ORANGE COUNTY, CA—Grocery chain Haggen’s recently announced plans to exit the Southwest markets, including 69 California stores, offers other players a chance to move in, but may create problems for grocery-saturated markets, retail experts tell GlobeSt.com. In part 1 of this two-part exclusive analysis, we spoke with four such experts to get their take on the move and its anticipated effect on the retail real estate sector. Stay tuned for part 2, in which we discuss more shake-ups in the industry.
GlobeSt.com: How do you think the grocery sector will be affected by Haggen’s announcement of plans to close their California and Southwest stores?
Ben Terry, senior associate, Coreland Cos.: The Haggen store closures will help the competing chains in the near term since shoppers will find a competing option. There is steep competition in Southern California with endless market options, from niche operators like Trader Joe’s and Whole Foods to discounted markets like Walmart and Winco. As a whole, the impact to the grocery sector will be minimal since the existing chains will simply absorb Haggen’s customer base.
Ed Hanley, president, Hanley Investment Group: The grocery sector will see the frustration from consumers from the exit of Haagen as they adjust their shopping patterns to address the store closings. Although consumers may benefit in the short term as prices come down during the liquidation stages, the impact of job loss in their communities will have its effects. The remaining grocers in the region will act quickly to grab the most desirable locations as the sector continues to diversify to meet the changing consumer tastes.
Philip Voorhees, EVP, CBRE: From our perspective, would-be Haggen shoppers quickly switched brands, as witnessed by the sharp drop in sales at Haggen locations in California and Arizona. So, from a volume standpoint, consumer purchasing volume already reallocated to other grocers. CBRE expects grocers such as Whole Foods and Sprouts will jump at the opportunity to acquire desirable infill locations such as Corona del Mar (Newport Beach) and Santa Monica. Locations in middle- and lower-income demographic areas will likely go ethnic grocers or value-focused retailers.
Donald MacLellan, senior managing partner, Faris Lee Investments: Haggen’s presence in the market was so short-lived I don’t see there being an impact on the overall grocery market. There is more of an effect on the landlords and vacancy. Out of the 146 stores that are closing, there are probably 50 or so desirable sites that will have a good chance of leasing up sometime soon. Depending on the economics of the Haggen lease, this might be a relief for some landlords who were leasing the space at below-market rents—now is their opportunity to capture a market-rate, brand-name user. The more-inferior locations could very likely remain dark for an extended period of time, and a good strategy would be to consider marketing to non-traditional retail uses.
GlobeSt.com: What effect will these closings have on grocery-anchored retail centers, and how should center owners react?
Terry: In areas where there is a clear over-saturation of grocery stores, I would be slightly concerned as a landlord of a Haggen-anchored center. We will see start to see landlords re-tenanting some of these stores with different uses, such as gyms, dollar stores or discounted soft-good retailers. However, with new discount chains entering the marketplace, such as Aldi and Grocery Outlet, many of these Haggen stores could get absorbed.
Overall, I think the Haggen closures provide landlords with the opportunity to redefine their shopping centers to better meet the social, economic and ethic needs of the surrounding community. Hispanic markets such as Northgate and El Super are successfully expanding, in addition to the specialized chains such as Sprouts, Trader Joe’s and Whole Foods.
Hanley: Once the stores do close, the effect on the neighboring shop tenants will be felt immediately as customer traffic to the shopping center declines. It is important that owners evaluate their leases and look for any co-tenancy type or square-footage occupancy clauses their tenants may have. Owners must be proactive and open communications with their tenants so the tenants understand that there is an immediate plan in place to fill the vacancy as soon as possible. Some owners will be faced with changing the theme of the shopping center from grocery anchored to soft goods or maybe home improvement if the remaining grocers are already located in the immediate area. This may be an opportunity to redesign or redevelop the shopping center and add value that previously was not possible due to the Haagen lease.
Voorhees: The answer to this question is as varied as the locations themselves—though, losing an anchor tenant is almost always tough on other tenants at the center, at least in the short term. The course of action for owners will depend largely on whether or not the space can be recaptured from Haggen. At locations where the lease rates were very low, a Haggen sublease to another tenant is likely. For locations with low lease rates (usually on leases that were cast 15 to 20 years ago or longer), the opportunity for owners to achieve better rent from a new tenant willing to make an investment at the center is real, if the space can be recaptured.
MacLellan: Dependent upon the quality of the real estate, landlords will need to rethink their center and perhaps create a junior anchor situation by breaking up the large space into smaller spaces with uses such as a Trader Joe’s, fitness operators or other daily uses. There will likely be interest on these various sites ranging from the value-oriented (dollar stores and warehouse) concepts, ethnic grocery operators and higher-end boutique operators (Sprouts, Gelson’s). We have recently seen the Smart & Final Extra concept occupy other dark grocery sites.