Grocery Wars Intensify in Texas

Taylor Williams/Texas Real Estate Business - When it comes to store size in the Texas grocery business, there’s no such thing as too big or too small. From the 100,000-square-foot Kroger to a 5,000-square-foot Hispanic butcher, the state’s torrid population growth has not only opened the door for a plethora of grocery concepts and competitors, but it has also given grocers the exibility to match the size of their stores to the population densities of the surrounding submarkets.

The Lone Star State has added approximately 850,000 new residents over the past two years combined, with the growth balanced between urban and suburban areas. According to Simmi Jaggi, senior vice president in JLL’s retail brokerage division, this balance enables grocers to customize new lo- cations to existing market characteristics, rather than gamble on an influx of people that may or may not come. “In urban settings we see grocers getting smaller and more agile, in some cases going to a vertical, multi-story layout,” says Jaggi. “But in suburban markets, we see grocers generally getting bigger.”

Even in urban settings, when land constraints become a bigger factor in site selection, ultimately it’s the demographic analysis of the area that dictates size of the project, says Jaggi. Basing store size on population volume generates a high level of sales per square foot, a key metric in evaluating the performance of grocery stores.

“The true, key factor in the site selection process is density of population,” says Jaggi. “After that, it’s a prime intersection in the middle of a dense population. That’s what it all really boils down to, because in the grocery business it’s all about sales volume.”

In addition to playing into demo- graphics, Texas grocers are able to build and lease locations that mesh with their brand images. Traditional grocers like Kroger and H-E-B can go bigger, enhancing their appeal to one- stop shoppers. Specialty grocers like Trader Joe’s, on the other hand, can go smaller, solidifying their images as niche retailers with high-quality, private-label offerings.

Jason Baker, founding partner of Houston-based retail brokerage rm Baker Katz, credits this trend to the efforts of traditional grocers such as Kroger and H-E-B to diversify their product lines and service offerings.

“Twenty years ago, Kroger and H-E-B were doing 25,000- to 35,000-square foot stores,” says Baker. “Now, both grocers are at or above 100,000 square feet because they’re offering everything from furniture and extended pharmacies to shoes and haircuts, not to mention stores that now have full restaurants operating inside. The willingness to experiment is driven by the significant foot traffic they generate.”

As for the specialty chains, adds Baker, their movement toward smaller store spaces stems from a willingness to locate stores closer to one another, a byproduct of expanding into more densely populated urban spaces.

But exibility, by denition, goes both ways. Not all big stores are get- ting bigger, nor vice versa.

According to David Livingston, an independent researcher and site selection consultant for supermarkets, some chains are rebelling against their traditional formats and brand images simply because a given target market demands it.

“Small formats like Aldi have been getting somewhat smaller, and large formats like Walmart have been developing smaller stores to better t smaller markets,” says Livingston. “Target has also been developing smaller urban formats for more densely populated cities. Basically, supermarkets will t the store to the market.”

One Game, Many Players

With great population growth comes great competition. Specialty grocers like Sprouts Farmers Market and its subsidiary, Sunfower Farmers Market, have been expanding in Texas since 2002, the year both chains were started. Then there is upscale organic grocer Whole Foods Market, which is based in Austin. These companies rank first, fourth and eighth, respectively, on Chain Store Guide’s list of the 50 fastest-growing grocery franchises in the United States, based on vear-over-year unit growth.

Despite the successes of these grocers, consumer trends still seem to favor the big players. According to a 2016 study by Food Marketing Institute (FMI) and food and beverage consulting rm The Hartman Group, the average shopper makes 1.6 trips to the grocery store per week, spending about $100 per trip. In such an environment, one-stop shopping marts with low price points retain the advantage.

The king of this model, Walmart, has been aggressive with its grocery divi- sions, in many cases offering delivery services from its locations in Texas where it operates 329 stores, the most out of any state in the country. Ap- proximately 27 percent of those locations are Neighborhood Market stores, which specialize in meat and produce and average about 40,000 square feet per location.

According to the company website, of the 700 or so Walmart Neighbor- hood Markets in the United States, about 13 percent are in Texas.

H-E-B, which has long been the dominant player in San Antonio, where it’s based, currently operates 318 stores in Texas. According to JLL, in addition to pushing further into the Dallas-Fort Worth market, the company opened one new store per month in the Houston area in 2016.

H-E-B has 28 percent market share in Houston, according to local sources, while Walmart has 25 percent and Kroger has 23 percent.

With such a heavy presence in the state, these two chains have emerged as market leaders among traditional grocers.

Other traditional grocers are making plays as well. Approximately 35 per- cent of the 176 Kroger locations that opened in 2016 were in Texas. Idaho- based Albertsons operates more locations in Texas than in any state except California. Aldi has opened roughly 100 stores in Texas since 2010, a total well below its projected limit for Texas, according to The Dallas Morning News.

All told, more than 3 million square feet of new grocery space was leased in Texas in 2016, according to JLL.

Still, the market continues to bear new entrants. Lidl, a discount super- market chain headquartered in Germany, has been eyeing Texas as a key market in its initial expansion into the United States. Lidl is expected to open its first stores in Houston in mid-2017. Farm Stores, a Florida-based chain that is an amalgam of a grocery store, bakery and restaurant with drive-thru service, will also enter the Houston market in 2017.

A diverse, competitive grocery industry is part for the course in America today. But in slower growing markets, the variety and volume of players is taking a toll, primarily on traditional grocers, says Phoenix-based retail consultant Jeff Green.

“In short, consumer demand is not sufficient to support all the competitors,” says Green. "The proliferation of specialty stores is bifurcating the market, claiming a large stake of market share from the traditional grocers.”

So, while Texas currently is enjoying substantial population growth to sustain both traditional and non- traditional grocers, when that growth starts to plateau there will be closures, Green believes.

High Impact of Hispanic Grocers

Frank Bullock, executive vice president of retail for Henry S. Miller Co. (HSM), a Dallas-based brokerage and management rm, notes that the cannibalization of market share is mostly due to competition among non-ethnic grocers. Ethnic grocers, by contrast, are more insulated, he says.

“Ethnic grocers meet an increasingly diversified demographic,” says Bullock. “They provide specialty items and don’t really hit the traditional grocer, other than being located nearer to the customers of those grocers.”

Among ethnic grocers in Texas, His- panic food providers are beginning to distance themselves from the rest of the pack.

“The only category of the ethnic segment that is expanding signicantly is the Hispanic grocery store,” says Green, the retail consultant. “These stores are growing with an emphasis on produce and meat because the His- panic family is more likely to sit down to a family dinner than other demo- graphics might be.”

These trends are particularly visible in Texas, a state that is home to nearly 10 million Hispanic people. These residents comprise approximately 37 percent of Texas’ overall population and nearly 20 percent of the country’s Hispanic population, according to a 2016 survey by suburbanstats.org, which tracks the demographic information of every American city.

Mainstream grocers are having a harder time emulating products found at Hispanic markets than ones offered at other ethnically oriented stores, such as Asian ones, adds Green.

“The Asian grocery segment isn’t experiencing much growth because traditional supermarkets are doing a better job of incorporating Asian products than they are Hispanic food options,” he says.

Houston-based La Michoacana Meat Market is a testament to these trends. The grocer, whose locations typically average 10,000 square feet and whose products are directly geared toward Hispanic cuisine, is now the largest independent Hispanic grocery chain in the country, with multiple locations in Houston, Dallas, San Antonio and Austin. La Michoacana ranks ninth on Chain Store Guide’s survey of the nation’s fastest growing grocers.

HSM’s Bullock cites Fiesta Mart as another example of a Hispanic grocery chain that successfully attracts customers by offering specialty items, despite the efforts of some traditional grocers to offer similar products at lower price points.

The chain currently operates 60 lo- cations throughout Houston, Austin and Dallas-Fort Worth. In keeping with the practice of basing store size on surrounding population density, Fiesta Mart’s store sizes range from

30,000 square feet to 100,000 square feet.

Investors’ Hearty Appetite

The five retail experts interviewed for this piece all agreed on one thing: in the eyes of investors, grocery stores are still second-to-none as preferred anchors of retail centers.

Whether it’s because grocery stores have long-term staying power, or be- cause they are open to product innovation that heightens customer experience, or simply because people will always need to eat, the centers they anchor remain low-risk investments.

According to JLL, the vacancy rate for grocery-anchored retail centers declined by 60 basis points in 2015, the most recent data available. Further- more, these centers posted positive net absorption of 376.5 million square feet, accounting for more than half of the year’s total absorption of retail space.

Still, some investors have begun to strike a more cautious tone toward grocery-anchored centers due to the impact that the growth of e-commerce has had on the brick-and-mortar retailers that flank the grocery store, according to Baker.

“If you look at the sales of grocery anchors, there’s room for a lot of optimism,” says Baker. “But the surround- ing cast of characters will continue to be impacted by the Internet and other alternative shopping methods.”