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Amazon’s Entry Means Center Owners Need to Update Strategies

With Amazon Inc. making a major splash in grocery retail with its $13.7 billion acquisition of Whole Foods Market, shopping center owners including Retail Opportunity Investments Corp. (ROIC) are closely watching for the potential competitive ripple effects.

Stuart Tanz, CEO of San Diego-headquartered ROIC, noted that his company over the years has focused exclusively on grocery-anchored shopping centers on the West Coast, where retail centers in strong locations remain generally in short supply relative to demand in places like San Diego, San Francisco and Seattle.

That strategy is not likely to change anytime soon. And until online shopping becomes a dominant force in the grocery sector — it currently accounts for just 2 percent of overall U.S. food sales, according to various industry sources — the brick-and-mortar grocery store is in no danger of becoming extinct.

Specialty Grocers

“The main thing I look at is keeping the portfolio diversified,” Tanz said. “We have tenants that are traditional supermarkets, there are high-end grocers and discount grocers, and we have centers with Asian markets and other specialty grocers.”

“You have a lot of these grocery companies looking to expand, but there are only so many spaces available,” he added, referring to a constrained construction climate for West Coast retail centers that has persisted for nearly a decade.

ROIC is a publicly traded real estate investment trust, and the bulk of its properties — 86 centers spanning nearly 10 million square feet as of mid-2017 — are anchored by a Whole Foods competitor. Tanz is anticipating that more grocers will respond to Amazon’s strategy, which is really a doubling down on multi-channel sales rather than a bid to put physical grocery stores out of business.

Need for Speed

There are still items, like fresh produce, that consumers prefer buying from a nearby grocer and which cannot always be delivered with the same quality. Tanz and other observers said the physical store will remain central to grocery sales for the foreseeable future, but to stay competitive with Amazon, supermarket chains and other retailers will need to make the shopping process faster for consumers — cutting out the time they would normally spend wandering aisles for items, then waiting in checkout lines to pay.

For instance, Vons, an anchor at several of ROIC’s properties, recently began offering on-site pickup of groceries that shoppers have purchased ahead of time online or via a mobile app. That’s similar to the move by Wal-Mart Stores Inc., the nation’s largest seller of groceries, which recently designated a parking lot area where customers can have pre-purchased items placed directly into their cars at several U.S. stores, including four in San Diego County.

Accelerating E-Grocery Sales

In its own recent “quick take” report, commercial real estate research firm Green Street Advisors said Amazon will likely experiment “with a variety of e-grocery business models that would not be possible without a physical brick-and-mortar infrastructure.” By adding new touch points with consumers, Amazon and its competitors will likely accelerate the growth of e-grocery sales in the U.S., which has so far lagged behind the pace of adoption in other countries.

In terms of real estate, Green Street noted that Amazon’s impact on strip retail centers will be minimal in the near term, but could head higher over time. Some property landlords may need to contribute “defensive capital” to keep their centers viable as multi-channel grocery sales evolve.

Also, if Amazon/Whole Foods eventually gains significant market share in groceries, some U.S. strip centers could see downward pressure on rents and small-shop occupancy if traditional grocers lose sales.

If Amazon is successful in growing its grocery sales via Whole Foods, the long-term winners could include retail center owners with Whole Foods as a tenant at multiple locations. According to Green Street, those include San Diego-based American Assets Trust Inc. and Florida-based Regency Centers, though the latter firm also owns several centers (including some in the local market) anchored by Whole Foods competitors.

According to Chicago-based real estate consulting firm Elkhorn Real Estate Partners, Amazon’s ramped-up role in groceries has helped to disrupt conventional wisdom regarding how to invest in grocery-anchored retail centers. Investors now have to monitor issues including how well grocers adjust their digital sales capabilities and physical store spaces to accommodate the evolving multi-channel climate.

“If picking winners in this sector used to be relatively easy — by, for example, closely watching financial strength and performance and new store growth and merger and acquisition trends — those days are gone,” said Elkhorn President Joe McKeska, writing in the latest issue of the news magazine Real Estate Forum.

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