Grocery stores compete for attention | JLL Retail

January 2016 a J L L r e t a i l r e s e a r c h p o i n t o f v i e w
Trust our retailntelligence. JLL | Retail Research 1
Supermarket sweep
Do you remember the game show Supermarket Sweep? In it, teams of shoppers would race through the grocery aisles competing to fill
their carts with the most expensive items within a time limit. The show turned what many considered a dull weekly chore into a race
against time. Back when Supermarket Sweep first aired in the sixties and later when it was revived in the early nineties, the weekly
shopping trip was a typical mainstay for most American families.
Grocers compete, retail real estate wins
Some expanding grocery sellers are competing with low costs while others win with unique
experience. Both cases foster steady demand for retail real estate.
Image: Eddie Welker, CC by 2.0
That was a time before the super centers, small format discount grocers, online shopping and expanded grocery options at your local
drug store. Now it seems like everybody wants to get in on the grocery action. That competition means more options than ever for the
consumer and often lower prices too. It also means a growing segment of grocery sellers are focused on creating a unique shopping
experience in order to attract loyal customers.

Grocery competition has been good for retail real estate
For players in the grocery sector, this stiff competition has meant a tough battle in three main arenas: price, convenience and
experience. This led to strong expansion of limited assortment discount grocers, a modest expansion of high-end grocers and new web-
based sales options from old and new retailers alike.
The victors in this war are as yet undetermined, but the overall impact on retail real estate is clear:
Some expanding grocery sellers are competing with low costs while others win with unique experience.
Image: Dean Hochman, CC by 2.0
Grocery propels new retail construction
Across the nation, new demand from grocery-oriented
users has propelled much of the new retail
construction. While retail construction levels overall
have remained modest since the recession, they are
growing annually at sustainable levels. Of the more
than 81.0 million square feet of new retail space built
in 2015, 77.5 percent fell into two broad categories:
freestanding retail buildings (50.9 percent) and
neighborhood and community shopping centers (26.5
percent). In other words, more than two thirds of new
construction occurred in categories dominated by
daily needs retailers including traditional grocers,
limited assortment grocers and super centers.
Grocery competition and expansion has prompted a steady demand for
new and existing retail real estate in the form of freestanding super centers
and supermarkets as well as neighborhood and community centers.
Freestanding
general retail
51%
Malls
10%
Power centers
7%
Neighborhood and
community centers
27%
Specialty
centers
5%
2015 new retail
construction
(by square feet)

Neighborhood and community centers feel benefits of grocery competition
Existing neighborhood and community centers clearly see the benefit of grocery sector demand. The national vacancy rate in those
centers dropped by 60 basis points over the year 2015. These centers absorbed over 376.5 million square feet of space, more than half
of all the retail absorption for the year. This is good news for a type of retail property that has seen higher vacancy rates. Neighborhood
and community center vacancy fell to 8.8 percent in 2015, higher than the overall U.S. retail vacancy rate of 5.6 percent.
Asking rents in these centers have been climbing too, although not at the same rate as other retail property types. The Q4 2015 national
average asking rent for neighborhood and community center space was $14.37 per square foot, a 1.3 percent bump over last year.
Fighting for a piece of that $10 billion pie
The supermarket and grocery store industry saw $10 billion in profit in 2015 , yet future growth prospects are rather modest. IBISWorld
projects that the industry will grow by an average annual rate of 0.8 percent from 2015 to 2020. One reason for this is the fact that
American consumers have seen little shift in what they have spent on shopping trips. In terms of real dollars, retail and food service
sales have shown only modest growth.
In order to carve out market share in the slowly growing industry, grocery sellers will have to fight tooth and nail in order to prevail in
each arena: convenience, price and experience
$140,000
$160,000
$180,000
$200,000
January2006
May2006
September2006
January2007
May2007
September2007
January2008
May2008
September2008
January2009
May2009
September2009
January2010
May2010
September2010
January2011
May2011
September2011
January2012
May2012
September2012
January2013
May2013
September2013
January2014
May2014
September2014
January2015
May2015
September2015
($M)
Real retail and food service sales, monthly, seasonally adjusted
Q4 2015
Year-over-year
asking rent increase
Year-over-year
change in vacancy rate
Freestanding general retail 2.8% -0.5%
Malls 3.8% -0.1%
Power centers 1.4% -0.3%
Neighborhood and community centers 1.3% -0.6%
Total retail 2.0% -0.5%
Source: JLL Research, CoStar

CONVENIENCE: Make it easy to buy
Surrogate shoppers do the hard work for you
It was Saturday morning at my local grocer. With the usual crowd of weekend shoppers, navigating my cart was becoming a pain. In the
produce section I leaned over a bin of sweet onions and then noticed something odd. I wasn’t the only shopper digging through onions
that morning. A store employee equipped with a small computer and bar code scanner on his wrist bagged some onions of his own and
placed them in a plastic bin on a cart. The employee was assembling a click-and-collect order for a consumer more astute than I. This
online shopper had avoided the crowds altogether, employing a grocery store employee as a surrogate shopper. Grocers charge small
fees for this service, but for many time-pressed shoppers the price is worth the convenience. Customers submit an online shopping list
one day and pick it up the next.
Harris-Teeter, which had been an early innovator in grocery click-and-collect, was acquired by Kroger in 2014. Kroger has since gone
on to roll out its ClickList shopping service in at least five markets. Safeway, which was acquired by Albertsons in 2015, has been
shipping groceries to consumers since 2000.
Millennials are leading the way in online grocery shopping. Eighteen percent of them reported that they already shopped in a virtual
supermarket and another sixty-four percent expressed their willingness to do so in the future. The results for generations X and Z
weren’t that far behind. Every age cohort younger than the baby boomers is ripe for conversion.
For the pure convenience of it, nothing beats picking out groceries on your laptop or smartphone and having them delivered to your
doorstep. Especially for prepackaged commodities, shoppers will likely have a growing willingness to shop in this fashion…if they can
afford it.
Grocery delivery and pickup comes in a few broad categories:
§  Traditional grocers have generally offered either home delivery from a store and click-and-collect at a store.
§  New startups have focused on either home delivery from a company warehouse or third-party home delivery of
purchases made at multiple retailers.
FreshDirect has been delivering online grocery orders in the New York area since 1999. Peapod, now owned by Royal Ahold has been
delivering web-ordered groceries since 1996. Peapod now delivers exclusively for Royal Ahold grocer banners Giant Food and Stop &
Shop.
One of the drawbacks of shopping online via an individual grocer is the fact that a shopper is limited to goods sold at a particular store.
Third party options such as Google Express and Instacart charge fees to do the shopping for you. Shoppers can choose higher per-
order fees or pay for memberships in exchange for reduced or free delivery. Both services are rolling out in a growing number of
markets, offering same-day delivery in some and next-day delivery in others.

0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
CA FL TX NY PA NC OH GA VA IL
PercentofallU.S.supermarkets
Fifty-six percent of all U.S. supermarkets
are in just 10 states
Grocery grows where people go
Despite the proliferation of online and delivery options, most grocery sales continue to occur in person. Rush hour shoppers picking up
a rotisserie chicken for dinner on the way home from the office do not have the foresight to plan ahead for online delivery. Lower income
families on a tight budget may not be willing to pay the additional cost of delivery. For all of those in-person shoppers, the apex of
convenience continues to be that old real estate standby: location, location, location.
Traditional grocers in markets with significant residential construction are fighting over key intersections in growing communities. Some
have even been willing to cannibalize existing trade areas in order to protect market share.
In Texas, regional heavy hitter H-E-B, which operates more than 340 stores in Texas and Mexico, has been opening new stores at the
pace of approximately one per month across the Houston region.
Source: JLL Research, AggData; Image: ornello_pics, CC by 2.0
Grocers find new homes in office buildings, residential towers and even malls
While traditional suburban residential construction continues to drive some grocery expansion, there remains a good deal of opportunity
in urban markets, especially as population continues to flow into major U.S. cities. Some grocers are making an effort to adapt their
store prototypes and product mixes to meet the needs of urban shoppers. While rents in these locations are generally higher, so too are
the incomes of shoppers and the potential profit margins.
In uptown Charlotte, North Carolina for example, a Whole Foods will occupy the first floor of a tower which will house hundreds of
apartments. The site is adjacent to a light rail station. The 47,000-square-foot supermarket will feature a bar and rooftop dining.
In shopping malls where traditional department store anchors are shrinking footprints, there is also potential for grocers to become a
part of the tenant mix. In Virginia Beach for example, The Fresh Market will soon open its doors at Pembroke Mall. The upscale grocer
has signed leases along with apparel retailers DSW and Nordstrom Rack to take over a portion of a downsized Sears anchor. It will be
the grocer’s third location in the region.
Some urban settings are better fits for grocers with limited assortments and smaller footprints. Lassens Natural Food & Vitamins, for
example, recently opened 12,000 square feet at Wilshire La Brea, an urban Los Angeles apartment complex. This is the 11th location
for this popular organic grocer. Trader Joe’s will open 12,700 square feet in Downtown Los Angeles at USC Village in late 2017. USC
Village is a 1.3 million-square-foot mixed-use project spread over 15 acres of USC campus. Erewhon, another high-end natural grocer
occupies the first floor of Broadcast Center Apartments on Beverly Boulevard in West Hollywood.

PRICE: Make it affordable
Aldi shoppers choose lower prices
A typical Saturday at Aldi finds young parents, children and elderly couples out in force, stocking up on affordable groceries. The stores’
entrance ways are stacked high on either side with tempting snacks and other impulse items. Fresh options are limited, with only the
most popular vegetables, meats and cheeses for sale.
Some may miss the selection offered at a large supermarket, but for the Aldi shopper this lack of selection is a good thing. The staff
required is a fraction of that found at a traditional supermarket and the savings are passed on to the consumer. Check-out lines move
at lightning speed, as there are no baggers here. The sole job of the cashier is to scan each item on the conveyer belt and return it to
the shoppers’ carts. When families bag their own groceries, they are making a conscious choice of price over convenience. With, for
example, only one kind of onion to choose from, cost-conscious shoppers choose price over selection.
Lidl soon to follow Aldi to American streets
Aldi has been in the U.S. since 1976, but a recent expansion push has meant real growth for the German discounter. Its stores in the
U.S. now number over 1,300, with locations in 32 states in the Eastern half of the U.S. Aldi is rumored to have approximately 29
Southern California locations set to open soon, with expectations to open about 130 new U.S. stores each year through 2018.
Meanwhile, another limited assortment grocer from Germany, Lidl is planning an American entrance of its own with an initial target along
the East coast from Pennsylvania south to Georgia. Lidl expects to eventually open 500 U.S. locations.
New concepts to compete on price
Whole Foods has built its business on delivering high levels of service and quality in an experience rich grocery environment. But
despite the inherent profit margins found in the high-end food world, Whole Foods has now determined that growth will come in the form
of lower price points.
365 by Whole Foods is the concept created to fuel that new growth. 365 is smaller than a typical Whole Foods. The first 365 will open
this year within approximately 30,000 square feet in the Silver Lake neighborhood of Los Angeles. Like the denizens of this hip
neighborhood, 365’s target customers are the children of Whole Foods shoppers. The stores will focus less on the shopping experience
and more on speedy service and discount prices. After Silver Lake, 365’s will open in Santa Monica, Bellevue, Houston and Portland in
2016. Whole Foods plans to open twice as many locations in 2017.
Images: Mike Mozart, CC by 2.0; Tim Samoff, CC by 2.0

Grocers still hot for SoCal
For a conflux of reasons including attractive demographics, continued in-migration and a strong economy, Southern California remains a
top destination for retailers, grocery sellers included. Indeed, one market observer remarked he can’t imagine a more active grocery
field, especially in the discount arena. In addition to the aforementioned Aldi and 365 by Whole Foods, Smart and Final and Grocery
Outlet are also opening new locations.
Grocers looking to expand along the West Coast have been helped by the unusual ongoing woes of the Haggen chain. The small, 18-
store chain based in Bellingham, Washington made a high stakes bet when it purchased 146 stores from Albertsons and Safeway. The
two large grocers were in the process of merging and needed to sell off the stores in order to satisfy FTC requirements. Just three
months after converting the branding and operations at the newly purchased stores, Haggen was forced to file for bankruptcy. Since
then, Haggen has put nearly all of those new stores up for auction.
Smart and Final has purchased and converted 30 Haggen stores to its brand. Smart and Final is, like Haggen, owned by a private
equity firm. However, the stores themselves are quite different. Smart & Final has branded itself as a warehouse grocer without the
membership fees. Through the newer Smart & Final Extra! stores, the chain has combined the discount elements of its warehouse
stores with the convenience of meats, produce and other traditional offerings. The limited assortment grocers are in footprints under
20,000 square feet.

EXPERIENCE: Make it a rewarding event
Grocery sellers provide daily needs goods such as food and beverages. And as such, they are more likely than other retailers to
compete on price. But some grocery sellers, especially those targeting a more affluent demographic, are competing to meet more
advanced human needs through unique shopping experiences. While expansion options appear limited for grocers with high-end
artisanal offerings, there is still some fresh movement in the sector.
New concepts bid for the artisanal experience
Kroger has launched a new concept in Gig Harbor, Washington called Main & Vine. It has a focus on fresh healthy food with a culinary
bent. Meanwhile, Ahold has opened two bfresh stores in the past year in Massachusetts and Connecticut. These are small format stores
with a foodie bent, clearly meant to compete with the likes of Trader Joe’s.
Food and Drink
A growing bar scene
Some grocers have advanced their food and beverage options in order to entice
shoppers to visit, hang out and spend money. As one writer for LA Weekly
provocatively asked, “Are supermarket bars the new dive bars?” In downtown Los
Angeles, that may just be the case. As gentrification progresses, more and more
affordable boozing options for millennials are disappearing in favor of high-end
restaurants and shops. This has led to bars and wine bars in some Whole Foods and
Ralphs. This trend isn’t limited to the West Coast. Hy-Vee, a Midwest grocer with
over 235 stores, offers in-store drinks and dining at its Market Grills, which are
currently within 80 supermarket locations. These full service restaurants offer 65 craft
beers and an extensive wine list.
Target too has been testing the alcoholic waters. In Chicago’s Streeterville
neighborhood, the latest small-footprint urban Target (~24,000 square feet) boasts a
Starbucks that serves booze as a part of the coffee chain’s Evenings program. It’s
the first bar in the nation inside a Target. (See our “Starbucks to Barbucks” report for
more on the Evenings program.) To further cater to the local millennials who make up
much of the neighborhood’s population, Target’s grocery offerings at the store are
heavy on natural, local and organic goods.
Beer, barbeque and live music
H-E-B, a privately owned grocer with 318
locations in Texas and another 52 in
Mexico, is also experimenting with adding
a dining experience, although in contrast
to Hy-Vee’s full-service dining, the
atmosphere at The Café at H-E-B is
decidedly more fast casual. Currently
found at nine locations in the Houston and
San Antonio markets with a tenth on the
way, these offer fresh made-to-order
dining, with an emphasis on local brew
and Texas barbeque. Some locations also
feature live music programming.
Image: Nan Palmero, CC by 2.0
Image: David Woo, CC by 2.0

Grocery Outlet opts for a different kind of experience
One grocer that competes in the value segment has also developed a unique method to offer shoppers a new kind of old fashioned
experience. Grocery Outlet is an “extreme discount” chain with a model which allows them to both expand like a larger chain and still
offer the traditional experience of shopping in a home-town family-run store. Stores have operated under the Grocery Outlet banner
since 1946. Each Grocery Outlet is independently operated by a locally-based family that shares a percentage of the ownership. These
co-owners develop community roots, have children in local schools and become an integral part of their cities. Meanwhile, the Grocery
Outlet corporate operation purchases overstock and surplus items in bulk. The experience offered in a discount setting is unique and
this old fashioned chain does not sell its goods online.
Expect further expansion from grocery sellers
In the short term, the growth prospects for grocery are good, as discretionary spending will continue to grow. As per capita disposable
income continues to rise in the U.S. along with total urban population, we can expect shoppers to continue to drive demand for grocery
sellers in all price categories.
§  Owners of neighborhood and community centers can continue to expect demand from grocery occupiers. In some
communities this will primarily come in the form of limited assortment discount sellers. In urban markets, higher-end
grocers offering an artisanal foodie experience will be adapting their typical prototypes to fit unique urban spaces in
residential towers, office buildings and even regional shopping malls.
§  Demand will certainly continue in suburban and urban markets in and around places like Los Angeles and Houston where
a steady stream of new residents propels new construction.
From the European model of limited selection, self-service and deep discounts, to the high-touch experience found at a large gourmet
market, community and neighborhood centers will continue to experience dropping vacancies and sensible levels of new construction in
order to meet the demand.

Source: JLL Research, company reports and Supermarket News 2016 Top 75 Retailers and Wholesalers rankings.
Top 10 U.S. grocery sellers Grocery sales locations Same-store-sales growth
1. Walmart
5,249 U.S. locations, including 3,445
supercenters, 656 neighborhood markets
and 652 Sam’s Clubs. In January,
Walmart announced it would close 154
U.S. stores, including all 102 Walmart
Express locations.
U.S. same-store-sales increased
1.5 percent in fiscal Q3 2015.
Neighborhood Market comps
increased by about 8.0 percent.
2. Kroger
2,623 supermarkets and multi-
department stores. In December, Kroger
acquired 151 Roundy’s stores.
Same-store-sales growth
(without fuel) in fiscal Q3 2015
grew by 5.4 percent.
3. Costco 480
U.S. comparable sales
(excluding impacts from gasoline
declines and foreign exchange)
grew 6 percent in fiscal Q4 2015.
4. Albertsons 2,205 N/A
5. Target 1,573
Q3 2015 store comps grew by
1.9 percent.
6. Publix 1,115
Q3 2015 store comps grew by
4.2 percent.
7. Ahold
(Merger with Delhaize to complete in
mid-2016)
781
Q3 2015 same-store-sales
growth (excluding gas) grew by
1.8 percent.
8. H-E-B 370 (52 in Mexico) N/A
9. Supervalu 1,541
Retail food same-store-sales
were down 2.6 percent in Q3 FY
2016.
10. Delhaize
(Merger with Ahold to complete in mid-2016)
1,300
Q4 2015 saw 2.3 percent
comparable U.S. store sales
growth.

Thank you
A special thanks to the JLL professionals who contributed insights to this report: Scott Burns (Los Angeles retail brokerage),
Simmi Jaggi (Houston retail brokerage) and Mike Longmore (retail agency leasing).

Trust our retailntelligence.
About JLL
JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking
increased value by owning, occupying and investing in real estate. With annual fee revenue of $4.0 billion and gross revenue of $4.5 billion,
JLL has more than 200 corporate offices, operates in 75 countries and has a global workforce of approximately 53,000. On behalf of its
clients, the firm provides management and real estate outsourcing services for a property portfolio of 3.0 billion square feet, or 280.0 million square
meters, and completed $99.0 billion in sales, acquisitions and finance transactions in 2013.
Its investment management business, LaSalle Investment Management, has $50.0 billion of real estate assets under management.
JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com.
About JLL Research
Jones Lang LaSalle’s research team delivers intelligence, analysis and insight through market-leading reports and services that illuminate
today’s commercial Real estate dynamics and identify tomorrow’s challenges and opportunities. Our more than 400 global research
professionals track and analyze economic and property trends and forecast future conditions in over 60 countries, producing unrivalled local
and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive
advantage for our clients and drives successful strategies and optimal real estate decisions.
About JLL Retail
JLL’s retail experts partners with retailers, investors and owner/operators with an extensive team of dedicated experts around the world. They
understand the inherent complexities and variability associated with both the retail industry and increasingly complex capital markets. Its specialists are
recognized for their independent and expert advice to clients, backed by industry-leading research that delivers maximum value. With leading in-depth
knowledge of the local, regional and global market dynamics, JLL aims to truly partner with its clients for the entire lifecycle of an asset or lease. Its
experts deliver clients maximum value that support and shape their investment, site selection and brand strategies.
JLL is the largest third party retail property manager in the United States with more than 1,000 centers, totaling 125 million square feet under
management. The firm has more than 140 retail brokerage experts spanning more than 30 major markets, representing more than 900 retail clients. In
2015, JLL’s Retail Group completed transaction management and portfolio optimization on 1,500+ leases, negotiated 500+ leases for retailers and
1,000+ leases for landlords and completed more than $2.7 billion of investment sales, dispositions and financing for investors. For more news, videos
and research from JLL’s Retail Group please visit: www.jllretail.com.
© 2016 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or
warranty is made to the accuracy thereof.
jllretail.com
For more information, please contact:
James D. Cook
Director of Retail Research, JLL
jamesd.cook@am.jll.com

Grocery stores compete for attention | JLL Retail

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