Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.
Issue link: https://westernrealestatebusiness.epubxp.com/i/873170
74 • September 2017 • Western Real Estate Business www.REBusinessOnline.com THE AMAZON EFFECT HITS THE GROCERY SCENE Amazon-Whole Foods merger reinforces importance of having a brick-and-mortar retail presence. By Jeff Shaw T he June announcement that on- line retail giant Amazon plans to acquire upscale grocery chain Whole Foods for $13.7 billion sent ripples through the commercial real estate industry. The move signals a lot of trends and changes within the retail sector, ac- cording to a newly released report by real estate brokerage firm Marcus & Millichap. "The purchase highlights the im- portance of omnichannel platforms, which incorporate a blend of brick- and-mortar establishments with an online footprint to drive traffic and sales," states the report. "In addition, grocery stores are typically retail cen- ter anchors, underscoring the impor- tance of strip and neighborhood cen- ters in the retail landscape." The 11 largest grocery chains in the country all plan to expand this year, with many doing so aggressively. Dis- count grocer Aldi, which already has more than 1,600 locations, expects to open 900 new stores by 2022. This expansion within the grocery sector is snapping up a lot of avail- able real estate. Combined with a low rate of new retail construction over the past seven years since the Great Recession, retail vacancy has reached a 16-year low of 5.4 percent. The flip side is that existing space is extremely constrained, and in- creased construction starts may be on the horizon to fill this gap, accord- ing to the report. "The announced store openings by major grocers will absorb an esti- mated 25 million square feet, which could be difficult to [find] without additional development. As new grocery stores are built, in-line space will likely accompany [the growth], pushing retail construction out of its currently flat trajectory and into a period of more aggressive develop- ment." Groceries Fall Behind in Online Trends Although e-commerce continues to grow quickly — increasing 148 per- cent over the past 10 years — it still only makes up 13.2 percent of core retail sales, which excludes gasoline and automobiles. The vast majority of shopping is still done in buildings, but online sales have become a key component in many sectors. Grocery stores have been particularly resis- tant to this trend, according to the report. "While online sales have integrated successfully into a wide range of re- tail segments, Internet sales of grocer- ies have notably lagged. Amazon, by way of its Whole Foods acquisition, is seeking an opportunity to establish a more meaningful brick-and-mortar presence in order to synergize its on- line presence with its ambitions for the broader retail landscape." The online sales component of the grocery segment has increased ap- preciably in recent years. According to the report, less than 10 percent of shoppers were likely to buy some (but not all) of their groceries online in 2015. That number has increased to nearly 30 percent in the report's esti- mate for 2017. This is where Amazon and Whole Foods could potentially lead the way in future online grocery orders. "Amazon brings an e-commerce- savvy customer base, a powerful web portal, a penchant for innovation, a significant capital war chest, and a seasoned fulfillment and delivery sys- tem," states the report. "It will blend The Whole Foods acquisition by Amazon is indicative of an evolving trend happening in the retail industry, which, in my opinion, has the potential to strengthen the entire retail property sector. As we know, brick-and-mortar stores have seen quite a shake-up over the past couple years as e-commerce has led to a weakening and, even, the shuttering of many well-known brands. Whole Foods was seeing its share of troubles as well. However, unlike other re- tailers that may not have been so lucky, e-commerce ironically may be this upscale grocery retailer 's saving grace. The Whole Foods brick-and-mortar stores will continue to operate under the Whole Foods brand, and they will also serve as a local distribution center for on- line orders. Essentially, the brick-and-mortar store will become a bigger profit center as it increases sales via e-commerce activity. This successful strategy is not new. The retail store as a distribution center was first executed in the 1990s when online ordering initially began. Yet it was done primarily on a business-to-business (B2B) level. For ex- ample, a business would order a substantial amount of office products online from an office supply store to be delivered to them directly. That retailer would gather the items together and ship them to the business. The physical office supply store would get the sales credit for that order, despite it being originated online. This system strengthened the overall sales for the store. Ulti- mately, what was old is new again. However, this time we will be seeing a much more streamlined and sophis- ticated e-commerce system that is consumer-centric as opposed to primarily B2B. With this strategy, brick and mortar and e-commerce are no longer working against each other, they are working together for the ultimate success and longev- ity of the brand. Physical stores have suffered as e-com- merce takes some of their market share. I see this trend in omnichannel presence increasing as retail moves forward, strengthening the overall retail property sector. In ad- dition to the grocery sector, major retail categories that will benefit include of- fice supply (which typically has a dis- tribution center in its store already for its customers), soft goods and sport- ing goods. We are already seeing this favorable strategy in the restaurant sector with delivery services like Door Dash and Uber Eats, but this will continue to grow as well. Below are some key benefits on the viability of bring- ing online sales to the store level: • Physical retail locations' sales will increase. • The retail store becomes a local distribution center for its customer base in the community. • The retailer's brand presence continues in the local community. • Store count isn't diminished, which is key for share- holder confidence. • The customer has options: order online, pick up pre- packaged in store, have doorstep delivery or shop tradi- tionally. • If the store doesn't have the item, a local distribution center can quickly deliver to the store or residence. Consumers like variety and they love brands in gener- al. No one wants to live in a world with industrial distri- bution centers that replace retail stores. Consumers also demand choices regarding how and when they receive their goods. Amazon recognized these consumer funda- mentals with its acquisition of Whole Foods. I believe this onmichannel paradigm will continue to proliferate over the coming months and years as retailers refine and adjust to technologies that will enable them to thrive in both physical and online worlds. HOW THE WHOLE FOODS-AMAZON MODEL CAN TRANSFORM THE FUTURE OF RETAIL REAL ESTATE By Keith Kropfl, Principal, Avison Young in Irvine, Calif. The Whole Foods in Reno, Nev., is situated on the Biggest Little City on Earth's most well-known street at 6139 S. Virginia Street. Kropfl continued on page 77