Food & Beverage Tomorrow: How grocers are approaching 2023

As 2023 unfolds, U.S. grocery-anchored retail centers remain highly sought-after by retailers as a preferred location for neighborhood stores and investors seeking strong-performing real estate assets.

Grocers attract more foot traffic than any other type of retailer, which emboldens other retailers to pay a premium for storefronts within the same center. Within this grocery-dependent ecosystem, retailers and investors are paying close attention to the asset class’s performance and prospects.

The nationwide availability rate for open-air neighborhood, community and strip centers—which house most supermarkets and big-box stores—reached an all-time low of 6.9% at the end of 2022, according to CBRE Research. Moreover, in a down year for real estate investment sales, CBRE data shows that more than $14.6 billion of grocery-anchored centers traded in 2022, up 24% year-over-year—and the highest mark in 10 years. Supermarkets are also experimenting with other space types, including larger, 100,000-sq.-ft.-plus spaces in power and subregional centers, as well as smaller-format neighborhood stores.

Navigating a challenging landscape

The ultra-competitive grocery business typically posts slim profit margins, and grocers need to sell large volumes across networks of stores to stay in the black. Headwinds—including a slowing economy, labor shortages, supply chain disruptions and rising inflation (for both food and other goods)—can materially impact their bottom line.

E-commerce is another challenge for traditional grocers. E-commerce is more expensive for groceries largely because fulfillment adds cost, such as labor to pick out and deliver orders either to a home or to a car parked outside. However, grocers still need to charge prices that are competitive with in-store prices. As a result, online grocery typically operates in the red, using subscription and delivery fees to help make up the difference.

On the business side, grocers are navigating these challenges through mergers and acquisitions to increase their purchasing power and achieve economies of scale and raising prices to keep pace with inflation. On the real estate front, grocers are focusing on three areas:

• Improving the in-store customer experience
• Deploying new technologies
• Optimizing storage and distribution

Capitalizing on the growth potential of e-commerce

When COVID-19 hit, grocers were among the fastest to adapt, offering curbside pick-up and home delivery options to shoppers unable or unwilling to shop in stores. Most shoppers returned as restrictions eased. CBRE’s 2022 survey of 20,000 consumers globally found only 25% prefer to buy groceries online, the lowest of any retail segment.

However, while grocery is traditionally the segment with the least exposure to e-commerce, online grocery sales are growing faster than most other e-commerce segments. Of the estimated $1.1 trillion of food and drink sales in 2022, only 7.5% were transacted online, according to Forrester, but online sales are expected to grow by 17.1% annually over the next five years (versus 3.2% annual growth for offline sales). Online sales are expected to account for 13.9% of all food and beverage (F&B) sales by 2027, meaning that most F&B sales will occur in brick-and-mortar settings for the foreseeable future.

Expect grocers to continue offering delivery and curbside pick-up options despite their higher costs as they seek to satisfy shoppers and fend off competition from online-only grocers. Grocers are also adjusting their in-store offerings, reconfiguring stores to offer more prepared foods and private-label goods, which have higher margins, as cost-conscious consumers eat out less.

Optimizing inventory management

Grocers have excelled at using predictive analytics to optimize their distribution networks, pinpointing when and how much inventory is needed at stores. As a result, supermarkets are storing fewer goods in the back, freeing up space that can be repurposed for other uses like adding more selling space.

Retailers are also using data to more efficiently stock pallets, pooling goods together that are needed in the same area of the store so that they are easier for associates to unload and stock, reducing the time it takes for items to move from the truck to shelves.

Deploying more tech behind the scenes

As e-commerce players seek market share, grocers are actively investing in new technologies to retain customers. However, while they’ve made deep inroads in deploying apps and self-checkout options, they’re taking a test-and-learn approach to other technologies. Grocers are trialing drone delivery, camera sensors, real-time checkout and smart carts in select locations, but full deployment requires major capital and infrastructure investments, often across thousands of stores.

Behind the scenes, however, technology continues to reshape operations. Robots are increasingly used to track inventory, move goods and clean stores, allowing grocers to redeploy scarce labor to other tasks. Moreover, predictive analytics and robotics are improving distribution, making stores and distributions centers more efficient, optimizing inventory levels and providing data to pinpoint new opportunities.

Strong outlook

The good news for grocers, retail property owners and neighboring tenants: these strategies seem to be working early in 2023. Grocers posted 2.3% quarter-over-quarter sales growth (7.8% on an annual basis) in Q4 2022, the strongest performance among all retail segments, according to the U.S. Census Bureau’s December Advance Retail Sales report. Foot-traffic numbers are also expected to remain high. However, industry consolidation and a challenging economic landscape could spur further M&A activity and other cost-cutting measures. Overall, grocery-anchored retail centers will likely continue to fare well and draw continued interest from investors and other retailers attracted to high foot traffic.