We Need Perspective

“A little perspective, like a little humor, goes a long way.” – Allen Klein, author

The grocery, retail and retail real estate industries have been buzzing with recent news of Lidl’s entrance into the U.S. market and Amazon’s pending acquisition of Whole Foods.  These announcements have sparked a plethora of speculation with predictions ranging from dire consequences for everyone to a new era in grocery.  Opinions on how these trends will affect our business vary greatly and analyst input is inconsistent at best.  I have read numerous articles and reports on the topic and I believe that we need a little perspective.

Phillips Edison opened for business more than 25 years ago with the acquisition of Nor-Dan Shopping Center, a grocery-anchored property located in Danville, Virginia.  We chose that opportunity, and to focus on grocery anchored real estate, because we understood the business and knew that necessity-based real estate would be capable of withstanding the constant cycles of the markets.  Since then, PECO has prospered through several market turns and industry changes.  Weathering those storms and achieving our long history of success has given us a unique perspective on the retail real estate business and the ever-changing retail landscape.  Based on those experiences, here are a few of my observations on recent industry events:

• One of the major shifts we’ve witnessed over the years was Walmart’s growth in the grocery sector. They first began making moves into grocery in the 1980’s but it took time and some trial and error before they found a format that was largely embraced by shoppers.  Today, more than 30 years later, they claim approximately 21% of the grocery business in the U.S.   When we look at Lidl and Amazon, who are both seeking to make that same push, we must remember that it will take time for them to make an impact and many things can happen during 10, 20 or 30 years (if they follow Wal-Mart’s path).  Some may feel that Amazon will be ahead of the game with the purchase of Whole Foods.  It’s important to note, however, that they have been trying to break into the grocery business for at least 10 years and currently only have about 1% of the market.  Whole Foods only has about 2 or 3% of the market. So, the combined company’s total market share will still be only about 4%.  Lidl, who already has a strong presence in Europe and the UK, will be facing some new, extremely strong competitors in the U.S. In addition, their primary focus has typically been on private label grocery, a concept that has not sold well in the U.S., and which is already under fire from Kroger who has filed a trademark infringement suit against Lidl.
• Technology and the advent of online shopping have obviously been in the spotlight lately.  The PECO team has been watching developments in this area closely and, up until recently, we considered internet strategy to be the biggest risk to bricks and mortar real estate.  That changed when Amazon announced its deal with Whole Foods.  Essentially, in pursing that acquisition, Amazon is validating the long-term need for physical storefront locations.   This acknowledgement of the value of bricks-and-mortar real estate has had a positive impact on the risk profile of our business.
• In the coming year or two, we expect more grocers to continue to focus their capital on internet strategies and upgrades to their existing stores to enhance the customer experience.  Amazon, having validated the value of a bricks and mortar presence, will likely be looking for additional space to deliver groceries in the last three miles to people’s homes.  The neighborhood centers will fit the bill.  

There has been a lot of over-reaction to these recent announcements.  While we don’t want to underestimate the power of Amazon or Lidl, it’s important to remember that this is just another step in the evolution of the industry.  Despite the recent glut of predictions, the only certainty in this business is change.  The PECO team, which has thrived on change for over 25 years, is adaptable.  We know that change brings opportunity for those willing to look for, and seize it.  

As Klein said, “A little perspective…goes a long way.”