Grocers Must Adapt to Tech and Other Shifts, Industry Veteran Warns

MIAMI, March 8, 2017 /PRNewswire/ -- Rapid shifts in demographics, shopping behavior and technology are forcing U.S. grocers to change the way they do business—or risk falling prey to disruptive competition, warned Joe McKeska, President of Elkhorn Real Estate Partners, during a March 2 panel discussion at the annual International Council of Shopping Centers (ICSC) Open Air conference in Miami.

"Shoppers in coming years will think nothing of using voice-activated devices like Amazon's Echo to restock their kitchens," McKeska told the landlord-heavy audience.  "They'll habitually cook meals with ingredients delivered by the likes of Blue Apron, or drive to kiosks outside of their neighborhood store to pick up groceries after work. We're already seeing this kind of channel fragmentation and disintermediation across the industry, and it will only accelerate."

A 25-year veteran of the grocery business who previously headed real estate operations for Southeastern Grocers, LLC and Supervalu, Inc., McKeska recently formed Elkhorn Real Estate Partners along with Melville, N.Y.-based real estate firm A&G Realty Partners. The venture focuses on helping retailers and investors maximize their real estate portfolio performance in alignment with their broader business strategies. Joining McKeska on the panel were Jeff G. Chamberlain, Senior Vice President of Real Estate and Facilities for Publix Super Markets, Inc., and Ted Frumkin, Chief Development Officer for Sprouts Farmers Market.

The panelists were unequivocal about the need for grocers and their landlords to prepare for major shifts. "In this disruptive environment, owners of grocery-anchored centers are going to need to find ways to both strengthen good-performing assets and deal with problem assets far in advance of critical events," McKeska told the audience. "In some cases, that might mean identifying opportunities to work with retailers to restructure leases and help them reposition certain stores. In others, landlords might work with retailers to recapitalize assets and co-invest to improve the operating performance of both the retail store and shopping center. The key is to avoid passivity. To compete effectively in the future, you have to get ahead of the curve."

McKeska started the discussion by outlining the gamut of disruptive forces that stand to affect traditional grocers. These include expansion by already popular, non-traditional specialty chains such as Trader Joe's, Sprouts, and Fresh Thyme, as well as newcomers such as European discount grocer Lidl, which reportedly aims to open up to 100 stores on the East Coast within the next year.

While the effects of ecommerce on the grocery sector have been relatively modest thus far, McKeska said, traditional grocers should not be complacent. "Yes, it's true that ecommerce still only accounts for an estimated 2 percent of the food-at-home market," he told the audience. "But it is growing rapidly. According to a three-year study recently published by FMI/Nielsen, e-commerce may capture up to 20 percent—or $100 billion—of the food-at-home market by 2025.  This is the average sales equivalent of 3,900 brick and mortar grocery stores."

Fortunately, some grocers are already making changes. "As of today, 600 Walmart stores now offer online grocery pick up, and Walmart aims to double that number by next year," McKeska said. "Kroger, too, has been aggressive in developing these capabilities through its Clicklist program, which has been rolled out to 440 stores thus far." Ultimately, such adjustments will enable grocers to provide personalized and flexible offers that can be used for in-store shopping, home delivery, or click-and-collect orders. "That's the true power of omni-channel and omni-format retailing," McKeska said.

Already, most of the large, publicly traded grocers in the United States are shifting their capital spending in ways that better position them for such changes. "They're generally not spending less capital overall," he said. "They're spending less on net new store growth and focusing instead on ramping up ecommerce and remodeling existing stores to roll out many of these omni-channel initiatives and to improve their customer offering and experience."

Walmart is a clear example of this trend, McKeska noted, pointing to the decline in U.S. store openings from 230 in 2015 to roughly 130 in 2016 and a planned 55 this year.  "Despite the steep drop, they are still projecting to spend the same amount of capital, $11 billion, as they did in the two prior years, with the majority of the capital shift going towards remodels and e-commerce initiatives, he reported.

Better store experiences can combat the tendency of shoppers to sit at home and buy things online, he advised. So, too, can a sharp focus on fresh and prepared foods. "On the traditional side, at least, that is a strong way for some chains to differentiate," McKeska said.

Given these and other changes, McKeska noted during the discussion, landlords and investors should be open to the idea that open-air shopping centers may need to undergo physical changes in the future. "As click-and-collect grows in popularity, some of these locations are going to become, in part, warehouse-style distribution and fulfillment centers," he noted. "That could mean modifications to physical stores as well as the addition of drive-up kiosks, pick-up lanes and parking spots. It will take some getting used to."

Press Contacts: At Parness & Associates Public Relations, Bill Parness, (732) 290-0121, [email protected] or Lisa Kreda, [email protected]

SOURCE Elkhorn Real Estate Partners