By Carol Radice
Through a special arrangement, what follows is an excerpt of a current article from Grocery Headquarters magazine, presented here for discussion.
A weakened economy and continuing pressure to achieve a speedy ROI has created a cautious spending environment, leading to a slowdown in new store development and remodels for supermarkets. According to the Food Marketing Institute's Facts About Store Development 2007, projected activity for 2007 shows a small increase of 2.4 percent for new construction and 0.6 percent for remodels.
In 2006, capital spending was only 2.22 percent of sales. By most measures, the 10 percent to 15 percent increases in the cost of building materials clearly influenced store development plans in 2006. The only factor rating higher than construction costs was the impact of higher energy expenditures.
The cost of real estate, coupled with the scarcity of ideal sites, is leading to an increasing number of retailers purchasing and retrofiting existing buildings. Using existing buildings is not necessarily a new trend, but what makes this noteworthy is that this is the first year where the number of retrofits surpassed the number of new structures by a wide margin. According to the report, 60.6 percent of all new stores in 2006 fell under this description.
While architectural and engineering fees for new stores have been holding steady for the past few years at $130,000, those same fees for retrofitted stores were only $86,750 on average. Based on these figures, those surveyed noted it would take nearly two years for a new store to break even.
It's no surprise then, given the economic and space constraints facing retailers, that the square footage of new stores remained the same in 2006. In 2006, the average new store size was 46,000 square feet and cost more than $6.5 million to construct when the cost of land, parking lots, site development, professional fees and financing are taken into account.
In this current environment, is it apparent that retailers are being more cautious about store development. While some have chosen to pull back on their building plans, others looked to alternative building materials to curtail building costs and solicited multiple bids. The most commonly recycled materials used in construction include concrete and steel, equipment and appliances, plastics, PVC, three-form panels, aluminum and gypsum board.
Given the anticipated increase in energy costs, more retailers will be focusing on sustainability initiatives to minimize their impact on the environment through recycling as well as refrigeration management programs, altering store design, landscaping and transportation. One-third of participants indicated they have a formal policy in place and an additional 40 percent have plans to implement initiatives in the next five years.
Discussion Questions: Has the supermarket industry entered a more rational period of store development? Is this only a temporary delay? Given the dicey economy and increased cost concerns, what's a wise real estate strategy for supermarkets?