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Category: Net Lease Retail Tags: Grocery Stores, net lease retail

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Over the past year and a half, almost every aspect of normalcy has drastically changed, including grocery shopping. The grocery industry was already adjusting to the digital transformation pre-COVID-19 but was accelerated by the pandemic. Grocers have been very adaptable during a period of uncertainty, and investors aren’t the only ones to notice as new competitors enter the market offering speedy delivery options or catered products. Customers’ focus on product availability, low prices, and promotions, whether online or in-store, plus the new competition has only pressured brands to distinguish themselves in the now saturated market.


The attractiveness of grocery stores can largely be attributed to their financial performance. According to McKinsey & Company, the grocery industry traditionally saw one to two percent growth annually but in 2020 experienced a 12 percent jump. More than $3.4 billion in grocery store sales have traded over the last year, recording an average cap rate of 6.7 percent. The average price per square foot for grocery stores has increased to $196, compared to $176 in 2020 and $164 in 2019, according to CoStar data.





2020’s surge in online grocery sales caused a widespread adaption among grocers to expand their shopping experience in the digital world with home delivery and buy online pick-up in-store/curbside (BOPIS) options. Though safety concerns and convenience were the intent behind these initiatives, customers have adopted and familiarized themselves with these services for over a year.


Online Grocery Ordering

Online grocery sales have bolstered in growth, reaching $8.6 billion in August 2021, a 28.4 percent increase from July, according to Brick Meets Click, a grocery business analytics and insight firm. The Food Marketing Institute and Nielsen reported that annual online grocery sales are projected to grow by $100 billion by 2022. Third-party delivery apps have largely benefitted from this activity. Instacart is among several tech companies to flourish as a result of the pandemic, forming partnerships with over 200 retailers. During the first few weeks of the outbreak, the grocery app saw a 20 percent higher ordering volume daily. This caused the company to hire an additional 300,000 employees within a matter of weeks to keep up with demand. However, convenience is not cheap, with online grocery orders 25 percent higher than a typical grocery trip due to delivery fees, price markups, and tips. Instacart’s most recent plan is to boost automation, which involves replacing workers with robots to cut costs and sustain relationships with supermarkets. Instacart plans to build automated fulfillment centers throughout the U.S. utilizing Artificial Intelligence to deliver non-perishables while employees collect the produce and deli products.


E-Grocery Start-Ups

As retailers start to recognize the market potential for new grocery delivery services, several start-ups have sprouted in the industry, such as JOKR, Gorillas, 1520, Getir, Fridge No More, and many more. These e-grocery brands are looking to offer ultra-fast delivery in as little as 15 minutes to compete with established brands like Amazon Fresh and Instacart. Though they do not have storefronts, they market their rapid delivery as a key differentiator to larger national and regional grocers.



Logistics Facilities

The escalating delivery trends have pressured grocers to seek additional cold storage and fulfillment center space for 2021 and beyond. Grocers are hunting for locations in proximity to people to supply customers better. On average, larger grocers have in-house fulfillment or third-party delivery partnerships in place to create proprietary automated fulfillment operations.




E-grocer brands are turning to vacated retail and industrial properties with reduced rents in secondary and tertiary markets. They convert the vacated properties into micro fulfillment centers around 1,500 to 5,000 square feet with a delivery radius of one to three miles.



It appears as if everyone wants to be part of the grocery boom, especially tech-focused start-ups and meal prep kit companies.


Tech Companies Introduce Contactless Payment

For a frictionless shopping experience, shoppers prefer contactless technology during checkout. The contactless payment industry is projected to be worth $273.1 billion by 2028. Mastercard found that over half, 51 percent, of Americans use some form of contactless payment. In August, Grand View Research reported that over 87 percent of consumers prefer contactless payment options while shopping. Zippin’, a tech start-up, has raised more than $45 million over the past few years to scale its contactless checkout technology to tens of thousands of stores by 2025. Other tech companies soon followed after seeing Zippin’s momentum, and now, even retailers are experimenting with their cashier-less technology, including Amazon’s Just Walk Out technology.



Meal Kits

To retain the customers gained during the pandemic, grocers are implementing technology, services, and new products to keep customers cooking at home. Hy-Vee, HEB, and many other grocers are adding fresh meal kits to online ordering. Target carries HelloFresh and Local Crate meal kit brands and fresh meal-in-bag options, while Albertsons relaunched Plated from a meal kit provider into a private brand.



The grocery industry is already a tight and competitive market, and with the introduction of new business models from e-tailer and start-up competitors, the pressure is on grocers to keep customers coming back.




As a once forgotten asset class, grocery stores have become top-of-mind for investors as they indicate a durable and adaptable future. While grocers witnessed stellar growth in 2020, the industry will see more moderate growth now that restaurants and other dine-out options are open again. According to the U.S. Census Bureau, food and beverage store sales in September 2021 grew 2.1 percent year-over-year for a total of $586.2 billion. With that in mind, grocery stores are poised for a positive long-term trajectory due to their financial performance and recent activity.

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