by Eric Hawthorn
Have you seen Stephen King’s The Mist? Based on a novella of the same name, the horror movie features a bunch of small-town Maine residents confined to their local supermarket while a never-ending swarm of giant mutant cephalopods wreaks havoc in the streets. It’s a pretty typical premise for Mr. King. The movie/story feature a standard set piece of the Stephen King oeuvre: the local grocery store. I think this is a common feature of the author’s work for a few reasons: the grocery store represents among the most basic of human needs, the need to eat, while also serving as a de facto gathering place for the community. In The Mist, as in other Stephen King works, the grocery store is a fitting setting for the often-primal struggles his characters face.
Either way, the grocery store that figures so prominently in Stephen King’s world is losing its relevance, as more and more retailers begin offering grocery-store merchandise to their customers. Since the ’80s, a number of different retail sectors and chains have begun to tread on supermarkets’ turf, vying for a share of their necessity-driven customer base. These competitors include big-box discount stores like Walmart and Target, drug store chains like Walgreens and CVS, specialty grocers like Whole Foods and Trader Joe’s, and wholesale clubs like Costco. Over the past decade, reports the Washington Post, citing an industry expert from Supermarket News, the grocery store sector has lost roughly 15% of its market share.
How have supermarkets coped with this reality? By taking pages from their competitors’ playbooks: creating stores with larger footprints, offering more specialty items like organic products and vitamins, including in-store pharmacies and banks, and establishing more substantial health and beauty departments to compete with drug stores.
Still, many supermarkets have floundered and some stores-and entire chains-have been closed as the grocery retail sector increasingly consolidates its brands. Not only has the retail sector become increasingly difficult for the small mom-and-pop grocer-itself a dying breed-it’s become very difficult and very competitive even for large operators like Kroger, Albertsons, A&P, and Safeway.
And what happens when a company is struggling to achieve its fullest profit potential? In marches the only thing more powerful than a swarm of giant mutant cephalopods: a huge private equity group!
Or in this case, a whole group of investors, including retailREIT Kimco, private equity group Lubert-Adler, and the group’s intrepid leader, private equity giant Cerberus Capital Management:
Commercial Property Executive‘s Scott Baltic reports,
An investor group led by Cerberus Capital Management L.P., and which already owns the parent company of Albertsons and several other major grocery retailers, will buy Safeway Inc., of Pleasanton, Calif., for about $9.4 billion, Cerberus announced Thursday. The investor group, AB Acquisition L.L.C., which owns Albertson’s L.L.C. and New Albertson’s Inc., also includes Kimco Realty Corp., Klaff Realty L.P., Lubert-Adler Partners L.P. and Schottenstein Stores Corp.
…The resulting company will include more than 2,400 stores, 27 distribution facilities and 20 manufacturing plants with more than 250,000 employees.
With this super-merger, the Kroger Company, the world’s largest supermarket operator, may have reason to be afraid. With a little over2,400 locations itself, Kroger has a formidable rival on its hands-though its territory doesn’t always overlap with that of the Safeway/Albertsons chains.
All of this is to say the supermarket sector is getting smaller and smaller-or rather, the fish in this pond are growing bigger and fewer.
What does this mean for the CRE industry?
This could mean a few things. For some shopping center landlords, that cherished anchor supermarket might be in jeopardy. Though Cerberus said it didn’t anticipate any store closures as a result of this merger, some analysts are wary. After all, a major merger results in significant “synergies” (read: opportunities to downsize) that may leave some markets over-saturated with Safeway-Albertsons stores. This may lead to some closures in coming years, though Cerberus doesn’t claim to have any such plans.
For shopping center landlords, this merger may or may not be a good thing: on the one hand, Safeway, Acme, and other Cerberus-owned supermarkets will often offer stability and limit competition. On the other hand, the relative lack of competing supermarket chains may give Cerberus-owned chains greater leverage when bargaining over a lease-after all, the landlord’s supermarket needs an anchor, and there aren’t too many available options these days.
One thing is clear, though: the era of the small-town grocery store is long over. Maybe the next time some Stephen King protagonists are battling monsters, they’ll have to hunker down in a Costco or something.