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Shopping Centers Today -> August 2001
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SUPERCENTERS POSE QUANDARY FOR STRIP CENTERS
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By Dave Bodamer
Supercenters operated by the giant discount chains are gaining a greater share of the grocery market, leaving many in the supermarket-anchored strip center segment to wonder how this will impact their business in the long run.
Supercenters, which usually contain at least 150,000 square feet of selling space split between a discount store and a full supermarket, are cutting into the $500 billion grocery industry, and now account for nearly 10% of all sales in the market segment, according to Willard Bishop Consulting (WBC), a grocery industry consulting firm based in Barrington, Ill.
“While that’s impressive by itself, what’s more scary is that [Wal-Mart] hasn’t even begun. It’s only penetrated a very small part of the country with its supercenter program,” Developers Diversified Realty Chairman and CEO Scott A. Wolstein said. “When you start with that percentage of the industry and you’ve only rolled out a small percentage of your program and then couple that with Kmart and Target along with Sam’s Clubs, Costco and BJ’s, we’re seeing a fundamental shift with how groceries are being distributed in the United States.”
Wal-Mart Stores, Kmart and Target all have supercenters now, though Wal-Mart has the most, with 965 Wal-Mart SuperCenters compared with Kmart’s roughly 100 Super Kmarts and Target’s 37 Super Targets.
The supercenter formats along with wholesale clubs Costco, BJ’s Wholesale Club and Sam’s Club, control a combined 17.2%, according to WBC. Wal-Mart alone posted an estimated $17.1 billion in grocery sales (compared with leader Kroger Co.’s $49 billion) last year. The $17.1 billion figure ranks fourth nationally just 12 years after Wal-Mart opened its first supercenter.
“The mantra in recent years has been that if you want to own strip centers, own grocery-anchored centers,” Wolstein said. “Our opinion is that that market is under a lot of pressure. Some say people always have to eat, but what’s missing is that people don’t have to buy groceries at those centers.
“Intuitively you’d think people would want to buy closest to home, but people will sacrifice a lot in order to save money,” he added. “That’s why I think Wal-Mart is so successful.”
Wal-Mart is growing at a rate of 150 to 180 new supercenters each year. Kmart plans to add 100 in the next four years and is seriously considering converting 1,000 of its regular stores, and Target is growing at a rate of 30 stores a year, according to each company’s stated plans.
By 2005 WBC estimates that there will be 2,020 supercenters in the United States, up from 1,283 in December 2000, along with 1,310 wholesale clubs, up from December’s 1,103. Those two segments will by then control an estimated 24% of grocery sales.
The largest players in the supermarket industry nationally, Kroger, Safeway and Royal Ahold, have countered supercenter development by consolidating and by building larger stores themselves. Recent projects throughout the United States have featured supermarkets of more than 70,000 square feet, more than double the size of most stores 20 years ago. Kroger also operates Fred Meyer supercenters, giving it a stake in the growing business.
Strip center operators, such as Pan Pacific Retail Properties, San Diego, say that while some customers may be willing to trek to supercenters for some of their grocery needs and bulk buys, traditional supermarkets will draw in customers two or three times a week for more regular purchases.
“Our grocers continue to show strong trends in terms of sales growth,” said Pan Pacific President Stuart Tanz. The firm is the largest owner of supermarket-anchored properties on the West Coast in terms of gross leasable area. “When you look at the West Coast, I certainly believe that there’s room for Super Kmart, Super Target and Wal-Mart SuperCenters.”
In general, though, most developers say strip center performance remains strong in denser areas.
“By and large we’re in densely populated suburban areas where Randall’s or Kroger have built 60,000-square-foot, state-of-the-art big stores that can hold their own against a Wal-Mart SuperCenter,” said Houston-based Weingarten Realty Investors President and CEO Drew Alexander. “Those work for the person who doesn’t want to have to put up with a 200,000-square-foot superstore.”
Alexander, whose firm is also a large player on the West Coast, said supercenters are having a more marked effect in rural areas than suburban or urban areas.
“We have a couple of centers in smaller towns where people can drive across the town or county and not be as pressed for time. We’ve noticed the effects of a Wal-Mart SuperCenter can be more significant there,” Alexander said. “But in dense suburban areas close to cities there’s a large enough market that the good grocery stores and good supercenters can all do business.”
Celia Wing, Cary, N.C.-based Konover Property Trust senior vice president of leasing, said her company has had similar experiences in the Southern United States. Konover has seen grocers leaving markets after the arrival of Wal-Mart SuperCenters while the strongest grocers remain competitive. “Mainly I believe our grocery retailers are the ones that know how to compete with Wal-Mart,” Wing said.
Tanz noted that grocery stores and supercenters are not going after the same customer base. “Our centers cater to what we call the basic needs of the community. We define the community as the population that’s within a 1 to 3 mile radius of the shopping center,” Tanz said. “Wal-Mart, Kmart and Target, tend to look at a much wider radius. They can go 10 to 15 miles, sometimes even 30.”
“The lesson is that location is still so important,” Alexander said. “Having top locations is the best security against mergers and closures.”
Ultimately, grocery stores competing with the supercenters are competing on price. Customer service and convenience will help keep people returning to traditional grocers, but more than anything else the buyers most likely to go to the discounters are price-conscious.
“What’s going to be important is customer loyalty,” Tanz said. “There are a number of operators that have established close customer loyalty. Because they have established themselves in the community, customers will continue to shop at those grocery stores rather than go to Wal-Mart for groceries.”
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