What’s Next in California Grocery Real Estate

Earlier this month, JLL, a commercial real estate firm, released its 2019 Grocery Tracker. The report showed an expanding grocery industry led by new store openings in California, Texas and Florida. The CGA communications team caught up with one of the report’s authors, Taylor Coyne, for a follow-up to dive deeper into the report’s conclusions to draw out new insights for California’s grocery community.

For reference, the full report can be downloaded here.

California grocery stores were one of the largest drivers of square footage growth in the U.S. This growth sounds positive, yet year-over-year, it appears the percentage growth was actually lower. What is your overall impression of the California grocery market?

A clarification about those percentages – California had 12.2 percent of all new openings (in square feet) in 2017 and had 7.83 percent of all new openings in 2018. California’s year-over-year growth is not reflected in that number. It took less of the overall pie because Florida had such strong growth from Publix. California opened approximately 157,000 square feet of more grocery space in 2018 compared to 2017. All signs continue to point to a strong and healthy California grocery market.

California growth was boosted by expansions of Sprouts Farmers Market, Aldi, Grocery Outlet, and Smart & Final. Do the particular brands that are expanding, and their operational niches, signal anything in particular to you about the state’s grocery community?

One of the characteristics of well-performing grocers is an awareness of the customer. All these grocers are doing a good job at connecting with shoppers both from the quality of products and price point. There is an acknowledgment that the modern consumer is focused on wellness and these grocers are responding by providing food options that appeal to this desire and need to purchase good quality foods and products for themselves and their families – all while not breaking the bank.

Grocery Outlet is headed towards an IPO while Smart & Final has been reacquired by Apollo. What do these strategies for raising capital, both going public and private, tell you about where the California grocery market is headed?

It’s about growth opportunities for these grocers. Raising additional capital to expand footprints will benefit many markets across the U.S., including California. California is and will likely remain a top market for grocery expansion because of our population numbers and the density of our major urban hubs. Grocers will want to continue to solidify footprints in the state.

A lot has been written in the industry about the trend towards smaller formats. Your report also talks about this trend, referencing formats designed for short, frequent trips. Why do you see a bifurcation in customer behavior occurring as the frequency of small trips grows, all while click and collect/e-commerce grow? What can this mix tell grocers thinking about building new storefronts?

This all goes back to realizing that not every customer shops in the same way and not all customers have the same shopping behavior for every grocery trip. It’s about providing reliable options for every shopper. So, while there seems to be a bifurcation in the way customers shop, there’s more fluidity between those two sides of the spectrum. In the years to come, grocers are going to become increasingly aware of these varying shopping patterns and will expand format options. As we see grocers expand, I think we’ll be seeing more concepts emerge as part of that process.

Despite the trend towards smaller formats, recent headlines have also noted that grocery retailers are exploring opportunities in shopping malls or replacing Sears and other failing mass retail concepts. Then again, there is also concern about foot traffic falling for malls…What is the logic behind these large concepts?

It’s not just grocery stores moving into these vacant spaces. We’re seeing much more food and beverage, entertainment concepts, and fitness and wellness backfill these spaces. These concepts are helping to reinvigorate these centers and are giving people new reasons to shop there. The location of these centers is also appealing. Many of these opportunities are in great locations with access to nearby consumer spending. Grocers may hope to capitalize on that proximity of potential shoppers.

Follow up to #5, what consumer dynamics are pushing grocery retailers into redeploying mall spaces? Will that continue?

It stems from customers wanting more out of their shopping experience at these centers and malls. It’s also about convenience. There is an appeal to checking off multiple items on a to-do list and a co-tenancy with grocery and other more typical retailers gives that ability and flexibility to the customer.

Final question: As e-commerce grows, do you predict grocers will grow square footage for “dark stores” or “ghost” supermarkets to separate the shopping experience for in-store vs. online?

We’re already seeing grocers experiment with micro-fulfillment centers both attached to existing stores and as stand-alone sites. We mentioned Giant Foods new click-and-collect store that also allows customers to order groceries at a walk-up counter. I expect we will see more grocers explore these hybrid concepts in the future as companies work to provide this flexible shopping experience to all types of shoppers.