Bright lights, big challenges: Can grocery stores make it in America's cities?
The big boxes that are so successful in the suburbs face a host of issues when they try to adapt to urban living
When natural and organic chain Mrs. Green’s opened its first Chicago location in late 2013, the store had all the makings of a hit.
There was plenty of fresh produce and prepared foods, an earthy atmosphere complete with exposed pipes and unfinished floors, and free one-hour parking at a nearby garage. Situated in the upscale neighborhood of Lincoln Park, the location stood to gain customers from nearby Dominick’s stores that had recently closed. Most importantly, Mrs. Green’s was surrounded by apartment buildings where many of Chicago's affluent, organic-loving young shoppers lived.
Soon after it opened, however, the 20,000-square foot store, which cost $4 million to build, began losing as much as $20,000 per week, according to reports. Within two years, it closed for renovations and never reopened.
As consumers — particularly affluent millennials — have moved into America’s urban centers over the past several years, grocers have eagerly followed suit. But while cities offer bright lights and big opportunities, the reality is that breaking into the market is a huge challenge. This is especially true for grocers used to operating in suburbs and rural areas.
And yet, despite the many past failures, retailers like Target and Wal-Mart remain determined to make it in America’s cities.
“With suburbs and small towns already saturated with grocery stores, urban areas are virtually untapped by the big chains,” Ken Morris, principal at Boston Retail Partners, told Food Dive. “There is a large captive audience that is ripe for the picking.”
Real estate brings real headaches
Food retailers are eager to reach wealthy millennials, and America’s cities are full of them. According to researchers at the University of California and the University of Pennsylvania, 23 of the country’s 25 largest cities have seen growth in the number of college-educated residents under age 45 since 2000. Some of the largest growth has come in revitalized Rust Belt cities like Pittsburgh, St. Louis, and Baltimore — all of which have seen their ranks of college-educated millennials grow by at least half since 2000, per Census data.
Even second-tier cities like Charleston, SC; Grand Rapids, MI; and Madison, WI have seen significant growth. The city that leads the nation in growth of college-educated millennials since 2000, Jersey City, NJ, now counts one-fifth of its population as belonging to this demographic.
These numbers, coupled with the scarcity of food retailers in many promising urban markets, are enticing supermarkets desperately seeking growth. But many retailers that have thrived outside of cities, including Wal-Mart, have struggled for years inside them.
“With suburbs and small towns already saturated with grocery stores, urban areas are virtually untapped by the big chains. There is a large captive audience that is ripe for the picking.”
Principal at Boston Retail Partners
“The challenges for these companies is, once you start tinkering with the formula, historically they haven’t been able to get the same return on investment,” Neil Stern, senior partner at retail consulting firm McMillanDoolittle, said.
One of the biggest challenges, even for deep-pocketed companies, is securing real estate in crowded, intensely competitive city centers.
“Most urban markets today are fully developed,” Simmi Jaggi, senior vice president of retail brokerage for real estate firm JLL Group, told Food Dive. “There aren’t vacant lots sitting around waiting to be filled in.”
According to Jaggi, buildings and sites that become available in cities like Houston, where she’s based, tend to get claimed by developers that can build vertically — and thus generate more revenue. Supermarkets, which tend to be two stories at most, simply can’t compete.
To break into the market, she said, retailers have to be creative and forward-thinking. Many developers, recognizing the need for food options, will court supermarkets they think could anchor their development. In Los Angeles, the Wilshire La Brea upscale apartment development includes a 12,000-square foot Lassens Natural Foods & Vitamins. Nearby, similar sized Trader Joe’s and Target stores will soon open inside a 15-acre mixed-use development called USC Village.
“It has to be a five, ten-year plan, and you have to get in there very early. Because if you approach the owner by the time they’ve bought it, they already have a building permit and it doesn’t include your use.”
SVP of retail brokerage for JLL Group
Retailers can get on developers’ radar early, and scout ahead for other opportunities before a “For Lease” sign goes up. Being flexible with store size and format can also open up a retailer’s options. This strategy takes time, said Jaggi, but it can reward a supermarket with a consumer-dense trade area in which they are the only shop around.
“It has to be a five, 10-year plan, and you have to get in there very early,” she said. “Because if you approach the owner by the time they’ve bought it, they already have a building permit and it doesn’t include your use.”
Another retailer that’s finding prime urban locations is Target. The retailer recently announced plans to open more than a hundred “flexible format” stores that are just 15% to 20% the size of their traditional formats. In New York City, Target opened a 45,000-square foot store in the city’s posh Tribeca neighborhood, and plans to open more locations in midtown and in Brooklyn.
Stern said Target’s fashion and beauty offerings tend to attract the sort of young, well-to-do consumers that reside in city centers. However, the company has struggled lately with sales of fresh produce, meat and prepared foods.
“Fashion and beauty are great, and they’re very good at that business, but the trip drivers tend to be around food and consumables,” Stern told Food Dive.
Adapting to city life
Another grocer that’s betting big on urban growth is Whole Foods. The company’s new 365 stores, slated to open in urban markets and college towns across the country, are about half the size of a typical Whole Foods store, and include a curated assortment of grocery products and prepared foods that appeal to younger demographics. According to Stern, who recently visited the 365 store in Los Angeles, the format also includes fewer staff members, service departments and other frills found in a traditional Whole Foods store to save on overhead costs.
“That’s one of their real challenges in a traditional Whole Foods store,” said Stern. “They put so much money into the store, they have to have very high sales to make it work.
And yet, Stern said, those traditional Whole Foods stores have long been — and remain — strong urban retailers. They have the premium assortment that moneyed city-dwellers are looking for, and have been able to adjust their store formats to fit their surroundings. Whole Foods’ struggles, he noted, have come in suburban areas where the competition for natural and organic foods has gotten stiffer.
“They had a willingness to be very flexible and adaptable with their formats,” said Stern. “They don’t operate a cookie-cutter box.”
This sort of adaptability is something many retailers struggle with, sources said. Companies used to operating large stores with spacious parking lots and spacious storage rooms must adjust to small, sometimes oddly laid-out store spaces that often don’t have parking and may have limited storage.
Jim Hertel, managing partner with retail consulting firm Willard Bishop, said this paring down often requires grocers to rethink their operations. A spacious storeroom isn’t practical, so stores often need to transfer products directly from the delivery truck to the shelves. And they need to do so in an efficient manner that doesn’t disrupt the shopping experience.
“Everything’s just going to have to be that much more precise,” Hertel told Food Dive.
Retailers also must optimize their product assortment for customers who make smaller trips and live in smaller spaces. Morris with Boston Retail Partners noted this makes it challenging for stores to achieve the high sales per square foot they need, but that focusing on carefully chosen selections of consumables, prepared foods and other items that appeal to local customers — “micro assortments,” he calls them — creates the best chance for success.
“Localizing the product mix based on the customer base is critical to turn inventory quickly."
Managing partner with Willard Bishop
“Localizing the product mix based on the customer base is critical to turn inventory quickly,” he said.
Urban markets have proven to be a sweet spot for premium natural and organic grocers, but other formats have begun elbowing into the crowded spaces, too. Convenience stores like Sheetz, Wawa and 7-11 are opening fuel-less locations with prepared foods, snacks and phone charging stations to appeal to millennial shoppers. Dollar General, meanwhile, recently unveiled a hip new format in Nashville called DGX. At just 3,400 square feet, the reimagined dollar store offers grab-and-go sandwiches, salads, coffee and other beverages, along with a limited selection of consumables.
Discounters like Aldi have also made their way into cities like New York and Chicago, and could see sales boom as they expand into more urban markets. Hertel said one of the format’s strengths is its already limited size.
“They’re used to operating in a 15,000-square foot environment, and their value proposition is quite resonant with the millennial shopper,” he said.
Sources said they expect opportunities for growth in America’s cities will remain high in the years to come. Recent data, however, may complicate that picture. According to the Census Bureau, last year was the first since the recession that saw suburban growth outpace urban growth — 1% versus 0.7%, respectively. One of the drivers of suburban growth, demographers have noted, is older millennials starting families.
Undeterred for the time being, retailers will closely monitor these shifts, and will continue to seek a winning formula in metropolitan markets for the meantime.
“They’re fundamentally underserved markets, and density of people means money,” said Stern.
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