Southern California is a desired market into which out-of-state grocers, new chains, and concepts want to expand. | Pixabay.com

How Healthy is SoCal’s Grocery-Store Sector?

Carrie Rossenfeld Retail

As SoCal Real Estate recently reported, CBRE reported that, according to ESRI, only 3 percent of the adult population in Southern California (roughly 450,000 residents) had purchased groceries online in the previous 30 days. The firm says, “Technological innovation has been a boon for the average American consumer, but on the other end of the spectrum, it has proven to be the bane of aging retailers who struggle to keep pace with the onslaught of change.”

We spoke with Jeff Moore, senior managing director of CBRE’s Orange County office and head of retail services for CBRE’s Southern California offices, about the health of the Southern California grocery-store sector, especially after recent consolidations, shakeups, and the increasing presence of technology in the sector.

SoCal Real Estate: What is the health of the grocery store sector in SoCal?
Moore:
Southern California is the largest grocery market in the nation; therefore, it is the one of the most competitive business sectors in California. Southern California is a desired market into which out-of-state grocers, new chains, and concepts want to expand. The traditional grocery stores like Vons, Ralphs, Albertsons and Stater Bros. now must compete for consumer dollars in a crowded field that includes specialty grocers like Sprouts, Whole Foods, and Bristol Farms; value-oriented chains like Aldi, Grocery Outlet, and Smart & Final; and lastly, discount, big-box retailers like Walmart, Costco, and Target, plus those that focus on ethnic niche demographics and foods like Northgate Gonzalez, as well as other Hispanic or Asian independents that attract loyal followings. Then, add Trader Joe’s to the mix, which is loved not only by consumers, but also by shopping-center owners and city officials for its high foot traffic and sales revenue.

In addition, we are now also seeing a wave of contemporary independent grocers that focus on urban markets and have smaller footprints, such as Erewhon Natural Foods. We are also seeing a new trend of restaurant/grocery hybrid stores and hip convenience stores that are attractive to their targeted demographic and compete for these same dollars. Despite this intense competition, grocery sales continue to increase in terms of overall volume, and this segment is an active and important part of the region’s real estate market.

Where does this sector stand now after the shakeups and consolidations?
We may see more consolidation in this sector as companies compete for market share and also explore different store formats and ways to attract consumers by providing exceptional and unique shopping experiences. The grocers who invest in technology and integrate an e-commerce strategy will likely surpass competition. We will continue to see consolidation as grocers prioritize their geographical footprint to manage efficient delivery of goods to consumers. Grocers will also need the capital and profit margin to be able to invest in omnichannel. Those that are slower to incorporate these ideas in such a fast-moving market will fall behind.

Where is this sector heading and will technology continue to change it?
E-commerce penetration is low in the grocery sector relative to other segments in the U.S., with estimates ranging from 1 percent to 3 percent of grocery sales online versus 9 percent for retail sales overall. Other parts of the world, including the UK and Asia Pacific, have much greater adoption by consumers ordering groceries online. American obstacles include cultural differences as well as logistical challenges. Since 2013, digital sales have increased at a rate of 20 percent annually, with estimates that market share could potentially climb to 13 percent by 2024 as technology improves, consumers become more familiar with the platform, and cultural adaptation to ordering online becomes the new normal. The U.S. is different from other countries in that it is such a vast country, making it more expensive to operate delivery and returns of grocery items and operate cold-storage facilities. In addition, the low margin of the grocery business has kept many grocers from adding an online option. We think that there will be more investment in technology to make in-store shopping and pick-up very convenient. In addition, we think we will see more logistic partnerships between grocers and delivery platforms.

What else should our readers know about grocery stores and technology in the SoCal market?
Technology and grocery stores may have not been used in the same sentence in the past, but Amazon’s purchase of Whole Foods is paving a way for that. Whether it is last-mile delivery, e-commerce grocery sales, or business diversification, the industry is changing, and technology will be at the forefront.