Retail Update: Grocery Stores Struggle

According to a recent analysis by Economy.com, the grocery industry, long a source of stability during previous downturns, is in a major tailspin. Since domestic payrolls began to contract in March 2001, food and beverage stores have laid off 170,500 workers, accounting for more than 1 in 17 jobs lost in the U.S. during that period. The bigger threat to the U.S. economy, however, may be the enormous amount of real estate inhabited by traditional grocery stores. As conventional supermarkets are shuttered, the loss of critical anchors could have a destabilizing effect on retail real estate markets. This is one for a large number of communities to consider at this time.

The grocery industry’s recent decline is unprecedented. In just over three years, food and beverage establishments have shed 7% of their workforce. By comparison, the biggest payroll contraction to this point had been the mere 2% drop in grocery store jobs during the 1990-1991 recession. For decades, the grocery industry was the largest retail employer, at one point employing over 3 million Americans. Due to heavy job losses lately, however, the industry ceded that title this year to general merchandise stores.

Therein lies the answer to the grocery industry’s troubles. Wal-Mart Supercenters, which are classified as general merchandise stores despite their vast aisles of food products, have decimated the conventional grocery market. Wal-Mart’s ascent has been nothing short of breathtaking. Since opening its first Supercenter in 1993, Wal-Mart has grown to become the largest supermarket operator in the U.S., according to sales estimates by TDLinx.

Wal-Mart’s chief advantage is its unbeatable prices. Even Kroger, the second largest supermarket chain, has prices that are 13% to 24% higher than Wal-Mart Superstores, according to a study by Deutsche Bank. Wal-Mart’s expansion in the grocery industry has had a profound impact on food prices. Prices at food and beverage stores are growing this year at the slowest pace in more than three decades. Faced with the utter loss of pricing power, grocery chains are forced to cut back on labor, their biggest cost, exacerbating the downturn in national payrolls.

We have been working on more retail projects in the past year. This is an issue in many of communities where we work. As they say, you can't have it both ways--that is, you can't have your grocery store in your local shopping center and also have a Wal-Mart Supercenter across the street. There is only so much disposable income to spend in any community.

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