Specialty grocers: Emerging influencers and latest growth activities
Specialty grocers are carving deeper inroads into the retail industry, with small to mid-size brands such as Sprouts, Fresh Thyme, The Fresh Market, Fairway, and Aldi expanding their presence amid established players including Trader Joe’s and Whole Foods. These specialty food retailers, many focused on health foods, have a major trend in their favor, with studies continuing to show increased growth in the healthy living sector. Research firm IRI predicts natural and organic product growth in 2013 will exceed 2012’s growth by 12 percent.
We’re looking closely at emerging specialty grocer concepts that are well-capitalized and have strong business potential. I talked about this recently in the September print edition of National Real Estate Investor. (The online version of the article is here.) We see a mutual growth opportunity in which we can incubate these retailers and help them achieve critical mass in their target markets, while driving new traffic to our properties and increasing the value of our shopping center assets.
Here’s a look at which specialty grocers are high on our radar, as well as how we see their growth affecting the greater supermarket industry and our portfolio.
Sprouts Farmers Market (NASDAQ: SFM) is a specialty retailer of natural and organic foods. The grocer’s shares are trading 159 percent higher since its blockbuster $333 million IPO on the NASDAQ in August. Much of Sprouts’ success is due to its high quality standards and competitive pricing — particularly in produce, which accounts for 25 percent of its sales. Sprouts merged with Sunflower Farmers Market in 2012, which brought 35 stores under the Sprouts banner. Sprouts now operates 163 stores in eight states, and plans to reach 1,200 stores nationwide. Supermarket News recently chose Sprouts as the winner of its 2013 Retail Excellence Award. We now have five leases with Sprouts across Colorado, California, and Texas, and plan to help Sprouts expand its store count as we identify strategic opportunities.
Fresh Thyme Farmers Market is a new specialty grocer planning to open 50 stores across the Midwest over the next six years. The retailer is scheduled to debut its chain in the Chicago area in January 2014. Fresh Thyme’s core offerings will be fresh produce, in addition to natural and organic meats, seafood, breads, and other groceries and health products. Chris Sherrell left his helm as President and CEO of Sunflower to found Fresh Thyme in 2012 to bring healthy grocery shopping to the Midwest, which has a low penetration of specialty grocers. We see significant upside potential in Fresh Thyme with its strong business plan and growth strategy. Fresh Thyme expects to open three locations within the year at Kimco centers in Illinois, Indiana, and Ohio.
The Fresh Market (NASDAQ: TFM) is a publically traded, high-growth specialty retailer offering fresh and gourmet foods in an open-air style market. It has 129 locations across 25 states, with plans to open its latest store this month in Myrtle Beach, S.C. It saw a 13.3 percent increase in net sales to $354.8 million in the second quarter, driven by a 3.4 percent increase in comparable store sales. The Fresh Market is differentiating itself based on its charming, old-world style shopping experience and high-quality perishables. As a result, it has some of the highest margins among food retailers. Kimco has three leases with The Fresh Market, and we expect to strategically build upon our partnership. In particular, The Fresh Market is looking to expand significantly in California, where we have over 100 properties.
Fairway (NASDAQ: FWM) has grown from its beginnings as a fruit and vegetable stand in 1933 into an iconic New York specialty food retailer. It offers fresh groceries and hard-to-find gourmet items at 14 locations in the New York metro, one of which is at Kimco’s Manetto Hill Plaza in Plainview, N.Y. Fairway has accelerated its business this year with a $178 million IPO in April, and plans to open 300 locations nationwide at a rate of three to four per year.
Aldi is a German-based discount grocery chain that stocks nearly all exclusive brands, including a “Fit & Active” line focusing on healthy foods and drinks. The retailer has been growing at a solid clip since early 2011, with its year-over-year growth rate now at 31.7 percent. Aldi’s market share rose to 3.8 percent over the 12 weeks ended Oct. 13, a new record increase for the retailer. Aldi has succeeded on its low-cost pricing model, allowing it to expand to over 1,200 stores in the U.S. The grocer is looking to expand more deeply into California — again, where Kimco has a strong presence to support its growth.
Beyond their individual strengths, another reason we like some of these retailers is because they are targeting middle-income consumers who’ve been excluded from the higher price indexes of grocers such as Whole Foods. This approach brings a major new consumer segment into the fold. In fact, we’re seeing this pricing trend across non-grocery health and wellness retailers in our portfolio as well, including gyms, yoga studios, and vitamin shops, creating significant market potential.
Kimco is also continuing to work with Whole Foods and Trader Joe’s, as they are proven concepts with significant expansion goals. To date, Trader Joe’s has 11 locations in Kimco centers, and Whole Foods has 12, with one more on the way.
Grocer competition evolves
From an industry perspective, the growth in specialty grocers again raises the question of whether traditional grocers will be able to compete. Many industry professionals thought Walmart and Target were going to erode the traditional grocery business when the big boxes began offering food items.
But traditional grocer sales have actually increased despite big boxes’ grocery expansion. Supermarkets owned a 59.3 percent share of grocery sales in 2012, up 0.4 percent from 2011, according to a DSR Marketing System study. Meanwhile, the share of grocery sales for warehouse clubs and supercenters slipped 0.4 percent to 22.6 percent.
Today it appears specialty grocers are the new threat. However, traditional grocers will succeed by differentiating themselves based on their market strengths and demonstrating their relevancy. Some of these large traditional grocers, as we have seen, are merging to build their muscle.
Another mover and shaker in the competitive landscape has been Amazon, which is entering the grocery business with AmazonFresh. Amazon introduced its fresh grocery delivery service to Los Angeles in June following a six-year pilot in Seattle. AmazonFresh has gained popularity in Seattle’s urban neighborhoods, where, similar to L.A., congested traffic corridors make online food shopping convenient.
However, Seattle and California consumers tend to be highly health conscious and are more likely to buy fresh, local foods. While Amazon has done a good job of partnering with local purveyors to provide these foods, many consumers still like to see, touch, and select their meats, seafood, produce, etc. As a result, both the brick-and-mortar and online grocery markets have growth potential, and we see the grocery industry remaining solid all around as it continues to undergo these changes.
Banking on grocery’s growth
This momentum plays ideally into Kimco’s business model, which is centered on owning strong, grocery-anchored properties in neighborhoods and communities. Approximately half of Kimco’s portfolio is grocery-anchored today. However, the grocery component of our portfolio can grow as the specialty subcategory gains traction and traditional grocers strengthen their businesses. This enables us to increase our leasing activity with sturdy tenants and add value to our assets.
In particular, some of these small and mid-sized specialty grocers want to enter power centers. Historically, the traditional grocers have avoided power centers, preferring instead to be the only anchor in a center, surrounded by small shops.
Now, we can add a grocery component to our power centers by redeveloping the big-box space to accommodate a smaller specialty grocer and one or more complementary tenants. This new option provides us more value creation and redevelopment opportunities, and increases the pool of tenants to choose from when a big box space becomes available.
Any new retail idea must pass the proof-of-concept phase prior to widespread adoption. We believe these exciting concepts are quickly changing from a regional to a national footprint, with help from Kimco. We’re optimistic about the growth of these specialty grocers and other retailers targeting healthy living, and expect to build new value through continued partnership across the country.