Expected Increase in Food Prices Could Prove Catastrophic Next Year for a Number of Grocery Chains
The historic drought ravaging America's farmland is likely to deliver another blow to grocery store-anchored shopping centers already losing sales to nontraditional retailers that have invaded their turf.
Since the late 1990s, nontraditional retailers have steadily increased their relative share of food-at-home sales, at the cost of traditional grocery stores, according to the U.S. Department of Agriculture. Most of the growth in food sales is now found in supercenters and warehouse club stores. More recently, dollar stores, such as Dollar General and Family Dollar, and drugstores, such as Rite Aid, CVS, and Walgreens, have all increased sales by expanding their in-store retail food offerings.
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And it hasn't been getting better recently. The 3 million square feet of retail absorption in the second quarter of this year was the lowest since 2009, with neighborhood shopping centers feeling the sharpest pinch, according to Suzanne Mulvee, senior real estate strategist for CoStar Group.
Economic pressures on traditional grocery store anchors, which already operate on slender margins, are continuing to see rising price competition from big-box retailers benefitting from size and scale with suppliers such as Wal-Mart, Costco, Sam's Club and Target, Mulvee said this past week in CoStar Group's State of the U.S. Retail Market - Mid-Year 2012 Review & Forecast.
Total leasing volume for traditional grocery stores has slid 60% since 2007, according to CoStar data. (There is one bright spot for some grocery chains: Leasing for high-end, specialty and organic grocers is up 72% over that same time period.)
This year has delivered additional bad news though. Overall retail sales hit a disappointing stretch. Year-over-year increases in retail sales growth (excluding automobile sales) of around 6% in March dropped to around 3% in June, according to Mulvee. While recent reports from retailers suggest that the sales bleeding stopped in July, sales remain a concern in the fragile recovery due to factors such as the expiration of unemployment benefits and rising fuel prices, soon to be joined by the dry heat blast across much of the country.
The multiple heat waves that have slammed most of the United States this year are among the many factors that have been blamed for the last few months of retail sales, according to Garrick Brown, director of research for Terranomics and the ChainLinks Retail Advisors Group.
"But there is a bigger story brewing and that is the impact that the accompanying drought will have on the retail world by next year, Brown said in a recent Terranomics' Weekly Retail Newsline.
"Corn prices have already increased by roughly one third this year and nearly 90% of the U.S. crop has been affected by the ongoing drought. Since corn is so widely used; from corn syrup in sodas and other processed foods, to animal feed, the impact on food pricing next year is likely to be strong," Brown wrote. "Analysts are already projecting that beef prices will rise 5% next year, if not more. Milk and eggs are likely to increase at a rate just below that of beef."
So, what does this have to do with grocery store-anchored retail real estate?
"A strong rise in food prices could prove to be catastrophic next year for a number of grocery chains," Brown said. "Smaller, unionized shops have struggled in recent years against the rapid expansion of discount grocers and non-unionized players who have vastly increased their grocery presence, like Walmart and Target."
"A squeeze in grocery pricing will only further benefit the discounters, wholesalers/warehouse clubs and the large, non-unionized chains," Brown said, adding: "Look for the rate of grocery consolidation to pick up next year."
"And grocery stores won't be the only ones to feel the pinch. Casual dining chains will also be put between a rock and a hard place as they try to weigh how much of the additional food costs that they can pass on to consumers before they lose them to cheaper alternatives," Brown said.
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