July 06, 2017

What Amazon’s Big Move Means for Retail Real Estate

Amazon Establishes a Brick-and-Mortar Presence with the Acquisition of Whole Foods

Amazon Enters Grocery Business

Amazon has decided to purchase Whole Foods for $13.7 billion dollars, after testing a variety of concepts to enter the grocery store segment. This transaction, allows Amazon to have direct access to the grocery store segment which accounts for consumer spending of $636 billion per year. It also highlights the significance of omnichannel platforms, which incorporates a mix of brick-and-mortar establishments with an online footprint to drive traffic and sales. As a leader of ecommerce retail sale distribution, Amazon will steer the sector towards innovation and a more integrated customer engagement model. As a result, the lines will blur on what constitutes traditional retail, further reinforcing the importance of brick-and-mortar spaces.

Whole Foods Purchase Provides Amazon Excellent Real Estate, Tech Testing Ground

Although Amazon has been testing a variety of concepts to enter the physical storefront sector, the purchase of Whole Foods Market puts the grocery sector directly in the firm’s sights. In addition, the high-quality demographics surround­ing Whole Food’s existing footprint likely overlap heavily with Amazon Prime us­ers, providing a built-in incentive for the combined firm to draw in more custom­ers. While Amazon could have spent years opening a handful of locations, the acquisition turbocharges its efforts and provides a testing ground for frictionless shopping using a range of advancements including big data, machine learning and sensor technologies. The firm will likely expand the existing delivery service offered by Whole Foods by utilizing its extensive logistics operations to stream­line service offerings and drive efficiency. Cross-selling opportunities across its many business lines are also likely within Whole Foods locations for Amazon products such as the Kindle, Echo, Fire and Prime-related benefits.

Online Grocery Industry Gathering Traction

Consumers’ preference for personally selecting fresh items has insulated the grocery business from intrusions by e-commerce, but the increasing consumer adoption of online shopping has started to shift the trend. Early entrants into this sector included pure-play e-commerce companies like WebVan. Although it generated modest success in dense urban markets such as San Francisco, adoption was limited. Traditional grocers including Safeway tried to leverage existing retail locations by adding online sales and delivery capabilities, but they have generated little traction. Peapod is trying to engage this sector and an­other entrant, lnstacart, offers two-hour grocery delivery services. Walmart has also joined the fray, leveraging existing associates who will deliver items to on­line customers, while Midwestern grocery chain Meijer is also moving online. Amazon’s move into the grocery business holds subtle differences from the competition. 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 system. It will blend these strengths with Whole Foods’ 467 locations, existing supplier network and brand that is known for quality. Together, the unified offering has the potential to offer more than the sum of the parts, possibly reinventing the grocery business in the process.

Rapid Grocery Expansion Heightens Competition

While Amazon’s entry into the grocery business holds the prospect of an inno­vative model blending online retail with this stalwart segment, a range of grocery companies have committed to significant expansion. Publix is set to open 20 new stores this year, with Wegmans planning a similar expansion, primarily in East Coast suburban communities. Kroger plans to open 55 stores and Sprouts is scoping for 40 new locations nationwide. Adding to the mix, German grocer Aldi, which offers a no-frills, value experience, has announced a $3.4 billion remodel of its existing storefronts together with a U.S. expansion that will add 900 new locations by 2022. Another German chain, Lidl has initiated an aggressive entry into the U.S., with plans for 100 East Coast locations by the middle of next year. Lidl’s smaller 20,000-square-foot operations cater to value-minded customers.

Expansions Strain Retail Space Availability

Significant grocery store expansion will strain retail space availability as vacan­cy rates now stand at 5.4 percent on a national level, the lowest in 16 years. Retail developers have been cautious in the postrecession era, adding an av­erage of just 48 million square feet per year since 2010, roughly one-third the annual average from 2000-2008. Much of the construction in recent years has been pre-leased or net-leased properties, with little speculative additions. The noteworthy expansion by grocery chains, which typically anchor neighborhood and community centers, will likely outstrip available space and spark additional retail construction. The announced store openings by major grocers will absorb an estimated 25 million square feet, which could be difficult to source without additional development. As new grocery stores are built, in-line space will likely accompany it, pushing retail construction out of its currently flat trajectory and into a period of more aggressive development.