April 8, 2008
GHQ: A tighter belt
By Carol Radice
Through a special arrangement, what follows is an excerpt of a current article from Grocery Headquarters magazine, presented here for discussion.
A weakened economy and continuing pressure to achieve a speedy ROI has created a cautious spending environment, leading to a slowdown in new store development and remodels for supermarkets. According to the Food Marketing Institute’s Facts About Store Development 2007, projected activity for 2007 shows a small increase of 2.4 percent for new construction and 0.6 percent for remodels.
In 2006, capital spending was only 2.22 percent of sales. By most measures, the 10 percent to 15 percent increases in the cost of building materials clearly influenced store development plans in 2006. The only factor rating higher than construction costs was the impact of higher energy expenditures.
The cost of real estate, coupled with the scarcity of ideal sites, is leading to an increasing number of retailers purchasing and retrofiting existing buildings. Using existing buildings is not necessarily a new trend, but what makes this noteworthy is that this is the first year where the number of retrofits surpassed the number of new structures by a wide margin. According to the report, 60.6 percent of all new stores in 2006 fell under this description.
While architectural and engineering fees for new stores have been holding steady for the past few years at $130,000, those same fees for retrofitted stores were only $86,750 on average. Based on these figures, those surveyed noted it would take nearly two years for a new store to break even.
It’s no surprise then, given the economic and space constraints facing retailers, that the square footage of new stores remained the same in 2006. In 2006, the average new store size was 46,000 square feet and cost more than $6.5 million to construct when the cost of land, parking lots, site development, professional fees and financing are taken into account.
In this current environment, is it apparent that retailers are being more cautious about store development. While some have chosen to pull back on their building plans, others looked to alternative building materials to curtail building costs and solicited multiple bids. The most commonly recycled materials used in construction include concrete and steel, equipment and appliances, plastics, PVC, three-form panels, aluminum and gypsum board.
Given the anticipated increase in energy costs, more retailers will be focusing on sustainability initiatives to minimize their impact on the environment through recycling as well as refrigeration management programs, altering store design, landscaping and transportation. One-third of participants indicated they have a formal policy in place and an additional 40 percent have plans to implement initiatives in the next five years.
Discussion Questions: Has the supermarket industry entered a more rational period of store development? Is this only a temporary delay? Given the dicey economy and increased cost concerns, what’s a wise real estate strategy for supermarkets?
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The slowdown in building new stores was inevitable after decades of popping up more and bigger boxes. Economic factors only exacerbated the problem. What is still unclear is how retailers’ increased focus on sustainability will impact the downswing….
I track trends reported in the media on a weekly basis for clients. Two weeks ago, I reported the impressive number of new concepts stores and merchandising approaches that were being debuted across the country. Pundits would say that of course those projects were on the boards for some time. True, but the fact that retailers went ahead with the projects is encouraging.
I think in economic times such as we are in, the smart retailer steps up R&D, while cautiously moves ahead with aggressive roll outs. It is an important balance that keeps the company in the customers’ sightlines, while remaining cautiously optimistic.
The other side of the equation is that the media get on board and report as much of the innovation that is occurring as they do the ‘doom and gloom’.
As a site location analyst, I am always being asked, when is a good time to open a store? My answer is, anytime.
During a robust economy, low interest rates and strong population growth seem to fuel growth. Someplace right now in the USA this is happening. During economic downturns, we begin to see the consolidation of supermarkets and more stores are up for sale. The expansion of Wal-Mart, even though it has slowed, is still going on and will continue to fuel bankruptcies that, in turn, create buying opportunities. Even in a good economy, we are still over-stored and the country is littered with sterile, plain vanilla chain stores with no future. However, some of the individual stores in these chains are worth saving. Then throw in a hurricane or two, and we have a lot of new store development going on.
Considering all the new projects I am working on, pretty much the days of finding a good corner in a high growth area to build a 50,000 square foot 1980s style supermarket are over. Now, it’s organic stores, small formats, and take-overs of the financially failed stores of Winn-Dixie, A&P, Albertsons etc.
Rationality can be an elusive animal in the food retailing zoo.
But with more square footage now available than a corresponding growth in consumer numbers and disposable income, rational thinking breaks through in Retail Land and says it’s time to slow the pace and prepare for the next race. Then when a new spring season comes to the economy, and more mouths demand feeding, and further efficiencies occur in construction, food retailers will turn into greyhounds again and race to the building block.
Most new locations result in lower returns on investment than existing locations. Investors want improved ROI figures. Sales growth isn’t as important as ROI growth. Look at Wal-Mart’s stock price. Their sales grow and grow, but in the past 5 years the stock went from $55 to $55. No growth at all. Most retailers should pay their real estate folks to avoid signing new leases, similar to the government paying farmers not to grow surplus crops.
And every retailer can use sustainability as a great cover to push for the prevention of real estate development. More shopping square footage = lower retail profits. Retailers should circulate petitions against shopping center development. They should help raise PAC funds directed towards every “green” candidate and cause.
When Acme stores left the Philadelphia market in the late 70s to relocate in Florida, they poured concrete into all the drains in the sales floors (that served the various refrigerated and frozen fixtures) so the sites could not be used as supermarkets in the future. True story. No retrofitting. Probably illegal today (and perhaps even back then!).
These days retrofitting is an idea whose time has come (as the report documents, duh!). Just ask Trader Joe’s, which has been doin’ it for years–tucking themselves into strange little real estate crevices that no one would previously have seen as suitable for a food store. They get great lease terms, by the way.
All of the big players in the grocery bidness have experience with formats of all sizes, so they can execute in footprints of any size. Used fixtures abound. So now, they must actually consider attracting customers with intelligent marketing instead of overpowering them with slick new B&Ms. What a concept!
As a country, we are still overstored. Heading into a bad economy, it makes no sense to make an existing problem worse. Retrofitting is good. Doing a better job with what you’ve already got is even better.
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The slowdown in building new stores was inevitable after decades of popping up more and bigger boxes. Economic factors only exacerbated the problem. What is still unclear is how retailers’ increased focus on sustainability will impact the downswing….
I track trends reported in the media on a weekly basis for clients. Two weeks ago, I reported the impressive number of new concepts stores and merchandising approaches that were being debuted across the country. Pundits would say that of course those projects were on the boards for some time. True, but the fact that retailers went ahead with the projects is encouraging.
I think in economic times such as we are in, the smart retailer steps up R&D, while cautiously moves ahead with aggressive roll outs. It is an important balance that keeps the company in the customers’ sightlines, while remaining cautiously optimistic.
The other side of the equation is that the media get on board and report as much of the innovation that is occurring as they do the ‘doom and gloom’.
As a site location analyst, I am always being asked, when is a good time to open a store? My answer is, anytime.
During a robust economy, low interest rates and strong population growth seem to fuel growth. Someplace right now in the USA this is happening. During economic downturns, we begin to see the consolidation of supermarkets and more stores are up for sale. The expansion of Wal-Mart, even though it has slowed, is still going on and will continue to fuel bankruptcies that, in turn, create buying opportunities. Even in a good economy, we are still over-stored and the country is littered with sterile, plain vanilla chain stores with no future. However, some of the individual stores in these chains are worth saving. Then throw in a hurricane or two, and we have a lot of new store development going on.
Considering all the new projects I am working on, pretty much the days of finding a good corner in a high growth area to build a 50,000 square foot 1980s style supermarket are over. Now, it’s organic stores, small formats, and take-overs of the financially failed stores of Winn-Dixie, A&P, Albertsons etc.
Rationality can be an elusive animal in the food retailing zoo.
But with more square footage now available than a corresponding growth in consumer numbers and disposable income, rational thinking breaks through in Retail Land and says it’s time to slow the pace and prepare for the next race. Then when a new spring season comes to the economy, and more mouths demand feeding, and further efficiencies occur in construction, food retailers will turn into greyhounds again and race to the building block.
Most new locations result in lower returns on investment than existing locations. Investors want improved ROI figures. Sales growth isn’t as important as ROI growth. Look at Wal-Mart’s stock price. Their sales grow and grow, but in the past 5 years the stock went from $55 to $55. No growth at all. Most retailers should pay their real estate folks to avoid signing new leases, similar to the government paying farmers not to grow surplus crops.
And every retailer can use sustainability as a great cover to push for the prevention of real estate development. More shopping square footage = lower retail profits. Retailers should circulate petitions against shopping center development. They should help raise PAC funds directed towards every “green” candidate and cause.
When Acme stores left the Philadelphia market in the late 70s to relocate in Florida, they poured concrete into all the drains in the sales floors (that served the various refrigerated and frozen fixtures) so the sites could not be used as supermarkets in the future. True story. No retrofitting. Probably illegal today (and perhaps even back then!).
These days retrofitting is an idea whose time has come (as the report documents, duh!). Just ask Trader Joe’s, which has been doin’ it for years–tucking themselves into strange little real estate crevices that no one would previously have seen as suitable for a food store. They get great lease terms, by the way.
All of the big players in the grocery bidness have experience with formats of all sizes, so they can execute in footprints of any size. Used fixtures abound. So now, they must actually consider attracting customers with intelligent marketing instead of overpowering them with slick new B&Ms. What a concept!
As a country, we are still overstored. Heading into a bad economy, it makes no sense to make an existing problem worse. Retrofitting is good. Doing a better job with what you’ve already got is even better.