While on the campaign trail, then-Sen. Barack Obama famously (or infamously, depending on your point of view) said to a group of Iowa farmers, “Anybody gone into Whole Foods lately and see what they charge for arugula? I mean, they're charging a lot of money for this stuff.”
Obama's rival, Sen. John McCain, tried to make political hay of the statement by deriding Obama as a “guy who worries about the price of arugula” — a way of saying the Democrat was out of touch with the needs and wants of average Americans.
The episode — which some even called “Arugulagate” — ended up being little more than a speed bump on the road to Obama's eventual victory. That may have been in part because mentioning arugula didn't alienate as many voters as McCain had hoped it would.
Indeed, grocery stores that have made their name on selling arugula and other upscale foods, such as Whole Foods and other retailers, continue to thrive and grow, with not even the Great Recession slowing down the pace of expansion.
Whole Foods reported that its sales grew 12 percent from the second quarter of last year to this year, with comparable-store sales growing 7.8 percent over that same time period. The Fresh Market, meanwhile, saw sales increase by 10 percent in the first quarter of 2011 and is now in the midst of a nationwide expansion effort from its home base of Greensboro, N.C.
The growing desire among shoppers for fresher, healthier and organic foods has helped upscale grocers remain hot commodities for landlords. That's especially true for owners angling for female shoppers, suburban moms, or anyone with a little more discretionary income to spend on clothes and luxury items — the target demographic for many of the upscale chains.
But not all consumers can afford the grocery bills that come along with that experience. Some still want savings, which has helped keep wholesale clubs and lower-priced grocery stores in vogue.
These diverging trends — which are driving success for grocers that operate at the top and bottom of the price chain — are making the middle ground a difficult place to be these days. Indeed, many mid-market chains have adapted to one or the other trend, either by adding higher-quality items to their traditional stores or trying to compete on price.
Safeway, for example, has added organic aisles and upgraded the appearance of its stores, while Kroger has moved to compete with Wal-Mart Stores by featuring bargains and lower prices. Wal-Mart itself has reacted to these trends and has begun playing up organic foods while continuing to mine its reputation for lower prices.
Landlords are also faced with a choice, since having a successful supermarket is crucial for drawing daily traffic, driving shoppers to other stores and luring other tenants seeking similar customers.
“Do you want to be more upscale or more down-market?” says Neil Stern, senior partner with McMillanDoolittle LLP, a Chicago-based retail consulting firm. “The one place you don't want to be right now is in the middle.”
Consumers' habits confirm that the current market can accommodate both approaches. Even as healthier and organic foods continue to grow in popularity, a Food Marketing Institute survey conducted in August 2010 also found that 55 percent of shoppers said price considerations influenced their choice of which grocery store to patronize. Fifty-three percent said they had taken advantage of sales to stock up on particular items.
Still springing for quality
The increasing bifurcation of grocery stores between bargains and upscale goods goes hand in hand with a broader shift in shopping habits among consumers. Decades ago, shoppers were more likely to go to the grocery store just once a week, bringing home enough to load up the freezer until the next week.
Many of today's shoppers “wouldn't think of doing that,” says Pat Donahue, CEO of Donahue Schriber in Costa Mesa, Calif. Instead, they might go to a BJ's or Sam's Club for bulk items, a Safeway or Kroger for other staples and, more frequently, a Whole Foods or Wegmans for fresher meat and produce — diverse habits that can open up the playing field for a wider range of grocers. “I don't think that's going to shift back,” Donahue says. “That's a new phenomenon that we'll have to deal with.”
Like many landlords, Donahue Schreiber has a keen interest in paying attention to such habits. More than 80 percent of its 85 centers feature a supermarket. “We think it's very important that we have a daily-needs retailer in our centers,” Donahue says.
While the recession has kept some shoppers price-conscious, owners have observed that those at higher income levels have been less affected. They may not have entirely escaped the pinch of the recession but have been less likely to feel the brunt of high gas prices and other factors.
In addition, shoppers across the spectrum are increasingly seeking out healthier food — a trend that is starting to cut across ethnicities, income levels and other demographic divisions, says Greg Schuster, managing director and principal of Cassidy Turley.
A valuable daily draw
A Whole Foods or another upscale grocery store can help define the character of a center and shape the mix of tenants. Such stores are an important component in the portfolio of Federal Realty Investment Trust, the Rockville, Md.-based REIT. Many of Federal's properties are located in populous areas with high proportions of affluent shoppers, criteria that make upper-tier supermarkets a valuable addition.
Even during the recession, customers have continued to visit Federal Realty's supermarkets at about the same frequency, says Chris Weilminster, senior vice president of leasing. It helps that Federal's properties, concentrated on both coasts, are in markets that were less affected by the downturn.
Federal Realty's Congressional Plaza in Rockville has long featured a Whole Foods — long enough that it was a Fresh Fields before the primarily East Coast chain merged with Whole Foods in 1996. The store helped draw a number of child-oriented retailers to the site, included the country's first Bye Bye Baby, the second Cartoon Cuts, and the first Zany Brainy in the Washington, D.C., area.
No other centers on Rockville Pike had a similar appeal, Weilminster says. “It allowed us, based on the female traffic, to enter into deals and bring those retailers into the center,” he says.
Whole Foods recently relocated to a new development, and Federal will replace it with a Fresh Market. Weilminster expects the new grocer will compliment Congressional Plaza tenants such as Chico's, the Container Store, and Last Call by Neiman Marcus.
“That customer that comes to shop at Fresh Market is the same customer that will shop at the other stores,” he says. “That daily trip generates familiarity with other stores in the center. … We love the daily draw that a grocery store brings.”
Higher-end chains have an added advantage of drawing shoppers from a wider geographical area, according to some landlords. The arrival of the first Wegmans in the Northern Virginia area outside of Washington, D.C., in 2005 was heralded as a major event among foodies throughout the region.
Frazier Farms, based in Escondido, Calif., has stores that draw shoppers from six to 10 miles away, whereas a traditional store may only pull from a one- to three-mile radius, says Bruce Schiff, a partner with Cassidy Turley BRE Commercial in San Diego. Shopping at Frazier Farms “is just a different experience,” Schiff says.
Balducci's, a small East Coast chain based in suburban Maryland, also proved to be a good match for Federal Realty's 90,000-square-foot Shops at Wildwood in Bethesda, Md. The presence of the upscale grocer has helped the REIT stock the center with a mix of full-price mom-and-pop tenants, including boutiques and two jewelers. The center has consistently hovered at around 90 percent occupancy, according to Weilminster.
Not all Balducci's stores have fared as well since 1999, when the chain was sold to Sutton Place Gourmet. Expansion plans fell apart as the economy weakened, sales dropped at some locations and backer Bear Stearns foundered, according to press reports. (Balducci's representatives did not return calls seeking comment). Balducci's shuttered four stores in 2009 that executives said were underperforming, including its two Manhattan locations.
Meanwhile, in Fresno, Calif., adding a Whole Foods to lifestyle center Fig Garden Village helped Donahue Schriber remerchandise the 271,000-square-foot site after acquiring it in 2005.
“The greater the selection at a grocery store, the more interesting your tenant mix can get,” says Pat Donahue. “As you get into somebody selling more wine and better meat and produce in particular, you can play off of that.” Local boutiques, jewelers, and sit-down restaurants serving lunch and dinner rather than fast-casual locations can enter the mix more easily, he says.
“If [a grocery store] is bringing that customer to the shopping center in big numbers, you can play off of that very effectively,” he says. “The retailers like the daily trip, and most of those better-quality grocers have people going there on a more frequent basis to get their meat and produce fresh.”
The Fresh Market is one of the few chains to be expanding after the recession, says Neil Stern of McMillianDoolittle. The chain went public last year and has been using those proceeds to open new locations throughout the country, including in the South, Midwest and Mid-Atlantic regions. The Fresh Market currently operates 105 stores in 21 states, with another 11 readying to open.
The Fresh Market appeals to a slightly older demographic than Whole Foods, Stern says, with its focus on gourmet foods, attentive customer service, and stores that are smaller and easier to shop. The average size of a Whole Foods opened in 2010 was 35,300 square feet, while the average Fresh Market is 20,792 square feet. Fresh Markets are becoming desired tenants, Stern says, especially among lifestyle centers.
Middle tier taking cues
With their appeal to more affluent customers, the upper tier of grocery stores may not always be best suited to smaller cities that lack the critical mass of shoppers to make them viable, observers say. But that could be changing, says Greg Schuster of Cassidy Turley.
“The natural starting place has been in more affluent markets, because typically there are incremental costs associated,” he says. “But the change in consumer focus isn't limited to those markets. I think you will see the trend permeating secondary and tertiary markets and expanding and broadening to include consumers with lower incomes.”
That shift is occurring alongside other trends that lower-tier grocery stores are adopting in part from their more upscale competitors. “The consumer is more knowledgeable now about food issues, both ethically and from a health perspective,” says Jodie McLean, president of Edens & Avant in Columbia, S.C. The owner and developer's portfolio includes 121 shopping centers, and 92 percent of them are anchored by grocery stores. About a quarter are more upscale.
With shoppers becoming more knowledgeable, middle-tier supermarkets are putting a greater emphasis on customer service, McLean says. Their butchers now know more about where their meats come from, for example, and can also discuss fish-farming practices with shoppers. “A lot of consumers are better educated and are making sure the staff is more knowledgeable,” she says.
Higher-end stores have also responded by highlighting bargains within the stores and adjusting prices. “Really, what consumers are looking for is permission to continue to shop there,” Stern says.
Whole Foods was among the higher-tier chains that adjusted prices to appease shoppers, according to Donahue. “Clearly, when your store's nickname is Whole Paycheck, you have to adjust your bearings,” he says.
Higher-end stores have also led the way in occupying smaller spaces — sometimes 50 percent to 70 percent the size of middle-tier supermarkets. In fiscal year 2009, the average Kroger was 60,000 square feet, for example. The smaller size of Whole Foods, Fresh Markets and other upscale grocery stores allows them to be more flexible in backfilling urban locations while also catering to shoppers' wishes. “The consumer doesn't want to have to work through a lot of products that don't make sense to them in that store,” McLean says.
After the recession, grocery retailers who were previously accustomed to larger spaces have followed suit and become more open to taking up smaller spaces. “Before, I think everybody had their model, and if you didn't fit into that model, they weren't interested,” says Pat Donahue. Now “they'll reduce their store size for an opportunity that they don't want to pass up,” he says.
Though some say that occupying the middle ground poses more challenges for lower-tier supermarkets, the stores remain an important player. Consumers still value convenience and reasonable prices, areas where Kroger, Safeway and similar grocers compete well, says Cassidy Turley's Schuster. “They're very well positioned to respond to the emerging base of competitors at the high end of the spectrum,” he says.
It might not hurt them to make sure that the arugula is prominently displayed.