Fueled by the consumer trend to cook and eat meals at home rather than visit restaurants during the healthcare crisis, the strong performance of the grocery category continues post-pandemic. However, experts participating in a recent Placer.ai-sponsored webinar warned that small cracks may be starting to appear in the category’s foundation. Challenges presented by supply chain issues, rising gas prices and inflation may be the impetus for consumers to scale back their regular shopping visits and overall grocery purchases.

The panelists in the webinar included Carrie Smith, Managing Director at Franklin Street and Jennifer Bartashus, Senior Equity Research Analyst, Staples & Retail at Bloomberg Intelligence. The session was moderated by Ethan Chernofsky, Vice President, Marketing for Placer.ai.

ALDI Supermarket recently opened a new store at Continental Realty Corporation’s Robinson Crossing Shopping Center in Severna Park.

“Historically, grocery stores have filled the anchor role for shopping centers based on the high volume of traffic the category generates and, in my view, they are the essential, essential business,” Smith said. “They survived the pandemic and are completely ingrained in the national fabric. The category has the once-per-week, twice-per-week week and bulk shopper, and has proven to be a risk-proof asset over the long-term and the primary driver of traffic into shopping centers. But certain things I am seeing worry me. What happens when continued supply chain issues produce shelves that are empty or not fully stocked? What if rising inflation causes consumers to spend less and veer more towards private label brands? Profits for grocery stores are already razor-thin. What is the impact if supermarkets slash jobs to make up for lower sales?”

“I envision continued strength in the grocery store category because, even though many employees have returned to the traditional workplace, the general public learned to cook and bake during the pandemic, and determined that they actually enjoyed spending time with their family during dinner time,” Bartashus said. “Grocery stores responded to this trend and significantly invested in the perimeter of their stores to drive consumers in. They added more prepared foods to simplify the dinner process. Nothing is more service-oriented than a grocery store and, if factors such as inflation create less spending, the worse thing they can do is to reduce the labor force.”

Growing demand for private label brands

The panelists agreed that private label brands (or store brands) are destined to be the beneficiary of inflation as consumers look to save money wherever possible.

“Trader Joe’s and Publix Super Markets, in particular, have created their own line of products that exceed the quality of more familiar brands, and I would not be surprised to see an increased shift to these lower-cost items,” said Smith.

“Growing up, I remember seeing products packaged in plain white boxes with black printing, so I have always been comfortable with private label brands,” added Bartashus. “When the economy turns, as we have seen since the start of this year, sales in private brands begin to rise.”

The natural and organic food category could also face disruption in the near future.

“For the true believers who have completely adopted a natural foods lifestyle, no, they won’t abandon this philosophy and stop serving organic milk to their kids no matter what,” Bartashus said. “A shift may occur among the half-hearted consumers that pay close attention to prices and only purchase natural and organic foods when the costs are relatively comparable.”

Threats from Amazon, Target, Walmart

When Amazon acquired Whole Foods Market in 2017, major supermarket chains braced for massive disruption in their industry. However according to Bartashus, “Amazon makes moves that demonstrate they are simply playing in this category but aren’t really serious about it.”

She explained that the expected massive rollout of Amazon Go and Amazon Fresh stores never really materialized and she doesn’t expect it to. “I think they use Whole Foods as a test model to try different things out and gather data and I don’t expect Amazon to begin a large-scale opening of food stores in the suburbs.”

“Amazon is a proven disruptor, and I don’t think things have played out yet, and certaintly expects to see many Amazon Fresh stores placed in secondary markets,” Smith counters. “Amazon’s edge lies in the data they collect on consumers, including sending alerts when consumers are likely to be running low on a particular product.”

She adds that Target counts on consumers buying 20 items during a regular visit when they had only planned to purchase one. “Whether you are planning a birthday or dinner party, or going on vacation, you need groceries, and Target and Walmart have created a one-stop shopping experience for consumers. But Target is getting a bit worried that inflation may start causing consumers to scale back their purchases.”

Although 50% of all Walmart sales come from its grocery section, the company never aspired to compete in this category. Instead, it intended to leverage food to enhance its offerings, Bartashus said. “Walmart’s size and scale enable them to be extremely cost-competitive across the board. Target has significantly improved its natural and organic offerings and is kid-friendly, which is a significant advantage.”

“In my two decades in the industry, I have seen various trends in grocery – chain consolidations, the introduction of niche brands and formats, bankruptcies of supermarket chains, and the push by Target and Walmart to higher and higher grocery as a percentage of sales,” stated David Donato, Chief Operating Officer for Continental Realty Corporation, a Baltimore-based real estate investment and management company.

“Throughout it all, grocery-anchored, surface-parked centers remain the gold standard for investors. Even with the growth of online grocery sales and delivery services like Instacart, grocery is still the most consistent consumer draw, and I believe there will always be a strong preference for in-person grocery shopping. More customer visits equal more cross-shopping for the remainder of the center and that, of course, leads to a healthy, profitable lineup of in-line and pad tenants,” he added.

Emergence of value-oriented stores

Both ALDI and Lidl, two European-based value grocery stores, are rapidly expanding across the country and have been scooping up strategic real estate sites.

“Consumers don’t just shop at one grocery store, but rather five or six, and ALDI and Lidl are quickly being added to this list,” explained Smith. “Both have not been afraid to open locations directly across the street from major competitors and now that strategy is paying off as consumers are experimenting with them to take advantage of lower prices. This is their moment to shine as once you get consumers in, you most likely have them for life.”

“I remember when ALDI first opened its stores and they were dark and dingy, but that has completely changed,” said Bartashus. “Now they have attractive interiors and sell avocados, gluten-free and organic products and, as a result, I now see BMWs and Mercedes parked in their lots. Both are taking all of their European knowledge and applying it to the US consumer.”

“It will remain to see if grocery stores will continue their march into urban areas,” Smith concluded. “For years, they have been attracted to the live-work-play environment but, with one of those elements now removed with many employees remaining at home or only visiting the workplace part-time, it may impact the number of deals occurring in downtown areas.”