April 11, 2018
By: Jeff Badstubner, Senior Vice President, Retail Market Lead, JLL
Growth in Northern California’s grocery retail sector has been a “start and stop” affair in the last two years, following some tectonic regional shifts in 2015, most notably the $9 billion acquisition of Pleasanton-based Safeway by Albertsons. High construction and labor costs in the Bay Area have shown no signs of abating and this, as well as physical and psychological barriers to entry for new grocery operators has slowed new store growth in certain sectors. This is particularly true at the saturated high-end of the grocery chain where pressure from rapidly-changing e-commerce shopping trends and competition generally seems to be greater.
Frugal stands out
One contrarian sector though is among economically-focused grocery operators. Southern California-based Smart & Final and other bulk players such as Grocery Outlet, continue to expand in the region. Trader Joe’s has long been a stand-out in the Bay Area grocery sector. It’s sister chain, Aldi, has yet to express any growth plans in Northern California but has shown it can expand rapidly once it has its eye on a market. Upon announcing its entry into Southern California in 2016 it quickly scaled to 25 stores in less than three months. Now with 1,750 stores in 35 states, the chain has a goal of expanding to 2,500 stores nationwide by 2022.
Fresh produce in high demand
Expansion has also taken place in fresh food formats, led by Arizona-headquartered Sprouts Farmers Markets. The chain’s 30 KSF full service stores emphasize organic bulk foods and fresh produce. Twenty-eight of the chain’s 111 California stores are in Northern California and a 29th is set to open in Placer County.
Sprouts has also pushed ahead in another key area for today’s grocery operators: delivery. The increasing popularity of e-commerce delivery, especially for bulk commodity and household items, is pushing more grocery operators to deliver further convenience to shoppers. Smart & Final and other operators also provide same-day delivery and shipping for certain products through a partnership with Instacart.
Looking ahead, another major trend to watch in the Bay Area is the growing development of smaller format grocery stores. This is especially evident in dense urban areas, like the city of San Francisco, where traditional large grocery store footprints are hard to find and even more expensive to build and fit-out. This has led some grocers to experiment with radically different store sizes and configurations. Some +50KSF store operators, such as Safeway, are experimenting with footprints as small as 15K SF in the Bay Area.
Download our 2018 U.S. Grocery Tracker here.
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