May 10

Competition Remains Fierce In Grocery Sector

The grocery sector is as hot as it has ever been in Texas, with several competitors looking to gain a larger market share in the Lone Star State. As the state’s population and economy continue to expand, companies working to meet the increased demand include national retailers like Kroger and Walmart, regional chains like H-E-B, and niche stores such as Whole Foods Market and Fresh Market.

In the state’s largest metropolitan areas of Houston and Dallas, the biggest competitors are H-E-B, Kroger and Walmart. According to Chain Store Guide, in metro Houston, HEB-branded stores commanded 23.7 percent of the grocery market in the frst quarter of 2015 by sales volume, followed by Kroger at 21 percent and Walmart Supercenter at 16 percent. Following those are Sam’s Club at 6.6 percent, Randall’s Food & Drug at 5.9 percent and Costco Wholesale at 4 percent. Whole Foods controls 2.2 percent of the market. Kroger operates 99 stores in metro Houston, HEB Grocery Stores operates 68 and Walmart operates 60. Whole Foods operates 10 locations in the area.

Grocery stores continue to lead the way when it comes to anchoring new retail centers being built across Texas. CBRE’s research team expects grocery-anchored development to continue dominating retail construction throughout 2015. The population of the metro Houston market is expected to increase by approximately 125,000 this year, and retail occupancy is well above 90 percent in many of Houston’s hot submarkets, including the near southwest (98.8 percent), the near north (96.7 percent), the inner loop (95.6 percent) and the near west (95.7 percent), indicating construction should remain strong. Metro Houston’s overall occupancy rate is 93.3 percent, compared to a national rate of 88.6 percent.

Patrick Manchi is vice president of leasing for Houston-based Weingarten Realty Investors, a publicly traded REIT that owns, manages and develops shopping centers. The company currently owns 237 shopping centers nationally. He says the market is as competitive as he’s ever seen it.

“We’re seeing H-E-B, Kroger, Spouts Farmers Markets and Whole Foods continue to expand in the Houston area,” says Manchi. “Whole Foods’ newest store recently opened in The Woodlands. Whole Foods is definitely looking to expand in the marketplace and has been aggressive over the past 12 or 18 months in Houston.”

Four new Whole Foods locations have opened in the greater Houston area in the last 12 months.

Grocery stores also are anchoring the retail portion of mixed-use developments, which usually include an office, hospitality and residential component on the same tract of land with retail. The 40,000-square foot Whole Foods in The Woodlands opened in March in Hughes Landing, a 66-acre, mixed-use development. It was the frst Whole Foods to open in The Woodlands, a master-planned community north of Houston.

Right Size, Best Fit

Grocery stores tend to draw a lot of foot trafc, with the same customers visiting the stores two or three times a week, according to Manchi. This makes them excellent anchors for retail development.

On the whole, grocery stores are performing well. Nationally, grocery stores average $507 in sales per square foot annually, versus a retail industry average of $350, according to JLL. In terms of individual performance, Whole Foods leads with sales of over $930 per square foot per year.

Whole Foods thrives in high-income urban areas, however, the supermarket chain has not performed as well in some suburban submarkets, according to Manchi.

“Whole Foods has told us it is going to re-evaluate the suburban stores and focus more on the urban developments,” says Manchi.

The chain tends to have smaller stores compared to some of its competitors. Kroger, H-E-B and Walmart range in size from around 75,000 square feet to 150,000 square feet or larger. Whole Foods stores range from 25,000 square feet to around 50,000 square feet.

San Antonio-based H-E-B, which was founded in 1905 and remains privately owned, is working to beat its competitors to expanding suburban areas, especially as the state’s population continues to grow. The company operates more than 350 stores across Texas and has purchased at least 12 plots of land in metro Dallas for a planned future expansion. The question is when the company will begin its long-awaited investment into adding locations in metro Dallas.

“They’ve got quite a few sites,” says John Zikos, a partner at Venture Commercial, a Dallas-based retail brokerage company. “Obviously they’re coming, it’s just a matter of when. When they do open new locations in the Dallas area it will make a huge impact on the market.”

Demand for retail in metro Dallas has reached a six-year high, according to CBRE, as occupancy reached 92 percent in the fourth quarter of 2014. Per capita income has grown by 5.3 percent in the last year, and is expected to grow by another 6.4 percent in 2015, an indication that grocers have room to grow in the market. The area’s population is expected to grow 8.6 percent from 2013 to 2018.

“H-E-B has been very aggressive,” says Manchi. “It is very nimble and is catering to each demographic and market area it goes into. I see it as being one of the more aggressive grocers out there.”

H-E-B only operates in Texas and northern Mexico, which Manchi believes gives the grocery chain an advantage over national companies in Texas markets. Brands like Kroger and Walmart are more likely to move at a slower pace, according to Manchi.

“Kroger and Walmart will expand naturally to fill in areas where they see a void,” says Manchi. “Being public companies, they have access to a lot of funds.”

Kroger, the largest traditional grocery store chain in the nation, is increasingly focusing on an approximately 123,000-square-foot model for new stores that is larger than the chain’s older locations.

The Castle Hills Marketplace development planned for the Dallas suburb of Lewisville features a 123,000-square-foot Kroger. Cencor Realty Services, a Dallas-based property management, asset management and development services firm, is nearing completion of the development’s first phase. Castle Hills Marketplace will be located at the gateway to Castle Hills, a 2,500-acre, master-planned community. Including the Kroger, the shopping center will span 400,000 square feet of retail space upon completion.

The new Kroger at Castle Hills Marketplace, which opened April 10, offers furniture, housewares, small appliances, toys, baby products, jewelry and a pharmacy in addition to traditional grocery store offerings. Other planned retailers for the development include Chili’s, Zoës Kitchen, Pie Five, Pei Wei Asian Diner, McDonald’s, Verizon, Supercuts and Orangetheory Fitness.

Finding a good location is a key factor when building new grocery-anchored developments. This includes having easy access and parking for cars and strong demographics with sufcient disposable income in the immediate area. Castle Hills Marketplace will draw from a residential base of 191,906 within a five-mile radius, with an average household income of $99,000, according to The Weitzman Group, a brokerage firm and sister company to Cencor.

Other competitors also are crowding the market for grocery stores in Texas. Boise, Idaho-based Albertsons, which acquired Safeway last year, operates 51 stores in metro Dallas under multiple brand names. Discount grocer Aldi operates 44 stores, Sprouts Farmers market has 15 locations, Target has 28 stores with a grocery component and there are nine Whole Foods Market locations in metro Dallas.

Balancing Tenants

An important component of grocery-anchored developments is leasing the smaller retail stores around the anchor. This can vary depending on which store is the anchor. Because a Whole Foods Market-anchored shopping center attracts high-income customers, other retailers in the center can benefit.

“Retailers love Whole Foods,” says Zikos. “They bring a lot to the table in attracting other specialty retailers as well as restaurants with them. Walmart can go into higher-income areas and compete, but their best stores cater to upper-middle income customers rather than upper-income,” says Zikos. “Walmart brings in retailers and restaurants that cater to a more moderate demographic.”

Jason Baker, who leads the tenant representation team at Houston-based real estate firm Baker Katz, says many consumers in Texas prefer to shop at H-E-B in part because the company is locally owned.

“H-E-B does a really good job of catering to the Texas crowd,” says Baker. “They’ve made it clear to everyone in greater Houston that they’re Texas born and bred. They play that up and pay careful attention to marketing.”

Baker predicts that the grocery sector will remain extremely competitive in Texas, especially in the major cities.

“Not all of the players today will withstand the unbelievably competitive nature of the grocery business,” says Baker. “Houston is in the top fve or six most competitive grocery markets in the country.”