce and online shopping was also helping drive consumers to grocery stores in increasing numbers, which continued as the pandemic spread across the country. Consumers preferred spending more time close to home with their immediate families, a trend fueled by remote work schedules and a desire to follow social distancing guidelines. Since people still needed to eat, and many restaurants were closed or were limited in service, grocers filled the need to feed America. There were some interesting tendencies that emerged over the pandemic, though.
One shifting consumer trend was in the number of store visits. Grocery shoppers made an average of 6.7 retailer trips per month in August 2020. That was a decrease from 7.5 trips in August 2019, a drop of nearly 11%. However, basket size swelled 19%, with customers spending an average of $49.28 per trip compared with $41.38 the previous year. The obvious reasoning for this phenomenon was the desire and necessity of the customer to limit activities that exposed them to large gatherings of people, including at the grocery store; however, once at the grocery store, consumers were increasing their expenditure per visit.
There is some evidence that customers are returning to normal shopping patterns, and grocery chains still believe that there will be a permanent shift in some consumer mindset. This could have a two-fold impact on the grocery-anchor center. One is that lengthier grocery store visits may open the door to grocers introducing more of an experiential offering in hopes of securing higher expenditure. Two, the downside may be that co-tenants in a typical shopping center could see less traffic and exposure to their concepts.
The pandemic did force groups without ecommerce options to quickly figure out how to add click-and-collect or delivery options. Some grocers may have been caught off guard or didn’t execute their ecommerce strategies well, but across the country there was a significant amount of investment made by grocery operators to ensure they had some type of online presence or platform that customers sought. That process may have also included a learning curve that was often custom-tailored to each site, for instance in situations where a mid-center located grocer didn’t have a pick-up area close to its entrance.
For grocery-anchor shopping investors, it is important to separate the facts from the “hysteria” surrounding ecommerce. Many believe ecommerce is a larger force today than it really is. The fact is, in 2019 ecommerce represented 4.3% of grocery expenditure. During the pandemic’s peak in 2020, ecommerce represented 10.2% of grocery expenditure. By comparison, through May 2021, ecommerce sales represented 7.4% of grocery expenditure. That is a distinct drop from 2020 and further evidence that the consumer has not fully accepted the platform.
Based on research and the current percentages related to ecommerce, it’s likely that ecommerce will see marginal growth over the next four to five years. Retail experts like MTN estimate that by 2025, ecommerce will account for roughly 12-13% of the total grocery expenditure. The long-term view of MTN is that ecommerce will plateau in the 18-20% range once more sustainable business models are tested and proven.
Set against that backdrop, the harsh realities of today’s market add intrigue and uncertainty. First, grocery operators are facing an enormous staffing issue. While that’s not unique to the sector, because food is a need for survival and continues to drive high demand, it presents problems grocery operators must address.
Second, significant disruptions being experienced across the supply chain are having perhaps even more of an impact on the retail sector. Significant gaps of product are showing up on nearly every aisle of a grocery store, and not just the toilet paper aisle. These are wholesale gaps that retailers haven’t seen before. Consumers are accustomed to seeing full shelves, so this condition is expected to have a huge psychological impact on them.
Even though demand is strong for grocery, the impact of a reduced labor pool, and supply chain issues are adding up to inflated costs to build and stock a store. The result is grocery retailers are understandably tapping the brakes a bit now on expansion or investment plans. They must closely examine their footprints in a market and acutely understand the macro- as well as micro-level factors. That encompasses deep insights into the performance of their own stores, their competitors’ locations, and a submarket-by-submarket evaluation to uncover the best locations for a grocery store.
Wise investors should focus on strong regional and national chains that are balancing both ecommerce platforms and physical store investments. They should place emphasis on site and shopping center characteristics that promote the success of the grocery asset. Investors must closely track the demographics that complement the grocery-anchor and co-tenancy, while ascertaining locations that provide the grocery-anchor with strategic positions relative to the competition.
Couple this information with knowing the weakest locations and the potential shuttering of stores/chains that rank in the fourth place or lower market share position allows an operator to be better-positioned – both from a real estate and operational perspective. By weighing these research-based considerations investors and grocery retailers can find locations that grocery tenants should pursue and maintain for long-term hold. Those operators will also be able to absorb the market share and volume and thus more likely to thrive in the current and future grocery retail environment.
* Excluding gas and adjustments