- Publix buys numerous stores every year without borrowing — a move that lowers store occupancy costs, according to The Real Deal. The retailer is also snapping up shopping centers where its stores are anchored in order to generate rental income from other tenants and control its next door neighbors. According to the publication, Publix purchases more than 30 stores a year nationwide.
- The company’s ownership of its stores jumped from 11.2% in 2007 to 31.8% at the end of 2017. Since 2015 in the South Florida market alone, Publix has acquired eight shopping centers it anchors, and two standalone stores, spending $234 million.
- In addition to operating rent-free, the grocer also receives a tax break on the stores it owns in Florida, where retail tenants pay sales tax on their rent. For example, if rent is $500,000 per year, Publix would save about $35,000 with each Florida store acquisition.
In an effort to stay competitive in an increasingly intense grocery industry, Publix is differentiating itself not just with its food, technology or experiences, but with its real estate chops. The company’s approach to buying its own stores without debt — which started in the throes of the recession — has significant advantages, including tax savings, lower interest rates and control over co-tenants and competition.
According to the University of Miami Law School, Publix’s $5.5 billion real estate portfolio could reduce the company’s taxable income by “tens, if not hundreds of millions” of dollars when considering the number of deductions available for landlords.
While other grocery chains, including Aldi and Kroger, also own some of their stores, they tend to borrow heavily, according to David J. Livingston from DJL Research. This approach adds interest costs on top of operating costs in an already-low-margin category. The average supermarket has a profit margin of about 1%.
Conversely, Publix’s landlord approach provides the company with a lot of cash — $580 million at the end of 2017 versus $155 million of long-term debt. The company can use that cash to remodel dated stores, invest in new technology and gobble up even more real estate. These investments are particularly advantageous in Florida, where more grocery stores are popping up. According to real estate brokerage firm JLL, grocery store openings declined by nearly 29% last year nationwide, but Florida grocery space grew by 6%.
In addition to the cash benefits derived from being a landlord, Publix also benefits significantly from the control it has over its co-tenants and its competition. The grocer probably wouldn’t want a competitive restaurant or a drug store opening in a shopping center it anchors, for example, and can therefore control a significant amount of business in that immediate market.
If there is a challenge to this approach it is the work that goes into playing landlord. Property management isn’t easy and there is a risk it could take away from Publix’s grocery focus. But right now, that doesn’t seem to be an issue as the company continues its dominance in Florida and plans to invest another $1.5 billion in real estate and other initiatives this year.