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How to Increase the ROI of Today’s Grocery-Anchored Retail

Grocery stores have an opportunity to increase ROI and become retail anchors of the future by adapting infrastructure to a rapidly changing consumer model.

It’s an inexorable fact of human existence that some people can adapt well to change and others struggle. It is no different in the world of real estate. Brick-and-mortar infrastructure has historically evolved based on the needs, utility and technological innovation of the populations it serves. Commercial retail is currently in the midst of a significant downturn. But grocery stores have an opportunity to increase ROI and become retail anchors of the future by adapting infrastructure to a rapidly changing consumer model.

Ushering in a new era of grocery shopping

Triple net grocery store real estate is still priced as if there is very little obsolescence risk, and I don’t think that always makes sense, particularly because the retail space itself comprises the highest cost of operation. Grocery stores have historically been very stable assets and I think they will be in the future if they adopt malleable models. If these assets are not adaptable, you may see chains like Kroger, Safeway and Publix, a large segment of the 38,000 total supermarkets in the U.S., retract, while smaller chains disappear altogether.

Online grocery deliverables will comprise at least 20 percent of market sales by 2025. Currently, about 7.7 percent of U.S. consumers order at least some of their groceries online, an uptick from 5.7 percent two years ago. There are many factors and behaviors fueling the merger of e-commerce and grocery shopping. Millennials, who are both the largest and fastest-growing generation in U.S. history, are about to move into their prime working and spending years. Compared to past generations, they prioritize balance and wellness in their lives, convenient access to goods and services without the burdens of ownership (what we think of as the “sharing/gig economy,”) they are technologically savvy and especially value access to prepared foods and healthy to-go items at grocery stores. Not surprisingly, they are leading the demographics of demand for flexibility and personalized experience in shopping, which includes groceries.

Changing brick-and-mortar models

From a broader perspective, mixed-use development has gravitated towards condensed spaces and inclusive community-based construction, the integration of future technology considerations such as driverless cars and “smart automation,” as well as facilitating a better use of time. People’s comfort level with ordering goods online continues to grow and there’s nothing stopping this trend from expanding to groceries. Concurrently, grocers have turned to utilizing metrics, big data and analytics to create a personalized shopping experience for consumers on an individual level.

The acquisition of Whole Foods by e-commerce behemoth Amazon will greatly accelerate this conceptual merger. Existing brick-and-mortar space can already be converted into centralized warehouse hubs, many of which adhere to the infrastructure and zoning ideal for groceries. Simultaneously, they plan on proliferating a series of compact, 1,800-sq.-ft. neighborhood retail spaces called Amazon Go, providing fresh staples and prepared foods. In conjunction with current delivery platform Amazon Fresh, this should capture a large market share. But other large conglomerates with mobile capabilities like Wal-Mart and Google Express will adapt, and the industry will spawn customized delivery service companies.

To me, as a civil engineer, the central question is: as grocers, retailers and delivery services evolve, what physical features will they necessitate in real estate spaces and how can we change our current retail building stock to meet this demand? Here are three key physical features that I believe need to be addressed to make a shopping center more adaptable in the future:

1: Could the typical 45,000-sq.-ft. grocery store give way to a 20,000-sq.-ft. vertical footprint?  

Delivered groceries are currently not profitable for stores to incorporate, primarily because the infrastructure isn’t designed for it. As this trend continues, however, grocers will see more pressure to adapt to delivery and pick-up models. Structurally, this could be accomplished by expanding warehousing to floor ratio via vertical multi-story growth. Upper floors could be used for bulk storage, packaging and checkout for cyber-shoppers, while a compressed ground retail space would be reserved for expedited fresh and prepared food shopping.

The size of an average Costco warehouse is 144,500 sq. ft., and typical ceiling height clearance for non-perishable warehousing (Amazon, Wayfair) is at 30 feet. To incorporate warehousing and delivery, grocery stores must increase mezzanine ceiling clearance from current 20-25 feet clear to at least 30 feet, and adopt a smaller floor footprint. Zoning and building codes should adapt building height, ceiling heights, revised bulk standards and MEP design. External layout considerations will include location and expanded use of docking areas for loading and delivery, a drive-through for customer pick-up and short-term curbside parking. This may require landscaping changes, such as a decrease in long walls surrounding the building.

2: Will e-commerce permanently shrink shelf stable footprints?

The inhibitive limitation to a fully automated model is that humans still prefer to shop for fresh groceries. We want to pick out the ripest piece of fruit, or have the butcher cut a select steak of our liking. This can still be achieved with a much smaller overall footprint for in-person shopping. In a hybrid, multi-story model, fresh consumables such as produce, meat, dairy, etc. would be situated on the main floor, while packaged and stable goods would be assembled in a different area for delivery. Satellite stores would adopt a “corner market” model, with specialty goods and food in a low-cost rental space.

The average grocery store is 45,000 sq. ft., with some upscale stores ballooning to 100,000 sq. ft. Smaller chains (Shop Rites and A&Ps), who may become obsolescent, and affluent luxury grocers, who may not all adapt, could be most affected by the contraction. The ROI of these modifications to retail investors and developers in the long run will be immense. Conventional grocery stores have operated on low cost margins for years. Yet 80 percent of a grocery store is occupied by shelf-stable goods in the center of the store. Compressing fresh groceries from the outer perimeter to a small space (1,000-2,000 sq. ft.) will improve margins, speed up shopping and help retailers capitalize on cheaper properties.

3: Will fewer drivers and overhauled parking layouts provide new opportunities?

Current parking ratio requirements for grocery stores may require five spaces per 1,000 sq. ft., with slight variances depending on the retail environment. As shoppers alternate between drive-throughs, ride sharing, pick-up spaces and short-stays, stores will need less parking. This, along with delivery dock re-allocation, may significantly reduce blacktop volume, creating an opportunity to repurpose space for pad development in shopping centers. A side benefit is the smaller overall environmental footprint created by a compact building design with blacktop space. The rooftop of an expanded vertical building can greatly reduce blacktop pavement run-off.

A bright future for grocery e-commerce ROI

Grocery stores have already been evolving structurally in subtle ways. First, average grocery stores greatly expanded footprints to 4.15 sq. ft. of retail food space per person, nearly 30 times higher than in 1950. Much of this expansion involved offering more than just groceries, including prepared foods and specialty items. Then, along came the stripped-down warehousing concept, with stores like Costco and Sam’s Club selling bulk items in an industrialized format. Now, it’s just a matter of putting it all together with new technology, and optimizing commercial real estate spaces, including transforming existing infrastructure, to minimize cost of operation and maximize ROI based on consumer demand.

Reports of retail’s coming demise have been somewhat exaggerated. Retail isn’t dying, just evolving. Some of the “growth spurts” and adjustments are painful, but could ultimately strengthen the sector for seamless, modernized transactions. Especially for groceries, this will include real estate changes to facilitate a hybridized model of virtual and physical shopping.

Joe Derhake, PE, serves as the CEO of Partner Engineering and Science, a national environmental and engineering due diligence consulting firm. Derhake has over 25 years of experience as a professional engineer. He is a registered civil engineer.

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