Grocery’s New Landscape Leads to a Rebalancing of Risk

By: Kenton McKeehan and Mike Jordan

Grocery-anchored shopping centers have been in favor among retail asset classes for the last decade. It started with the “retail apocalypse” and the notion that there was no real infrastructure around buying perishables online so the grocery-anchored asset would be more resilient. Even as the pandemic moved the needle on digital grocery buying, the brick & mortar store network was an asset due to being located so close to the consumer. However, looking at grocery only through the lens of e-commerce both undersells the risks to these assets happening in the broader grocery landscape and undersells the opportunities that power centers present.

While it’s true that grocery is more insulated from e-commerce than other retail sectors, that does not mean it is immune from the same pressures that other retailers have seen since the rise of digital shopping. Naturally there was a surge in online grocery sales during the pandemic and in the first few years following 2020. In 2024, it looked like the trend was leveling off as sales in the first half of the year were flat vs. 2023. However, online grocery sales surged in the 2^nd half, growing 17.7% according to a survey by Mercatus. Ecommerce’s share of all grocery sales is now at 12.5%, nearly 400 basis points higher than at the beginning of the pandemic and just 500 basis points less than overall digital market share across retail.

As grocery prices have remained elevated, retailers began offering deep discounts on digital orders to help drive that growth. However, not all grocers can afford to discount low margin items, which means that the bulk of that market share was coming from Mass Market retailers like Walmart and Target, who accounted for 48% of online grocery shopping. By contrast, traditional supermarkets only accounted for 27% of sales, a share that has been falling over the course of the year. So, what does this mean for real estate? If online channels continue to be the primary driver of growth in the grocery sector, that demand will be fulfilled by power center anchors, while traditional stores struggle to compete driving further consolidation (and store closings) among regional chains. Independent grocers have fared even worse, with market share falling 50% in the last 25 years.

Landlords that buy into grocery anchored centers, only to see a supermarket close will often run into additional trouble due to the high cost of retrofitting a box that doesn’t conform to the needs of growing big box retailers and may not be zoned for higher density retail uses. In addition, the majority of small shop tenants at these centers will come from local operators who will not have the corporate support to stay open in a mostly empty plaza. This will further constrain mark to market opportunities for community centers. Meanwhile, small shops within power centers are typically leased to national chains or franchisees with access to corporate credit quality, minimizing the risk when a large tenant goes dark.

Not only have supermarkets faced additional pressures from online shopping and mass merchants, but other new competitors have also emerged to offer shoppers even more choices to spread their grocery dollar. According to food & beverage consulting firm Gourmet Pro, there are only 5 traditional supermarkets operators among the top 15 grocery retailers.  In addition to the big box stores mentioned above, other dominant players include no frills discounters like Aldi and Dollar General along with specialty brands like Trader Joe’s. What they all have in common is a smaller physical footprint and more flexibility in real estate formats. In fact, all of these stores are often preferred cotenants within a power center. Driving traffic that ends up cross shopping at specialty anchors such as Dick’s Sporting Goods and TJ Maxx.

So, besides the shift happening with food & beverage sales moving away from supermarkets, what else makes power centers an attractive alternative for retail real estate investing? Following the economic crisis of 2008-09, power centers fell sharply out of favor. Many tenants went bankrupt, and others were clearly headed in that direction. Retailers were cautious about growth plans, and the sheer amount of space available meant that the tenant was in the driver’s seat in lease negotiations. However, that was over 15 years ago and there has been little new retail supply built over that time. Now, the tables have turned. There are an increasing number of retailers looking to fill boxes between 10,000-30,000 square feet and with strip center occupancy at an all-time high of 96%, attractive locations are harder to come by. Green Street recently looked at the retenanting dynamic between the Sports Authority bankruptcy of 2016 and the Bed Bath & Beyond bankruptcy of 2023. Their findings show that 80% of the Bed Bath & Beyond boxes were leased within one year, while the same could be said for only 20% of the Sports Authority boxes. And while construction costs have been a hindrance to development, only 8% of Bed Bath spaces needed to be split, less than half of the number of Sports Authority locations. This meant there was less CapEx for the landlord and several growing retailers who were willing to adjust their footprint to secure the best locations. As we work through the bankruptcy cycle with recent liquidations of Big Lots and Party City and the ongoing bankruptcy of JoAnn. We’re seeing strong demand coming out of the bankruptcy auctions, with roughly 1/3^rd of the Conn’s Home Plus stores being sold at auction in October, 2024. We’re seeing similar results from the several rounds of store auctions of former Big Lots locations.

But what about the retail apocalypse that said power center tenants were uniquely threatened by the rise of ecommerce? While it’s true a number of poorly merchandised or over-levered retailers have been buried in the shopping center graveyard, those that have adapted have not only survived but thrived! These retailers have learned that ecommerce is complimentary to brick & mortar locations and not the threat it once seemed. One strategy is to leverage store locations as part of the supply chain. Target came out of the pandemic with record sales due to the success of their drive-up service. In fact over 90% of their digital sales went through a store at some point in the customer fulfillment process. Another way to get consumers to come to your store is through excellent service and localized selection. Barnes & Noble is having one of the most remarkable turnarounds in retail history by putting the power of buying inventory in the hands of local store managers and using a brighter, smaller, and more welcoming store layout. After being left for dead, they have opened over 70 new locations in the last two years, with plans for 60 stores in 2025!

There will continue to be superior grocery operators that add value to the real estate project they anchor like H-E-B in Texas and Wegmans in the Northeast and Mid-Atlantic. As the fallout from the failed Kroger/Albertson’s merger has shown, the landscape looks increasingly challenging in the years ahead for traditional supermarkets which should give savvy investors pause when evaluating grocery-anchored deals. However, retail is thriving more than ever and increasingly the opportunity for investment will be in multi-anchor formats like power centers. Next month, we will look at how power centers are poised to have some of the most attractive mark to market opportunities in the retail world.