By Merrie S. Frankel

The expansion of superstores by Wal-Mart, Kmart and Target continues to affect community shopping centers, the physical formatting of grocery anchors and centers' in-line tenants. These effects are being felt in various ways depending upon the location of the new supercenters, and whether or not nearby community shopping centers include a grocery store anchor.

Despite these challenges, we believe that grocery- and discount-anchored community shopping centers remain stable assets overall. Centers that perform best will have true in-fill locations, and be anchored by the top discounters and grocers, which have the efficiency, brand name, and merchandising moxie to succeed. Centers with second-tier anchors will find a widening performance gap.

Supercenters are defined as full-line discount stores that include a full-line supermarket. The format is not new—it was first developed by Wal-Mart in 1988. Supercenters typically range from 110,000 to 250,000 square feet, with an average of 170,000 square feet. The emergence of supercenters and freestanding, drive-through drugstores has strongly affected neighborhood and community shopping centers, which are heavily dependent upon the success of their supermarket, drugstore and discount store anchors. Whereas superstores that locate adjacent to shopping centers generally compel the grocery anchor to succeed by becoming more service-oriented, superstores located down the road or across town tend to draw customers and tenants away.

Competition in Food and Consumables

Increasing market share is the supercenters' mantra. The superstore format is designed to drive sales growth and increase productivity, thereby leveraging firms' supply chain power and expertise. Retailers such as Wal-Mart, Kmart and Target are increasingly adding food and consumables to their merchandise assortments in order to increase the frequency of visits, average amount spent, and length of shopping trips to bolster sales at the higher margin, discount side of the house. These nontraditional grocers are battling for market share in an environment where the food retailing industry's margins are already razor thin and sales growth is slow.

To stay competitive, many grocers are expanding stores to create larger prototype formats that include not only food with specialty sections such as deli and florists, but also pharmacy, movie rental and consumer banking areas as well.

Supercenters Re-lease or Re-format Excess Space

As the supercenter retailers expand, redesign and consolidate, they find that older units often no longer serve their needs. Thus, the flight to larger stores has left these chains with excess space. For example, Wal-Mart has an inventory of 30 million feet of excess space, half of which has been re-leased and often partitioned for other retail concepts requiring less space. They would prefer to expand on their current sites if the land is available, as this is the cheaper alternative, but that option is not always available.

There are two major scenarios on how the supercenters will impact the community shopping centers. Generally, the supercenters locate near smaller towns rather than urban or in-fill areas due to physical space limitations and labor issues, leaving shopping center REITs with properties in urban or in-fill areas much less susceptible to supercenter competition.

1. Creating a new destination: A worrisome scenario occurs when the supercenter vacates the shopping center because it cannot find contiguous space and relocates down the road or across town. This may occur because the retailer wants a larger configuration or because it legally cannot sell food in the shopping center it is vacating (e.g., because of a previously existing exclusivity agreement between the shopping center and the grocer). There is a ripple effect throughout the shopping center if it does not replace the lost supercenter anchor. Moreover, if the supercenter moves down the road or across town, the smaller stores that generally locate with them, such as Cato Fashions, Dollar Tree, GNC, Goodies, TJ Maxx, PETsMART,and Old Navy, often follow, which makes it difficult for the community shopping center to maintain its in-line shops.

2. Expanding in place may enhance the area: If the supercenter is built next to the shopping center, the neighborhood grocer's sales volume is affected. Grocers have remained competitive, however, by creating a niche for themselves; not by becoming more price sensitive, but by becoming more service-oriented and offering a better merchandise mix, more imported and prepared foods for carryout and better fresh produce sections. However, there is a better chance of re-tenanting the potentially vacant grocer if the supercenter is built next to the shopping center, rather than down the road. The supercenter, by its very presence, creates a retailing node, a synergy between the supercenter and the community center that validates the real estate location, strengthens the real estate value and enhances the retail. The supercenter's relocation will affect the grocery store in most cases, but the closer the supercenter's new location, the better the ability of the grocery anchor to re-format or the REIT owner to re-lease that space.

A Niche for Both Price and Convenience

On the one hand, supercenters work because consumers' shopping habits have changed over the past decade. Consumers are shopping more purposefully—shopping less often, visiting fewer stores per trip and spending more per visit. On the other hand, shoppers, especially those from time-starved, two-income families, need convenience and easy access—and supercenters are less convenient for the every two- or three-day shopping trip. This shopper may sacrifice quantity and price for convenience and service. Well-managed supermarket anchors have come to grips with the supercenter threat by providing more service, greater convenience, larger selections, greater variety, better produce and perishables and more pre-packaged, prepared foods for takeout that are highly profitable. Strong supermarkets also recognize that clean, well lit, appropriately staffed stores provide an effective competitive position and a point of differentiation versus the supercenters.