Amazon’s Whole Foods Acquisition: The Latest Game Changer for Developers

September 11, 2017

Amazon’s Whole Foods acquisition made headlines this summer, one of a series of events to shake the real estate industry. Representing a huge step into brick-and-mortar retail for the e-commerce giant, the deal proves the lines are blurring between traditional and online retailers. But what does it mean for real estate developers, owners and investors active in the grocery-anchored shopping center market?

Who’s Affected

Developers and property owners with a Whole Foods store in place might feel like they’ve been dealt a winning hand. In an industry where tenant credit is king, they’e just traded up from a $13.4 billion BBB-credit tenant to a $465 billion AA company.

Some players might jump at the chance to maximize their value in a sale or refinancing. Some will find the tenancy gives them more bargaining power with other retail tenants.

The Whole Foods acquisition spotlights the challenges and opportunities emerging in the grocery sector.

Shopping center owners and developers have been watching the “grocery wars” closely, and the Whole Foods deal raises the stakes on what’s already a highly competitive grocery sector, with a crowded field of players operating on thin margins.

Who’s Responding

German grocers Aldi and Lidl are adding even more pressure to the market with their ambitious expansion plans.

As Fortune reports, Aldi will invest $3.4 billion to expand its footprint from 1,600 to 2,500 stores by 2022. Lidl also opened the first of 100 planned new U.S. stores earlier this summer.

And Lidl has announced plans to open 10 to 12 stores in Georgia, according to the Atlanta Business Chronicle, while Aldi is moving forward with four new Georgia stores.

Shopping center owners and developers are benefiting from the hefty pipeline of new grocery stores.

According to a third-quarter market report released by Marcus & Millichap, the expansion will help absorb additional space in a market where vacancies have already dropped to 5.4 percent and will likely fuel more grocery-anchored development.

Existing grocers will be forced to up their game with added investment in store improvements or renovations. Many have modified leases for new stores to remove requirements that they open. This change alone could wreak havoc on a shopping center.

At the same time, there’s been fallout among players struggling with slumping sales and declining foot traffic, resulting in store closures.

Since 2014, Fortune reports, 18 grocers have filed for bankruptcy, including major brands such as Marsh Supermarkets and A&P.

What You Should Do

It remains to be seen just how much of a disruptor Amazon will be in brick-and-mortar grocery sales.

What’s clear is that shopping center owners and developers will need to have a laser focus on making sure the grocery anchor they put into a center is a good fit for that market and its target customer, and will be in business for the entire lease term.

If you’re a real estate developer, you’ll need to keep close tabs on the finances and performance of those key grocer anchors in this rapidly changing segment. In addition, owners should monitor the sales of their existing grocery tenants. Doing so will allow you to better position your firm in the marketplace.