the european grocery real estate market
TRANSCRIPT
European grocery real estate attracts investor appetite
The European Grocery Real Estate Market
– March 2021 –
02
Contents
Con
ten
ts
At a Glance 03
Introduction 06
Consumer Market 10
Drivers of Food Consumption 12
Food Sales 16
E-Commerce and Grocery Sales 21
Operator Landscape 25
European Grocery Operators 27
Operating Concepts 34
Current Developments and Outlook 38
Real Estate Leasing Market 42
Real Estate Investment Market 49
Innovation and Trends 59
Outlook 65
Bibliography 70
Contacts 77
03
At a Glance
04
The European grocery market is the largest retail sector in Europe, estimated
at €2.0 trillion in sales in 2020. While it benefits greatly from the daily needs of
growing populations, allowing it to outperform various retail categories, the
overall revenue growth is still closely linked to consumers’ purchasing power.
In times of economic growth, stronger disposable incomes offer retailers
opportunities to introduce new higher-margin products and services, leading
to higher growth rates. During periods of uncertainty, consumers generally
focus on affordability, which slows overall revenue growth, but rarely leads to
a decline. In the next five years, affordability, sustainability and quality are
predicted to be the key drivers of grocery consumption in Europe.
Attracted by employment opportunities, convenience or social considerations,
people across all generations have been migrating into cities. Urban populations
across Europe are expected to grow by 3.4 percent by 2035. Well-connected
grocery stores within growing conurbations are able to attract new consumers
and offset periods of weak economic conditions.
Despite the COVID-19 pandemic halting much of the economic activity, the
grocery sector grew at 3.2 percent in 2020 as it drew customers’ essential and
sustenance needs away from restaurants and hotel accommodation. A portion
of this short-term boost in grocery sales may become permanent as new
working and living habits continue post pandemic. Future sales growth rates
are expected to normalize at slower rates of under 2 percent.
Consumers have historically shown reluctance in purchasing groceries online
due to delivery costs, scheduling considerations, and the perishable nature of
fresh produce. With many consumers being reluctant or unable to visit food
stores during the major pandemic-driven lockdowns across Europe, demand for
home delivery rose rapidly, notably during periods of lockdown. Though online
grocery e-commerce is expected to contract post pandemic, a proportion of the
COVID-19 shift in grocery spending towards online may remain permanent as
the online channel welcomes new customers.
The rise in online grocery sales accelerated the evolution of physical grocery
stores. Many grocery retailers have increased their investments in strengthening
their online capabilities and infrastructure. Despite rapid growth in grocery
e-commerce, physical stores continue to fulfil an irreplaceable role in the food
distribution process, supporting both in-store and online grocery sales.
At a Glance
01 04
05
02
03
At
a G
lan
ce
05
European grocery is a highly competitive, high-volume, but low-margin sector.
It is dominated by a few traditional operators with domestic market shares
protected by local legislation. The supermarket format remains the preferred
and still growing sales channel. Discount and convenience are newer formats
and the fastest growing categories.
Grocery real estate leases typically offer annual indexation and longer terms,
often without break clauses, while major grocery chains generally provide
strong covenants. This makes grocery real estate attractive to investors
looking for longer and more secure income streams. A stable to moderate
rental growth outlook, in comparison with other retail asset classes, provides
security in a more volatile retail market.
Grocery stores attracted 37 percent of the total retail consumption in the EU
(27 countries) in 2020. With European grocery retail investments accounting
for only 10 percent of Europe’s overall retail investment volumes on average
between 2014 and 2020, real estate investors appear to have under-allocated
capital towards grocery real estate assets. A daily flow of footfall supporting
sales, the irreplaceable role of highly-accessible stores in the food distribution
process and diversification opportunities are among the defensive qualities
attracting institutional capital.
Though opportunities to access core grocery stock have historically been
limited, the European grocery real estate investment market is gaining
momentum with solid growth in investment volumes and increased market
share within the wider retail investment market. Average grocery investment
in Europe has been reasonably consistent year on year at approximately €4.5bn
annually over the last 6 years but grew by over 40 percent to approximately
€6.7bn in 2020 compared to 2019. As market conditions require increased
investments into the business force grocery operators to raise capital, more
core product is expected to become available, primarily via sale and leaseback
transactions.
Grocery real estate has over the years proven to be among the most stable
commercial real estate asset classes in Europe in terms of pricing. JLL’s
view prime of net initial yields for quality grocery stock in Europe’s key retail
markets stood at 5.10 percent on average at the end of 2019 and moved inwards
to 5.00 percent at the end of 2020 due to the increased investor appetite. De-
spite an uncertain economic environment, the medium-term outlook on yields
for high-quality stock with robust and secure income remains stable across
Europe. This is further supported by the current low to negative yields on
long-term government bonds and the weak inflation outlook, on the one hand,
and sharp pricing of quality product in offices and logistics assets on the other.
06 09
10
07
08
At
a G
lan
ce
06
Introduction
07
The European grocery real estate sector is emerging as a secure and defensive sub-sector within the wider retail investment market.
As well-located food stores remain an irreplaceable part of the food distribution process, it will appeal to investors searching for robustness and longevity of income and to investors willing to pursue alternative use opportunities.
08
The European grocery real estate investment market is gaining momentum with growth in investment volumes and increased market share.
Pension funds and institutional investors have long shown a particular interest
in the grocery sector, attracted by the robustness and longevity of income
provided by grocery real estate assets. Amidst the COVID-19 pandemic, investor
interest has surged as the grocery sector has proven to be a systemically
relevant asset class and a crisis resilient investment, serving the fundamental
basic needs of consumers. Yet grocery real estate is still an under-allocated
asset class, despite attracting 37 percent of the total retail spend across the EU
(27 countries) in 2020. As capital targeting commercial real estate continues to
grow and yield levels continue to compress, some specialised asset managers
may seek to benefit from capital gains and offer quality portfolios to the market.
While access to core product has historically fluctuated, a range of opportunities
are emerging that will likely satisfy investor requirements, including grocery
operators exploring sale and leaseback options and specialist value-add real
estate investors who may prepare for exit upon completion of their business
plans.
Grocery is Europe’s largest retail sector in terms of revenue and has seen
stronger growth between 2001 and 2020 on average than other traditional retail
sectors, such as fashion, but, along with most retail sectors, its margins continue
to be squeezed. The market is dominated by major national and international
grocery chains, operating well-developed store networks and modern store
formats. However, the sector will need to address these margin pressures and
economic uncertainty, magnified by the COVID-19 pandemic. Furthermore,
changing consumer shopping preferences, driven by demographics, changing
work patterns, technology and sustainability, will require a continuous
assessment of current store portfolios.
Understanding grocery retailers’ changing property requirements will be key
for investors. Good stock selection backed by residual values will provide
security and opportunity. Changing consumer grocery shopping preferences is
a key driver for floor productivity for the various grocery store formats. With a
typical supermarket targeting 2 percent to 3 percent of their annual turnover as
rent, grocery operators are sensitive to changes in local catchments and remain
focused on managing their cost base, including rents. Grocery operators have
options to utilise overcapacity in their stores, allowing their stores to evolve
and tap into new income streams to maintain store productivity. Grocers who
typically operate hypermarket formats as part of their wider store portfolios
are concentrating on slightly smaller store formats compared to their historic
requirements. Grocery stores are well suited to embrace click-and-collect as a
key driver for attracting new customers, supported by efficient supply-chains
and growing store networks in urban areas. Another emerging trend is
alternative uses with developers increasingly looking to transform some larger
stand-alone sites into urban logistics hubs or to develop affordable housing.
Introduction
Intr
od
uct
ion
09
This report provides a high-level overview of the European grocery real estate market.
It starts with the consumer market, including an outlook for food consumption
across Europe and a summary of key consumer trends that operators will need
to adjust to.
An overview of who’s who among the key operators and some operating
concepts follows next.
The report subsequently outlines key lease terms and provides a perspective
for the grocery real estate investment market in terms of investor demand.
The report concludes with an outlook of key innovations and trend developments
in the grocery real estate sector, sets out opportunities expected to emerge, and
offers risk mitigation solutions as the sector goes through a period of accelerated
change.
Intr
od
uct
ion
10
Consumer Market
11
The European grocery market is the largest retail sector and closely linked to consumers’ purchasing power.
In times of weaker economic conditions, expected to follow the COVID-19 pandemic, grocery basket sizes may shrink.
However, well-located grocery stores in growing conurbations are able to offset this negative impact on overall store productivity by attracting new customers.
Grocery e-commerce has accelerated during the COVID-19 pandemic, but the online grocery business remains challenging.
The role of the physical grocery store remains irreplaceable.
In addition to most of the grocery consumption being generated in-store, future profitable growth of grocery e-commerce is also largely tied to well-located bricks and mortar locations facilitating last mile fulfilment from stores.
12
Europe’s largest retail sector is worth €2.0 trillion
The European food market is the region’s largest retail sector, attracting
€2.0 trillion in sales in 2020. This includes the sale of food, beverage and
tobacco products. Food sales in the EU (27 countries) and the UK combined
were worth €1.5 trillion. European grocery retailers attract 87 percent of all
food, beverage and tobacco sales, supported by their well-developed store
networks and modern store formats. The remaining share is sold in specialist
stores such as greengrocers, butchers and fish mongers as well as via
market stalls. While the European food sector benefits from a daily flow of
footfall and growing populations, overall revenue growth is closely linked to
economic prosperity and consumers’ purchasing power.
In times of growth, rising levels of disposable income offer consumers more
options for buying food products, while consumers generally curb their
expenses in times of uncertainty. The COVID-19 pandemic is a unique
exception to this pattern as grocery operators have been able to continue
operating while containment measures, implemented in large parts of
Europe, have affected consumer shopping behaviour in other sectors of the
retail market more heavily. Elevated levels of homeworking have further
boosted demand for grocery goods.
In less affluent catchment areas, consumers have a stronger preference for
value and affordability, either through every-day low prices or promotional
discounts. In wealthier areas, consumers prefer to have more choice in
products and would happily visit multiple grocery brands in a week. The desire
for choice offers grocers opportunities to innovate and introduce new products
or services that may boost margins and impulse purchases. However, the recent
success of discounter brands also encourages mainstream grocers to compete
at the value end of the retail spectrum. According to research by EY, quality,
affordability and sustainability will be key decision criteria for consumers
making grocery purchases in the next five years.
Drivers of Food Consumption
European grocery retailers attract 87% of all food, beverage and tobacco sales, supported by their welldeveloped store networks and modern store formats.
Consumer Market
Con
sum
er M
arke
t
Disposable Income Per Household(€ `000s, real, 2015 Prices)
Food Sales Index(100=2015)
Retail Sale of Food, Beverage and Tobacco
Household Disposable Income
Source: Eurostat (Februar y 2021), Oxford Economics (Januar y 2021)
110
105
100
95
90 38
40
42
44
46
2004 2006 2008 2010 2012 2014 2016 2018 2020
EU27 Food Sales and Disposable Incomes
13
Source: EY Future Consumer index (June 2020)
Consumer Purchase Criteria Grocery Goods Germany
0% 10% 20% 30% 40% 50%
Quality
Affordability
Sustainability
Financial Security
Social Responsibility
Selection
Privacy
Time
Convenience
Transparency
Service
Flexibility
Authenticity
Speed
What Criteria
will be
important
for you when
shopping in five
years' time?
EY Future Consumer Index:
14
Source: Oxford Economics (Januar y 2021)
Urban PopulationTotal Population
Swed
en
Net
her
lan
ds
Fran
ce
Spai
n
Un
ited
Kin
gd
om
Euro
zon
e
Fin
lan
d
EU27
Ger
man
y
Ital
y
Czec
h R
epu
bli
c
Pola
nd
15%
10%
5%
0%
-5%
Total Growth
(%)
Urban Population vs Total Population Growth 2021 – 2035
15
Growing conurbations to help physical store sales offset shifts in retail spending
Attracted by employment opportunities, convenience or social considerations,
people across all generations have migrated into cities. Forecast data, released
by Oxford Economics at the end of August 2020, shows the urban population
across the EU (27 countries) is expected to grow by 3.4 percent, equaling
11.4 million people, between 2021 and 2035. Including the UK, the urban
population is forecast to grow 3.7 percent, equaling 13.2 million people,
over the same period. Among the key grocery markets, urban population
growth by 2035 is forecast to be strongest in Sweden (+14.7 percent), the
Netherlands (+8.4 percent) and France (+8.3 percent). The increase in Germany
(+1.1 percent) is more moderate.
Growing conurbations offer well-connected grocery stores opportunities to attract new consumers and offset a period of weak GDP growth.
Drivers of Food Consumption
Con
sum
er M
arke
t
16
Grocery sales outperform fashion sales in most mature European markets – COVID 19 has boosted grocery sales
Since 2001, grocery sales have outperformed fashion sales growth in the
Eurozone and across the EU (27 countries). Fashion is the retail industry’s
second- largest sector in most of Europe. A lion’s share of retail spending on
clothing and accessories would typically flow towards shopping centres and
high street locations where many fashion retailers can traditionally be found.
While there are exceptions across Europe, several countries have seen
grocery retailers capturing a larger share of consumer spending over time in
comparison with fashion sales, including Germany, the Netherlands, Sweden,
Spain and Italy. As COVID-19 limits the need for new formal and leisure clothes
for many consumers, at least in the short term, grocery retailers are expected to
continue delivering better results than many fashion retailers.
Fewer people eating out or staying in hotel accommodation will result
in an additional short-term boost for consumer grocery consumption. Social
distancing measures, elevated levels of homeworking and consumer
reluctance to eat out or order takeaway food due to COVID-19 has had
a significant negative impact on the gastronomy sector across the EU and
has mostly favoured retail spending in grocery stores. A proportion of this
short-term boost in grocery consumption may become more permanent as
some employees may be expected to continue working from home
post-COVID, shifting lunch spending away from restaurants and takeaway
venues.
Food Sales
Con
sum
er M
arke
t
Fashion Grocery
So urce: Eurostat ( Februar y 2021)
75
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
80
85
90
95
100
105
110
Sales Index
(100=2015)
Source: Eurostat (Februar y 2021)
75
200
7 Q
3
200
8 Q
3
200
9 Q
3
2010
Q3
2011
Q3
2012
Q3
2013
Q3
2014
Q3
2015
Q3
2016
Q3
2017
Q3
2018
Q3
2019
Q3
2020
Q3
80
85
90
95
100
105
110
115
Food & beverage service activities
Retail sale of food, beverage & tobacco
TurnoverIndex
(100=2015)
EU27 Fashion & GroceryRetail Trade Volume Index
EU27 Food Sales &Catering Industry Trade Index
17
Fin
lan
d
Ger
man
y
Net
her
lan
ds
Un
ited
K
ing
do
m
Euro
zon
e
EU27
Fran
ce
Swed
en
Ital
y
Spai
n
Czec
h
Rep
ub
lic
Pola
nd
Average Sales
Growth(% p.a.)
2001 - 2020 2015 - 2020 2020
Average Annual Food Sales Growth6%5%4%3%2%1%
0%-1%-2%-3%
So urce: Eurostat (Februar y 2021), ONS (Februar y 2021); Note: The long-term average growth rate for the Netherlands is based on the period 2006 – 2019.
18
Food sales resilient through all economic cycles
Amidst economic downturns and the rise of e-commerce, the trade volume in food,
beverage and tobacco products has grown by 0.8 percent a year on average, in real
terms, between 2001 and 2020 in the EU (27 countries). The Eurozone saw annual
sales levels rise by 0.6 percent on average during the same period. With economic
prosperity being a key driver for growth, consumer demand for food products was
affected during the Global Financial Crisis and the Eurozone Debt Crisis as shoppers
reined in their grocery spending and opted for more value products. However, the
trade in food, beverage and tobacco products received a boost in demand due to
the effects of the COVID-19 pandemic in 2020. Between 2015 and 2020, the trade
volume for food, beverage and tobacco products rose by 1.8 percent a year on
average across the EU (27 countries), driven by a return of solid economic
expansion. The Eurozone recorded an annual sales rise of 1.7 percent on average
over the same period, ahead of Eurozone inflation of 0.9 percent.
The Czech Republic and Poland have seen robust food sales growth over the
past two decades. France, Germany and the UK, Europe’s three largest grocery
markets, have also seen solid food sales growth between 2014 and 2020,
although they experienced more economic headwinds during the Global
Financial Crisis and the years following. Food sales growth in the Netherlands
has been more gradual due to austerity measures and the squeezing of
disposable income levels. Both Sweden and Finland saw strong continued food
sales growth until the Global Financial Crisis that started in 2007, but diverged
significantly as the Eurozone crisis and Nokia’s failure impacted Finland’s
economy until 2015. Between 2007 and 2013, food sales in Spain and Italy fell
significantly as consumers reined in their spending. Food sales rose again in
Spain between 2014 and 2020, driven by a return to strong economic growth until
2019 and followed by the windfall that the COVID-19 pandemic provided in 2020.
Food Sales
Con
sum
er M
arke
t
19
Stable food sales growth expected after COVID-19
The COVID-19 pandemic has been a major challenge for European grocery
operators, notably at the beginning of the virus outbreak in 2020. Consumer
stockpiling and elevated levels of homeworking have boosted demand
throughout the year. While GDP for the EU (27 countries) fell by 6.7 percent
year-on-year in 2020, food sales across the region were up by 3.2 percent
on 2019 levels. Despite strong revenue growth, many grocery operators faced
significant unexpected costs due to hiring additional staff to keep stores
stocked, implementing safety measures, catering for the massive surge in
online orders and leasing additional warehouse space. As a result, profits have
not kept pace with the strong growth in sales for most operators.
Ongoing containment measures and potential lockdown measures will likely
continue to fuel demand for food products, until the COVID-19 pandemic
subsides. The roll out of COVID-19 vaccines is expected to act as a turning point
in 2021, with social consumption in restaurants and tourists destinations and
a return to the workplace expected to affect grocery sales. In addition, some
consumers may rely on smaller budgets as a result of the projected economic
downturn post COVID-19. However, most markets are expected to return to
food sales growth from 2022 onwards, albeit at a slower rate than before the
COVID-19 outbreak. France, Germany and the UK are expected to be the largest
contributors to Europe’s long-term food sales growth.
Food Sales
Con
sum
er M
arke
t
Source: Oxford Economics (Januar y 2021)
Food Sales Growth Forecast 2021 by Country
Average Annual Growth
(% p.a.)
Swed
en
Pola
nd
Czec
h
Rep
ub
lic
Fin
lan
d
EU27
Ital
y
Net
her
lan
ds
Ger
man
y
Euro
zon
e
Un
ited
K
ing
do
m
Fran
ce
Spai
n
0.0%
-2.0%
-4.0%
-6.0%
-8.0%
-10,0%
Food Sales Growth Forecast 2022 – 2026 by Country
Czec
h
Rep
ub
lic
Swed
en
Ger
man
y
Spai
n
Net
her
lan
ds
Un
ited
K
ing
do
m
Euro
zon
e
EU27
Fran
ce
Fin
lan
d
Itla
y
Pola
nd
1.8%
1.6%
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
Average Annual Growth
(% p.a.)
Food Sales GDP
EU27 Food Sales & GDP Forecast 2001 – 2025
80
200
1
200
3
200
5
200
7
200
9
2011
2013
2015
2017
2019
2021
2023
2025
85
90
95
100
105
110
115
120
Forecast
Index(100=2015,
real)
20
21
The rise in online grocery sales will temper down
Grocery retail in Europe has been historically the most defensive sector against
the shift in retail spending towards online. Consumers have shown reluctance
in purchasing grocery goods online due to delivery costs, quality and the
perishable nature of fresh produce, as well as the convenience of nearby
grocery stores. According to Kantar, 8.8 percent of grocery sales in the world’s
largest food markets in 2019 were generated through e-commerce. In Western
Europe, this share was less than 5.0 percent, which is low when considering
eMarketer’s estimate of 10.2 percent for the total e-commerce sales as a
proportion of total retail sales in the same region. The UK was Europe’s largest
online grocery market in 2019 with a 7.9 percent share. France followed at
6.2 percent, largely driven by the successful roll-out of pick-up points for online
orders by the likes of Carrefour and E.Leclerc. Spain demonstrated an online
share of 2.4 percent. The share in Germany was only 1.4 percent, according
to HDE, due to the fragmented nature of the market and grocers’ low margins
limiting additional expenses for grocery deliveries.
The COVID-19 outbreak has spurred growth in online grocery sales. According
to Kantar, the COVID-19 outbreak has resulted in a 30 percent growth in
online grocery sales globally. At the end of April 2020, the share of online
grocery sales cumulatively reached 12.4 percent in the world’s largest food
markets, including France, Spain, the UK and China – up from 8.8 percent at
the end of 2019. Further growth was constrained by the limited availability
of delivery slots among operators and infrastructure unable to cope with the
sudden rise in demand.
According to Kantar, the initial
COVID-19 outbreak has resulted in
a 30% growth in online grocery
sales globally.
E-Commerce and Grocery Sales
Con
sum
er M
arke
t
UK Share of Online Grocery Sales 2019 – 2020
Source: ONS, Afterpay (Januar y 2021)
Change in Number of Online Grocery Purchases 2020
0%
Jan
19
Feb
19
Mar
19
Ap
r 19
Ma
y 1
9Ju
ne
19Ju
ly 1
9A
ug
19
Sep
t 19
Oct
19
Nov
19
Dec
19
5%
10%
15%
20%
25%
30%
35%
40%All Online Retail Sales Online Grocery Sales
Jan
20
Feb
20
Mar
20
Ap
r 20
Ma
y 2
0Ju
ne
20Ju
ly 2
0A
ug
20
Sep
t 20
Oct
20
Nov
20
Dec
20
0
Wee
k 13
Wee
k 14
– 1
5
Wee
k 16
– 1
7
Wee
k 18
– 1
9
Wee
k 20
– 2
1
Wee
k 22
– 2
3
Wee
k 24
– 2
5
Wee
k 26
– 2
7
Wee
k 28
– 2
9
Wee
k 30
– 3
1
Wee
k 32
– 3
3
20
40
60
80
100
120
140
Netherlands Germany
Wee
k 34
– 3
5
Wee
k 36
– 3
7
Wee
k 38
– 3
9
Wee
k 40
– 4
1
Wee
k 42
– 4
3
Wee
k 44
– 4
5
Wee
k 46
– 4
7
Wee
k 48
– 4
9
Wee
k 50
– 5
1
Wee
k 52
– 5
3
-20
AverageNorway
Dif
fere
nce
bet
wee
n t
he
two
res
pec
tive
wee
ks
and
th
e d
iffe
ren
ce b
efo
re C
OV
ID-1
9 ( i
n %
)Sh
are
On
lin
e of
To
tal
Reta
il S
ales
(%)
22
UK data on the share of online grocery sales, Office for National Statistics (ONS)
data in the UK shows a similar pattern. The share of online grocery sales as a
proportion of total retail sales in the UK has increased from 5.4 percent in 2019
to 9.2 percent for 2020 as a whole. New customers have been a key driver for
online sales growth as many were reluctant or unable to visit grocery stores
during major lockdowns. While customers returned to the store following the
relaxation of social distancing measures over the summer months, online sales
growth rates remain elevated from pre-COVID-19 levels. A similar trend can also
be observed from consumer research conducted by Afterpay in Germany, the
Netherlands and Norway. Afterpay asked consumers if they had made more
grocery purchases in the past two weeks than before the COVID-19 outbreak.
As COVID-19 containment measures became stricter towards the end of 2020,
growth in online grocery purchases accelerated again.
The share of online grocery
sales as a proportion of total
retail sales in the UK has
increased from 5.4% in 2019
to 9.2% for 2020 as a whole.
E-Commerce and Grocery Sales
Con
sum
er M
arke
t
Source: Stat ista (Januar y 2021)
Revenue(€ billion)
Online Food & Beverage Products Revenue Forecast Europe
Annual Revenue Growth (%)
2018
2019
2020
2021
2022
2023
10
5
0
15
20
25
30
2024
2025
5
0
20
25
30
35
40
10
15
Revenue Annual Revenue Growth
Online Food & Beverage Products Revenue Forecast Europe
Un
ited
K
ing
do
m
Ger
man
y
Fran
ce
Spai
n
Net
her
lan
ds
Ital
y
Fin
lan
d
Swed
en
Pola
nd
Czec
h
Rep
ub
lic
2,000
0
6,000
8,000
10,000
4,000
10%
11%9%
14%9% 15%
8% 8% 16% 15%
Revenue (€ billion)
2019 2020
% values show CAGR for the period 2019 and 202523
The growth in online grocery retail sales is expected to soften once the COVID-19
pandemic subsides. Grocery e-commerce today remains challenging; however,
grocery retailers continue to invest in their omnichannel capabilities. With drive
times being a major cost component to fulfilling online orders via home delivery,
various grocery operators are expected to introduce click-and-collect services
and explore utilising excess grocery space in larger stores for micro-fulfilment
purposes. While online is a difficult business model for discount operators, some
have started to run trials with click-and-collect services due to the short-term
impact of the COVID-19 pandemic on shopping behaviour and the longer-term
structural change in the grocery market.
E-Commerce and Grocery Sales
Con
sum
er M
arke
t
The growth in online grocery
retail sales is expected to
soften once the COVID-19 pandemic
subsides as grocery e-commerce
today remains challenging.
24
Stores remain irreplaceable in food distribution but continue to evolve rapidly
Over the years, major grocery operators across Europe have been tentative
with investing in their online grocery platforms due to profitability challenges,
required capital expenditures and cannibalisation of sales from existing
stores. This has allowed pure-play e-tailers to gain a foothold in the market.
One example of an online grocer is Ocado. Ocado has developed in-house
technologies to automate the costly stock picking process in warehouses and
set out delivery routes. The share price has more than doubled due to the
strong rise in online sales this year and the value placed by markets on their
ability to resell their automation expertise to other retailers. Pure-play grocer
Picnic is growing rapidly in the Netherlands and Germany. It has focused on
developing an automated distribution model, capable of reaching a drop-off
density of 14 deliveries per hour. This model enables Picnic to visit a single
street once a day. Customers are given a 20-minute delivery time slot, with
95 percent accuracy and free delivery.
As customers increasingly embrace omnichannel retail and rapidly adopt
online grocery shopping, many traditional operators are being forced to make
necessary infrastructure investments to avoid margin erosion and consider what
services, convenience or click-and collect facilities they should offer in physical
stores to preserve their market shares. In this respect, click-and-collect is one
of the fastest-growing retail services. It offers consumers control over the
shopping process, instant gratification and zero to very low processing
costs to the retailer. Edgar, Dunn & Company predicted in 2019 that the
European click-and-collect market was expected to grow (11 percent CAGR) to
€45.1 billion by 2023, outpacing the growth of the wider e-commerce market.
While click-and-collect does not eliminate the costs of picking grocery items,
it emerges as the most efficient digital integration tool in retail and its
effectiveness is directly tied to the quality of bricks-and-mortar locations
and layouts.
Despite the recent shift in grocery spending towards online, physical
supermarkets continue to fulfil an irreplaceable role in food distribution.
Almost 90 percent of all revenue continues to be generated from physical
supermarkets in Europe’s mature retail markets. Additionally, an increasing
portion of e-commerce sales, such as click-and-collect, will remain tied to
physical stores. PwC’s Global Consumer Insights Survey 2020 highlights
while two-thirds of urban consumers have bought grocery products online
and indicate they will continue doing so post COVID-19, in-store grocery
shopping remains the preferred channel of choice. Online grocery shoppers
prefer buying their larger ‘weekly shop’ online, including bulky and
non-perishable items, and make regular visits to local grocery stores to top
up with fresh products. Nonetheless, grocery operators will need to assess
if they have appropriate space and layouts in individual stores to accommodate
emerging omnichannel trends, such as click-and-collect, curb-side pickup, and
last mile micro-fulfilment from stores.
E-Commerce and Grocery Sales
Con
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25
Operator Landscape
26
The European grocery sector is dominated by a small number of traditional grocery operators, often major players in their domestic markets. As occupiers, they are regarded as strong tenants, supported by resilient grocery spending in combination with protective local legislation, such as competition law and planning. The supermarket format represents the most widely used sales channel, though convenience and discount formats are currently the fastest growing categories.
Due to intense competition and emerging variability of sales channels, margins are narrow, which in turn encourages operators to diligently monitor their financial strength and employ various strategies to improve profitability. Strategies include optimisation of physical space, densification with accretive non-grocery uses, growth of store portfolios and merger and acquisition activity.
27
Europe’s top grocers rank among the largest retailers globally
European grocery operators have benefited from solid sales growth over the
past 20 to 25 years, fuelling proliferation of store networks, market entries and
expansion of product offering. As the sector evolved, competition intensified
in-store and online, putting pressure on retailers’ profitability. This in turn has
led to restructuring and consolidation across the industry. Today, Europe’s
leading grocers are among the largest retail conglomerates globally. The
combined annual revenue for the 20 largest European-based grocery groups
exceeded €935 billion in 2019. This includes income from a range of grocery
facias, banners and formats, overseas revenue, and income from non-grocery
operations.
Schwarz Group is Europe’s largest grocery group. In 2019, it reported annual
revenue of €113 billion, ranking the company among the top-five largest
retailers globally. With €89 billion in global sales, discounter Lidl contributed
the lion’s share to Schwarz Group’s overall revenue. The next largest group is
Aldi with the combined revenue from Aldi Nord and Aldi Süd estimated to be
in the same range as its direct rival Lidl. While Schwarz Group’s Lidl and Aldi
are currently Europe’s largest grocers, they do not typically have the largest
market share in any of the countries they operate in. Carrefour and Tesco are
Europe’s largest mainstream grocery groups and rank number one in their
respective markets.
Operator Landscape
European Grocery OperatorsBetween 2014 and 2020, grocery sales have expanded by over 13 percent
across the EU (27 countries). This growth, however, has been uneven. Discount
operators in particular, including Lidl, Aldi, E.Leclerc and Biedronka have
outperformed the market. Further growth in discount retail was driven by the
launch of Jack’s in the UK by Tesco in 2018 and the opening of French Supeco
stores by Carrefour in 2019. The so-called ‘Local Heroes’, including Spanish
Mercadona, the ‘smaller’ retailers Globus in Germany and Jumbo in the
Netherlands, have also seen solid growth in recent years. Growth has been
more stagnant for several mainstream grocers, notably among those with
large exposure to hypermarket formats in out-of-town locations.
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Revenue2019
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Group Revenue Revenue 2019
So urce: Co mpan y Reports, Ref init iv (H1 2020); Note: Aldi f igures are based on 2018 numbers publ ished in Deloitte’s Global Powers of Retai l ing 2020 report . Re ven ue may in clude income from non-grocer y and non-retai l operations. Exchange rates are based on the 2019 average rate, source is Oxford Economics.
Europe´s Largest Grocery Groups by Global Revenue 2019
28
29
Low-margin grocery sector sets strong focus on managing the operational cost base
The grocery sector is generally a high-volume, but low-margin industry.
Between 2015 and 2019, the average operating margin for Europe’s 15
largest publicly listed grocery groups was 3.0 percent. The average net prof-
it margin across the sector was 1.5 percent. This compares to an average
5.8 percent net profit margin for the 135 largest publicly listed retail
companies globally. The performance between individual grocery operators
is mixed. Stronger performers are distinguished by their efficient operations,
relevant store concepts and optimised retail fleet. These attributes facilitate
preservation and even expansion of their market shares by enabling them to
best cater to the growing consumer demand for convenience, discount and
e-commerce. Due to thin margins and the need for continuous evolution,
grocery retailers remain highly diligent with their operational cost base,
including occupancy costs of their store portfolios.
Margin and profitability improvements are derived from many different areas,
ranging from in-store optimisations to tapping into fast-growing profitable
markets. Schwarz Group has launched a cloud computing division and has
acquired an online marketplace Real.de in order to better compete with
Carrefour and Ahold Delhaize. Aldi Nord aims to develop affordable housing
on top of its stores, while Edeka has launched a food tech campus to drive
food-product innovation. Dutch grocer Jumbo operates in-store food markets
to attract and inspire shoppers. In addition to implementing click-and-collect
services as an alternative option for home delivery of online orders, supermarket
chains continue to open smaller convenience stores in urban areas, including
Sonae’s Meu Super Stores, Spar, Intermarché, Delhaize, Aldi, Lidl, Carrefour and
others. Other notable initiatives include Lidl’s plan to open an in-store pub in
Northern Ireland.
During the initial COVID-19 outbreak in 2020, and despite a surge in sales due
to consumer stockpiling, many grocery retailers have suffered a short-term
erosion of their profit margins, as they faced substantial temporary costs in
response to the virus. Grocers are expected to resolve these issues post
COVID-19.
European Grocery Operators
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Net Profit Margin
(%)
Source: Ref init iv (H1 2020); Note: Margins based on the f inancial performance of the wider grocer y groups.
-1%-2%
Combined 5 Year Average Net Profit Margin: 1.5%
Net Profit Margins 5 Year Average (2015 – 2019) Net Profit Margins for H1 2019 to H1 2020
5 Year Combined Average Net Profit Margin
30
Net Profit Margins for Top 15 Listed European Based Grocery Groups
31
Who’s who: opportunity, competition and regulations shaping Europe’s grocery landscape
There are notable differences in the competitive grocery landscape across
the European regions, both in the make-up and dominance of key grocery
retailers. The tables on the following pages illustrates the main differences
between the regional European grocery markets.
Considered are differences due to: country, level of consolidation, market
maturity, domestic or foreign ownership as well as barriers to entry, such as
competition law and local planning legislation, which may offer protection to
the market shares of established operators.
European Grocery Operators
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Western Europe
In France, Germany and the UK, domestic operators are the leading grocery chains with extensive store networks across their countries.
Local competition authorities closely monitor merger and acquisition initiatives to ensure healthy market competition. None of the leading grocers, such as Carrefour and E.Leclerc in France, Tesco and Sainsbury’s in the UK or Edeka Group and Rewe Group in Germany, have a market share above 28 percent.
Notable exceptions are the Netherlands, where the Albert Heijn supermarket chain has a 35 percent market share, and Belgium, where foreign operators, including the likes of Carrefour, Aldi, Lidl and Jumbo, attract over 42 percent of all grocery spending.
Strict planning rules apply, limiting and slowing organic growth at a local level in most countries and allowing many existing supermarkets to thrive.
Southern Europe
Grocery markets in Southern Europe are the most diverse in terms of operator types and the number of active operators, with relatively lower market shares captured by the main operators.
Consumer preference for fresh produce and the proximity of stores has allowed many traditional local and regional grocers to maintain their market share.
The Eurozone crisis, which caused many consumers to rein in their spending, has created a shift towards value. However, economic recovery seen in recent years has encouraged mainstream grocers to accelerate store openings.
Zoning, planning and licensing regulations have been fairly flexible in Italy, Portugal and Spain.
Spanish Mercadona is the largest operator in the region, attracting 25 percent of all grocery spending in Spain. It also entered the Portuguese market in 2019.
Europe’s Grocery Operator Landscape by Region
33
Northern Europe
The Nordic grocery markets are highly consolidated. In comparison with the rest of Europe, the number of major grocery groups is low, particularly in Finland, Norway and Sweden.
In Sweden, ICA Gruppen attracts over half of all grocery retail spending. S Group and K Group in Finland have a combined market share of more than 80 percent. In Norway and Denmark, the largest two grocery groups, Norgesgruppen and Coop in Norway and Salling Group and Coop in Denmark, attract over two-thirds of all grocery sales in each country. The barriers to market entry in the region are high due to strong customer loyalty, strict planning legislation and the geographical challenges of building economies of scale.
Lidl is currently the most notable foreign operator and a discount chain in the region. Danish Netto left Sweden in 2019 and sold its division to Coop.
Central Eastern Europe
Major European grocery groups have gained a strong foothold in the region, attracting the majority of grocery spending in the key markets.
Economic growth and rapid development of modern retail stock have allowed many operators to achieve strong organic growth over the past 20 years.
Strong competition has also forced market exits by foreign operators, including Tesco, who announced the sale of its Polish division to Danish Salling Group, and Carrefour, whose Slovakian franchise partner closed all stores.
Notable is the fast-rising popularity of Biedronka in Poland. While owned by Jerónimo Martins, it is run as an independent operator, allowing it to source products, set prices and brand itself locally.
34
Overview of the most common types of grocery formats
The European grocery market continues to grow, but revenue and profits
are unevenly distributed among the major operators. Much of the uneven
distribution is linked to the various supermarket brands and underlying
business models these operators run in combination with the store formats
and existing real estate footprints. As a result, property requirements will
continue to vary by both the operator and the fundamentals of each country’s
real estate investment market, which will need to be taken into account by
potential investors.
Across Europe, there is a wide variety of grocery real estate formats.
Supermarkets, hypermarkets and convenience stores are the most commonly
used formats. Supermarkets and hypermarkets are often stand-alone real
estate properties or a part of larger retail agglomerations, such as shopping
centres and retail parks, whereby the grocery operator acts as an anchor, or a
part of a mixed-use development with residential, offices or other uses. Other
grocery channels include forecourt retail, click-and-drive and click-and-collect
facilities and cashier-less mini supermarkets, as well as food divisions within
other stores, such as department stores or drug stores.
For this report, Grocery Real Estate has been defined as an asset, whereby
grocery typically contributes between 50 percent to 100 percent of the rental
income, often supported by a wider retail and leisure offer in daily goods and
services.
Operating Concepts
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Supermarkets and Discounters
The typical store size ranges from 500 to 1,500 square metres.
Stand-alone supermarket units may vary from 1,500 to 3,500 square metres in size, depending on the market.
Supermarkets are the most commonly used store type, often located in urban areas and residential neighbourhoods.
The format is used by traditional and discount grocery retailers.
Hypermarkets
Historically, hypermarkets ranged from 10,000 to 20,000 square metres in size.
New stores now often range from 3,500 square metres to 7,000 square metres in size.
The food offering is bolstered by a selection of non-food products.
Hypermarkets are a key sales channel for grocers, with the grocery share of sales typically varying from 30 percent to 70 percent of total sales, depending on the market.
Convenience Stores Convenience stores typically range from 80 square metres to 400 square metres.
Stores are often located in major urban areas, such as retail high streets, central business districts or near transport hubs.
Revenue is driven by higher prices for products in combination with higher inventory turnover.
This format is one of the strongest growing channels for sales in urban areas.
Most Common Types of Grocery Real Estate Formats
Source: Nielsen (2019, Analysis covers 19 European countr ies) , GfK; TradeDimensions; BulwienGesa (2020)
Number of stores (‘000s)
Number of Discount Stores & Market Share Europe
Market Share Grocery Sales Europe (%)
Space Productivity Germany by Food Retailer 2019
0 2,000 4,000 6,000 8,000 10,000
Aldi SüdLidl (Schwarz Gruppe)
Aldi NordGlobus
Penny (Rewe Group)Kaufland (Schwarz Gruppe)
E-Center (Edeka)famila Nordost
Edeka/E aktiv/E-neukaufNetto (Edeka)
real,- (Metro Group)Marktkauf (Edeka)
Rewe CenterRewe (Rewe Group)
Normafamila Nordwest
9,130
1991
1050
1520253035404550
0
5
10
15
20
25
1993
1995
1997
1999
200
1
200
3
200
5
200
7
200
9
2011
2013
2015
2017
Number of Stores Market Share %
7,4206,620
6,1205,170
4,9304,5304,5104,4504,280
4,1704,1504,0403,970
3,5303,500 Gross revenue
per sqm (€)
36
Discount concepts have experienced continuous growth
Grocery retail, when stripped down, has always been about product, turnover
and distribution. The growth and success of the traditional supermarkets in
Europe was driven by economic growth, a robust middle class, suburbanisation
and rising car ownership from the 1960s onwards. Over time, higher growth
has shifted from Western Europe towards Central-Eastern European countries.
Historically, traditional grocers put emphasis towards low prices, rather than
the value of brands. Stores often carried over 10,000 different products. The
hypermarket further bolstered its supermarket offering with a wide range of
non-grocery products, aiming to satisfy a customer’s routine shopping needs
in one trip.
The German discount retailers Aldi and Lidl introduced a more disciplined
approach with the opening of stores in affordable locations, typically ranging
from 1,200 to 2,000 square metres in size and offering a smaller selection of
just 1,500 core products. Analysis by Kearney of German grocery sales data
shows that discounters benefit from inventory turnover levels being 2.5 to 3
times higher than in traditional supermarkets. As a result of higher floor
productivity, discounters also have lower staffing and real estate costs as
a percentage of sales. The success of the discount format underpinned
rapid store expansion. According to Nielsen, the number of discount stores
in Europe has grown from 15,300 in 1990 to 42,400 in 2017. While market
saturation has slowed the opening of new discounter stores over the past
decade, analysis by Nielsen has also shown that further gains in market share
have been driven by continued sales growth of branded products.
Operating Concepts
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Source: IGD (2019)
UK Grocery Retail Market by Channel 2016 vs 2019
0 20 40 60 80 100
Supermarkets
Convenience
Discounters
Hypermarkets
Online
Other
+ 1.2%
Market Value
+ 3.3%
+ 12.1%
-0.5%
+ 3.6%
-0.9%
2019 2016
0 10 20 30 40 50
Supermarkets
Convenience
Discounters
Hypermarkets
Online
Other
46%
Market Share of Grocery Market
21%
13%
8%
6%
5%
48%
21%
10%
9%
6%
6%
Share by channel
in %
Revenue in billion
GBP
37
Consumer lifestyle changes create new convenience formats
Urbanisation, declining household sizes, the rise of e-commerce, the increased
value of leisure time and declining car ownership in major cities have shifted
consumer shopping preferences over the past 20 years in Europe. Attributes,
such as freshness, quality, value-for-money, cost and convenience have
become more important for grocery shoppers, which has fuelled demand
for discount retail as well as higher frequency visits to nearby stores with
smaller basket sizes. To meet the rising demand for convenience, major
grocery groups have accelerated the development of smaller convenience
stores. While these stores have a smaller grocery range, they offer fresh food,
accounting for up to 50 percent of the category sales. The continued growth
in supermarket, discount and convenience stores all cater to the needs of
consumers looking to shop every three to four days. These new consumption
preferences have taken hold at the expense of weekly visits to more distantly
located hypermarkets, which in turn has caused a gradual erosion of floor
productivity over time for the hypermarket format.
Operating Concepts
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Source: LZ Retai lyt ics (2018)
14%Minimarkets
5%Drugstores
32%Supermarkets
26%Hypermarkets
23%Discounters
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Grocery operators continue to grow their store portfolios
European grocery retailers operate 195 million square metres of modern
grocery retail space, according to data published by LZ Retailytics in 2018.
Supermarket formats account for 32 percent of this space, while 26 percent
and 23 percent can be attributed to hypermarket formats and discount stores,
respectively. The share of occupied space by store type varies significantly
by market. For example, hypermarkets occupy the majority of space in
France and the UK, while this format is hardly present in the Netherlands due
to widely developed grocery store networks and planning legislation.
Share of Sales Area in Modern Grocery Europe 2018
Current Developments and Outlook
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largest share of sales area in
Europe followed by hypermarkets
and discounters.
So urce: LZ Retai lyt ics (2018)
Sales Area of Modern Grocery Channels Europe
0 10 20 30 40 50 60 70
Supermarkets
Hypermarkets
Discounters
Minimarkets
Drugstores
61.7
50.2
2018 2023 Forecast
Sales area in million
square metres
65.8
52.0
45.255.3
27.028.8
9.411.1
39
LZ Retailytics’ forecast anticipates European grocery operators to expand their
store footprint by 19.5 million square metres by 2023. Discount grocers are the
most active operators looking for new space and are expected to grow their
European store footprint by 10.1 million square metres to 55.3 million square
metres, overtaking the total space used by hypermarket formats. At the end
of 2019, Aldi indicated it was planning to double the number of stores in
London to 100 by 2025. In tandem, Lidl announced it would accelerate its UK
expansion by opening 230 additional stores by 2023. Lidl also indicated that
it would open 50 additional stores in Italy. Russian hard-discounter Mere,
which looks to undercut prices from the likes of Aldi and Lidl, has set its sights
on European expansion. Traditional grocers, often hypermarket operators,
are also contributing to the growth of discount retail. Following Edeka’s
acquisition in 2009 of Netto Marken-Discount in Germany, Carrefour launched
the discounter Supeco in 2012 in Spain and exported the brand to France
and Poland in 2019. Tesco launched Jack’s in the UK in 2018.
The supermarket formats and convenience store formats are expected to
occupy an additional 4.1 million square metres and 1.8 million square metres
of space, respectively, across Europe. Delhaize has opened 23 supermarkets
in Belgium during the first half of 2020 and announced it would open an
additional 25 to 30 stores, mostly convenience oriented. Spar has introduced
a new 80 square metres Spar City format for high-traffic locations in the
Netherlands, targeting rapid expansion.
The COVID-19 pandemic has forced grocery operators to focus their resources
on limiting disruptions to their daily operations. However, well-capitalised
grocers are pressing ahead with expanding their store portfolios. Some are
actively targeting quality space that may become available due to potential
failures and restructuring of retailers and leisure operators as well as
non-retail occupiers. The expansion plans will lead to continued demand
for space by discount formats, convenience stores and supermarkets. Some
operators are keen to downsize larger supermarket and hypermarket stores,
which may result in a redevelopment or sublease of excess space to smaller
non-food retail tenants, depending on the opportunity.
Current Developments and Outlook
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Retailers continuously adapt store concepts to meet local consumer demands and target profitable growth
Grocery operators have a range of options to maintain the performance of their
stores in case of emerging regional overcapacity, although these will vary on a
store-by-store basis. These options include introducing new services, renting
out space to other businesses, right-sizing stores or removing them from the
network entirely. Grocery store operators and real estate investors may also be
able to unlock residual value by adding non-grocery uses to existing sites or
redeveloping grocery stores into mixed-use properties.
Hypermarkets, in particular, have seen their traditional formats change over
time and in some cases have introduced new concepts and alternative uses.
For example, Dutch grocer Jumbo has added a Foodmarkt Café in some of their
larger stores, allowing consumers to taste freshly made dishes by professional
chefs. Another invention by Jumbo is the introduction of pharmacies in smaller
villages to complete the convenience offer. In some cases, operators have also
introduced in-store farms, such as Metro in Germany.
Major grocery operators benefit from widely developed store networks and
sophisticated supply-chains. These stores are therefore well positioned to
cater to the fulfilment of online orders via click-and-collect, allowing stores to
optimise the sales floor, re-allocate grocery space and benefit from additional
impulse purchases by store visitors.
Current Developments and Outlook
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Outlook: Continued consolidation of the European grocery market
According to Harvard Business Review, a business that can significantly grow
its market share is likely to generate higher profit margins than its direct
competitors. Both McKinsey & Company and Oliver Wyman expect further
consolidation of the European grocery sector, which will see two to four very
strong grocery retailers with winning formats emerge in each country. Scale will
drive financial strength and improve margins, but in many European countries,
regulators are reluctant to allow further domestic takeovers. One alternative
strategy is international consolidation, but this is fraught with risk, which risk,
which will result in various supermarket chains in Europe changing ownership.
Examples include the sale of the Leader Price chain by Casino Group to Aldi
in France and an acquisition of 172 Supersol stores in Spain by Carrefour from
the Lithuanian Maxima Group, which has decided to leave the Spanish market.
However, international acquisitions can also be challenging as illustrated by
Couche-Tard’s recent takeover attempt of Carrefour, which has caused
concerns with the French government about food sovereignty and job security
at one of the largest employers in France.
Looking forward, a large number of grocers will focus on optimising store
performance. Stores that will see productivity erode, will likely trigger a
review that may lead to repurposing initiatives of excess grocery store space,
most notably in hypermarket formats. This may offer real estate investors
opportunities to unlock latent value, but this will depend on the asset, the
market context and risk appetite.
For real estate investors looking to invest in grocery real estate, the size of the
grocery market and the variety of different operators offer a range of strategic
options, catering to different risk and return profiles. However, a focused
investment plan, underpinned by diligent stock selection and a flexible asset
management plan for the wider portfolio of assets to unlock latent value,
remains key.
Current Developments and Outlook
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Real Estate Leasing Market
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Investors seeking secure income will appreciate the typically strong covenants and long lease terms of food stores, but need to be mindful of potential items, such as indexation caps, rare but possible break options, and sustainable occupancy costs. While the grocery sector offers a stable rental outlook, the overall lack of market transparency due to significant operator ownership requires a diligent market and competition analysis in each individual investment case. Locational issues, potential alternative use as well as asset management analysis is recommended to ensure investors have flexibility in the future use of the grocery space to drive returns and mitigate risks.
44
Grocery real estate typically provides longer leases, often without break clauses
European grocers typically sign longer leases in comparison to other retailers.
Convenience food store and supermarket leases tend to be three to five years
longer on average across Europe in comparison to non-food leases. In addition,
the use of break options is less likely, especially in Europe’s most mature
retail markets. There are various reasons why operators sign longer
terms, including protection of market share, limited options for
taking alternative space locally and amortisation of investments.
In some markets, grocery retailers may have repeated options to
renew their leases, which limit landlord opportunity to access
potential rental upside. Due to the size and importance of
major grocery chains as tenants, and their ability to release
equity via sale and leaseback transactions, investors highly
regard the covenant strength of grocers. Due to longer lease
terms and strong covenants, food stores appeal to investors
looking for longer and more secure income streams.
Real Estate Leasing Market
Real
Est
ate
Leas
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Mar
ket
Source: JLL (Januar y 2021); Note: The typical lease length is based on an analysis of over 20,000 shopping centre leases across Europe.
Typical Lease Length Food vs Non-Food Stores Europe
Typical Lease Length (Number of Years)
Food Stores Non-food Stores
Unit Size
< 500 sqm 500 – 3,500 sqm > 3,500 sqm
5
0
15
20
10
0 50 100 150 200
Major Cities
Medium-sized Cities
Cities < 50,000 inhabitants
Supermarkets & Discount Grocery Stores
Range of Typical Food Store Rents by City Size Europe
Hypermarkets
Major Cities
Medium-sized Cities
Cities < 50,000 inhabitants
Annual Rent (€/sqm)45
At a country level, there is great variety in the typical lease length for grocery
stores. Core product in the UK generally commands 15+ year leases, while leases
for core product in Portugal generally range from 15 to 20 years. In contrast, the
leases for core grocery assets in Spain tend to vary between seven to 10 years
and in Italy between nine to 12 years. Across the Nordics, lease lengths for quality
product tend to range from 10 to 15 years in Denmark and Finland, while the
period typically ranges from eight to 15 years in Sweden. The preferred option
in the Netherlands is 10 years, with a minimum of 5 years. In Poland, lease terms
range from five to 15 years with multiple extension options for hypermarkets
and from five to 10 years for supermarkets without break options.
Lease lengths also differ by location and retail asset type. In Germany, the
preferred lease length for stand-alone stores in downtown locations and stores
in quality shopping centres is typically five or 10 years, while out-of-town
supermarkets and discounters see leases vary from 10 to 15 years or more. In the
Czech Republic, a typical lease term for hypermarkets is 10 years with a further
five-year extension, while supermarket leases are usually on a “five+five” year
term, giving retailer an option to renew for five years at an indexation-only
rental uplift. In secondary or tertiary locations, a tenant may request a
three-year break option.
Real
Est
ate
Leas
ing
Mar
ket
46
Food store rents are typically linked to inflation, but indexation hurdles apply
Grocery leases in Europe are typically linked to local inflation metrics and are
usually adjusted on an annual basis. Due to the strong negotiating leverage of
grocery operators, contractual rent growth for core and core + grocery assets
can be limited to 70 percent, 80 percent or 90 percent of the annual indexation,
especially for German retailers. Newly developed grocery stores may require
‘ratchet’ rent structures during the first couple of years of a lease, while local
market practices may dictate additional provisions around the minimum
and maximum amount of annual indexation. As a result, it requires asset
managers and investors to successfully agree on the terms of the indexation,
including potential hurdles, lease reviews and lease length to ensure the
projected rental growth is achieved, particularly if rents are expected to keep
pace with inflation.
In some markets, notable indexation practices exist. In the UK, upward-only
rent reviews in combination with long leases have long benefitted landlords
of grocery stores with stable and growing income streams. Due to the growing
grocery e-commerce and the relatively large share of the hypermarket format,
this model is becoming increasingly difficult to maintain. In Poland, grocery
rents can be euro-denominated with Eurozone CPI-indexation as well as zIoty
denominated with Polish CPI indexation, depending on the tenant, location or
retail asset.
Rent levels are a key lever for managing margins
European grocery operators are highly focused on managing their operational
cost base due to their operational model. Grocery retailers typically target
2 percent to 3 percent of their annual turnover as rent for supermarket stores
in Europe’s most mature markets. To gain market share, some operators engaged
in competitive bidding to secure new space, which caused contracted rents
levels to get too high. As the opportunity to grow market share became
limited over time, the focus has shifted on reducing rent levels for stores
that were deemed over-rented.
Germany and the UK are among Europe’s most well-developed grocery
markets, with fewer options for operators to gain significant market share
via new store openings. Intense competition has eroded margins, despite
economic growth. Over the past five years, the rental outlook for food stores
in both countries has softened. Although rental growth has been observed for
convenience store formats in major urban areas in line with expansion trends,
average hypermarket rents in Europe’s most mature markets, including
Germany, have seen a modest decline in recent years. In some cases, operators
have exited under-performing corporate-owned stores by transferring stores to
local franchise partners or selectively closing stores in markets with diminishing
consumer demand or intensifying local competition. For example, in order to
reduce costs, Carrefour announced in 2018 a plan to close 238 supermarkets in
France, which it had previously acquired from the Dia Group in 2014.
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Source: JLL, IPD (2020)
Annual Nominal Rental Growth Germany
Average Annual Rental
Growth (%)
2011 – 2015 2015 – 2020
Grocery Real Estate Rent Index Germany & UK
2011
0
20
40
60
80
100
120
140
2012
2013
2014
2015
2016
2017
2018
2019
2020
Germany United KingdomPrime High Street Big 5 (100 sqm)
Hypermarket > 5,000 sqm
Supermarket, discounter > 800 sqm
2%
0%
6%8%
4%
10%12%14%16%18%
-2%
16.9%
0.6%1.9%
-0.5%
2.5%
0.0%
Annual Average Rent Index (100 = 2011)
47
Where rents are too high, there is a major trend for retailers to seek
restructuring of rents to appropriate rent-to-sales metrics, especially in
locations where competition for market share has pushed rents to
unsustainable levels. Potentially for the highly competitive but growing
discount market, landlords have a better chance to achieve higher rent
levels whilst these retailers compete aggressively for market share.
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Change in lease practices and limited market transparency
Potential changes in the common lease terms is another aspect investors and
asset managers need to consider when assessing opportunities. This could
be the case where a triple net lease is in place, but the adoption of a new
lease model may require the landlord to take responsibility for property
maintenance. For diligent investors, even in cases where a triple net lease
applies, a thorough technical appraisal of the asset will be warranted. For
grocery sale and leaseback transactions, it is still a key requirement to offer
triple net leases in order to achieve best pricing.
Another aspect that investors need to consider is the relative lack of
transparency in the grocery real estate market across Europe. Due to high
levels of operator store ownership, long leases coupled with indexation
hurdles, and relatively limited leasing and investment transactions, it has
been more difficult to track market rents and yield levels across Europe.
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Real Estate Investment Market
50
Activity in the European grocery retail investment market is gaining momentum as investors search for secure long-term income.
While opportunities to access core product have historically been limited, more core product will become available as market conditions, which require investments into the business, force grocery operators to raise capital. The prime yield outlook is stable for most markets but is likely to compress in the most sought-after markets.
Profitability issues will polarise the demand for space and affect pricing for less attractive grocery stores with shorter leases. Asset management repurposing plans, particularly with last mile logistics and affordable housing uses, will help mitigate risks and identify opportunities to add value.
Grocery Real Estate Investment Volumes 2014 – 2020
Average Annual Investment Volumes 2014 – 2020 (€ millions)0 200 400 600 800 1,000 1.200 1,400
United KingdomGermany
FinlandFranceSpain
SwedenNetherlands
PortugalCzech Republic
Poland
Source: JLL (Februar y 2021); Note: JLL’s retai l investment analysis excludes any investment deal less than $ 5 mil l ion in value.51
Rising investor interest in supermarkets and grocery- anchored real estate
A rising number of regional and local real estate investors are now targeting
stand-alone grocery stores and grocery-anchored assets across Europe.
A daily flow of footfall supporting sales, an irreplaceable role of highly
accessible stores in the food distribution process and diversification
opportunities are among the defensive qualities now attracting more
institutional capital. Typical grocery-anchored real estate may include
shopping centres and retail parks, as well as residential units and office real
estate, whereby a food store would contribute to a better secured income
stream and, in some cases, be part of a larger investment proposition.
With respect to supermarket portfolios and stand-alone food stores as an
investment product, the European grocery real estate investment market has
traded €4.5 billion in assets on average each year between 2014 and 2020,
representing 10 percent of the capital flows into European retail real estate.
The UK and Germany, traditionally Europe’s largest retail investment markets,
have drawn-in the lion’s share of capital, attracting €1.3 billion and €1.2 billion
on average each year, respectively. Finland is Europe’s third-largest destination
for grocery real estate investments, benefitting from a number of large portfolio
transactions, followed by France and Spain.
Real Estate Investment Market
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So urce: JLL, Eurostat, Oxford Economics (Februar y 2021); Note: JLL’s retai l investment analysis excludes any investment deal less than $ 5 mil l ion in value; The share of gro cer y sto re sales of total retai l sales is based on the total retai l sales in non-special ised stores with food, be verage or tobacco predominating (NACE Re v. 2 : G4711), as a percentage of the total retai l trade,
excluding motor vehicles and motorc ycles (NACE Re v. 2 : G47) for 2018 and adjusted by avai lable growth rates for 2019 and 2020.
Grocery Sales and Investments as a Percentage of Total Retail Sales and Investments
% Grocery Sales of Total Retail Sales 2020 % Grocery Investment of Total Retail Investments 2014 – 2020
France Finland United Kingdom
Czech Republic
Portugal Spain EU27 Sweden Germany Nether-lands
Poland
10%
0%
30%
40%
50%
20%
60%
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Grocery stores attracted 37 percent of the total retail consumption in the EU
(27 countries) in 2020. With European grocery retail investments accounting
for only 10 percent of Europe’s overall retail investment volumes on average
between 2014 and 2020, real estate investors appear to have under-allocated
capital towards grocery real estate and grocery-anchored real estate assets.
There are a number of reasons why investors have historically not found
suitable investment product, such as high levels of corporate ownership, use of
franchise models and the need for scale complicated by fragmented ownership.
One example is the Netherlands, where the grocery sector is characterised by
a relatively strong franchise culture. As a result, opportunities for building scale
within a short time frame with high-quality grocery stock have historically been
limited. However, some characteristics of the grocery sector, such as a stable to
moderate rental growth outlook, may now appear more attractive and secure
in comparison to a more volatile non-food retail market.
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Source: JLL (Januar y 2021); Note: JLL’s retai l investment analysis excludes any investment deal less than € 5 mil l ion in value.
European Grocery Investment Volumes by Deal Size
1. €5m – €25m 2. €25m – €250m 3. €250m – €350m
4. €350m – €500m 5. €500m +
2014
2015
2016
2017
2018
2019
2020
100%
80%
60%
40%
20%
0%
53
European grocery real estate attracted 22 percent of capital flows targeting retail in 2020, up from 6 percent in 2016
A direct comparison between the share of grocery sales as a proportion of total
retail sales and the share of grocery real estate investments as a proportion of
total retail real estate investments is more complicated than it may appear at
first glance. Many food stores are often also part of larger retail developments
and mixed-use complexes, including shopping centres and retail warehouse
parks (RWP). These assets offer investors an additional range of options in risk
and return requirements on top of fully grocery-focused investment products.
Many successful retail warehouse parks that are sought after by real estate
investors are often typically anchored by one or more strong grocery tenants
due to their daily flow of footfall. While these assets have exposure to
non-grocery rental income, they also offer more flexibility to tailor the
tenant-mix to the changing consumer demand in local catchments. Investment
volumes into grocery real estate and retail parks combined reached €13.7
billion a year on average between 2014 and 2020, equating to a 31 percent
share of Europe’s total retail investment volumes over the same period.
The share of grocery real estate investment as a proportion of total retail real
estate investment has grown from 6 percent in 2016 to 22 percent in 2020.
Investor demand notably strengthened in 2020 due to continued resilience in
consumer spending in food stores during the COVID-19 pandemic. European
retail real estate investment volumes amounted to €29.9 billion in 2020;
representing a 21 percent year-on-year decline; but within this, grocery real
estate investment rose by 43 percent to €6.7 billion over the same period. As
fewer major retail park portfolios were traded in 2020, the combined volumes
for grocery real estate and retail warehouse assets fell by 4 percent year-on-year
to €12.7 billion. However, the combined share reached 42 percent of the total
retail investment volume for the same period.
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Investment Volumes
(€ billion)
European Grocery & Retail Warehouse Investment Volumes
% of Total Retail Investment Volumes
2014
2015
2016
2017
2018
2019
18
16
14
12
10
8
6
4
2
0
2020
0%
60%
20%
40%
Retail Warehouse Grocery% Grocery % Grocery & Retail Warehouse
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Notable transactions in 2020 include Esselunga’s €435 million sale and
leaseback transaction to UniCredit Bank in Italy and X+bricks Group’s acquisition
of 120 German food stores, worth €500 million, in two separate transactions
from TLG Immobilien. Annexum has acquired 55 Jumbo supermarkets and
seven additional assets in the Netherlands for €325 million in a sale and
leaseback transaction and has sold 13 assets of this portfolio to Portico for
€82 million upon completion of the transaction. LCN Capital Partners has
acquired 27 stores in a sale and leaseback transaction from Mercadona in
Spain, while Cibus bought 111 Netto stores in Sweden from Coop for
€178 million, following Coop’s acquisition of the Swedish Netto division.
Grocery real estate transactions ranging from €25 million to €250 million make
up the largest share of Europe’s annual grocery investment volumes. Since
2014, four portfolios were traded in Europe with a lot size between €250 million
to €350 million, seven portfolios that changed hands ranged between
€350 million to €500 million and only three portfolios fetched a price in
excess of €500 million. It is notable’ so the sentence reads: It is notable that
out of the 14 transactions larger than €250 million, 10 materialised outside the
two largest grocery real estate markets of the UK and Germany. The average
price for an individual food-store was €7.5 million between 2014 and 2020.
However, some stores traded for well over €40 million, while many more,
typically part of a portfolio, achieved a price below €1 million per store.
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Domestic investors are most active in acquiring grocery stores
In recent years, investors have primarily been interested in two distinctive
routes for acquiring food stores and grocery-anchored real estate; targeting
either core or value-add product. Domestic investors have historically
been most active, contributing two-thirds to the overall grocery investment
volumes. As many domestic investors benefit from on the ground local market
knowledge, supporting stock selection and asset management initiatives, they
have acquired grocery assets across the wider risk spectrum. However, most
investments are focused on either core or value-add strategies.
A clearer distinction prevails among major foreign investors. Sale and
leaseback has been a popular route for some to gain access to core product.
For example, Realty Income Corporation bought 12 Sainsbury’s Superstores
in the UK in 2019, worth €490 million; while Apollo Global Management
acquired a portfolio of 12 Géant Casino assets and 20 Monoprix and Casino
stores for €465 million in the same year in France. Value-add investments
have also been made by overseas investors, particularly focused on acquiring
German portfolios, with shorter lease terms for refurbishment and rent
renegotiation purposes.
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Q4 2019 Q4 2020
Prime Grocery Real Estate Yields 2019 and 2020
So urce: JLL (Januar y 2021); Note: Unweighted average for Europe’s pr ime grocer y y ield, UK’s pr ime grocer y y ield is based on long leases with CPI/RPI indexing.
7.00%6.00%5.00%4.00%3.00%2.00%1.00%
0.00%Germany France United
KingdomSpain Sweden Finland European
AverageNetherlands Poland Czech
RepublicItaly
4.20
%
4.0
0%
3.75
%
4.0
0% 5.
00
%
4.50
%
4.25
%
4.0
0% 5.
00
%
5.0
0%
5.0
0%
5.0
0%
6.50
%
6.0
0%
6.0
0%
6.0
0%
6.50
%
6.50
%
5.25
%
5.25
%
Net Initial Yields (%)
5.10
%
5.0
0%
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Stable outlook on pricing for quality grocery stock
Grocery real estate has, over the years, proven to be among the most stable
commercial real estate asset classes in Europe in terms of pricing. High-quality
stock provides investors with secure long-term income, supported by long lease
structures and limited break options, in combination with strong covenants
and annual indexation of rents. JLL’s view of prime net initial net initial yields
for quality grocery stock in Europe’s key retail markets stood at 5.10 percent on
average at the end of 2019 and moved inwards to 5.00 percent at the end of
2020, due to the increased volume of capital targeting quality grocery stock. In
comparison, Europe’s weighted net initial yield for prime shopping centres has
moved out 90 base points since 2018, exacerbated by the COVID-19 pandemic
and the challenges it has created for ‘non-essential’ retailers.
At a country level, pricing for prime stock typically ranges from 3.60 to 4.50 percent
in Europe’s most mature markets, such as Germany, to sub 6.00 to 6.50 percent in
the Central Eastern European markets of the Czech Republic and Poland. Sustain-
able rent levels are key in the current conditions to maintain sharp pricing.
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4% 5% 6% 7% 8% 9% 10%
Major Cities
Medium-sized Cities
Cities < 50,000 inhabitants
Supermarkets & Discount Grocery Stores
Range of Typical Food Store Yields by City Size Europe
HypermarketsMajor Cities
Medium-sized Cities
Cities < 50,000 inhabitants
Net Initial Yield (%)
Source: JLL (Januar y 2021); Note: Unweighted average for Europe’s pr ime grocer y y ield
Prime European Real Estate Yields Q4 2020 (Weighted)
Net Initial Yields (%)
Q4 2019 Q4 2020
Offices High Street
Industrial Grocery Shopping Centre
Retail Park
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
3.25
%
3.15
%
5.50
%
5.70
%
4.8
0%
5.35
%
5.10
%
5.0
0%
4.40
%
4.10
%
3.20
%
3.50
%
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The yield spread for high-quality supermarkets and discounters in the major
European cities and medium-sized cities typically ranges between 50 to 100
basis points, when compared to smaller cities. The yield spread is slightly larger
for hypermarket assets and in countries where shorter lease terms are common.
With respect to pricing of quality grocery real estate stock across Europe, the
yield gap with the other prime retail assets has narrowed as a result of the
structural change in the retail market. This trend has been accelerated by the
COVID-19 pandemic, and the underwriting of residual value for alternative
uses. At the end of 2020, although mainly driven by some outward movement
in yields for shopping centres in particular, core grocery real estate was more
tightly priced than shopping centres and retail parks. It should be noted that
this differs by country. For example, Germany’s best retail warehouse parks
are anchored by strong grocery tenants. Indexation hurdles have historically
limited strong rental growth. As a result of stimulus measures in response to
the COVID-19 pandemic and the relatively strong performance of Germany’s
retail market, prime retail warehouse park yields have compressed to historic
low levels of 3.90 percent. This is broadly on par with pricing for quality grocery
assets in Germany. In contrast, the UK’s prime retail warehouse park yields
have moved out 150 base points to 6.25 percent over the past two years due to
concerns around sustainability of rent levels. Consequently, the yield gap
between quality grocery and retail warehouse park stock in the UK was 225
basis points at the end of 2020. Compared with pricing of prime office space
across Europe, the yield gap remained broadly stable in 2020. However, it
increased over core logistics real estate stock due to unprecedented investor
demand in this sector.
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Despite the uncertain economic environment, the medium-term outlook on
yields for high-quality stock across Europe remains stable in most markets,
supported by the robustness and longevity of income. The availability of
long-term domestic capital targeting grocery stock may further compress yield
levels, notably in Germany and Spain. Key investment pricing drivers continue
to be location resilience, covenant strength and substantial lease length.
For leases that come up for renegotiation or are near a turnover-based rent
review, grocery operators will be keen to re-assess the post COVID-19 revenue
potential as consumers are expected to curb their expenses for food products
and shift a portion of grocery spending towards online. Grocery operators may
also seek to obtain rent reductions from landlords already pressured by fashion
retailers into longer-term concessions. This will polarise yield levels between
high-quality assets and weaker grocery stock. Nevertheless, repurposing of
retail space into urban logistics distribution centres may offer alternative
options to drive investment returns.
Supermarkets are increasingly looking to sale and leasebacks as a way to unlock fresh capital
Sale and leaseback transactions are an attractive route to release capital and
both grocery stores and warehouses, as tenants, are appealing to investors
looking for long-term income. The last major peak in sale-leaseback
opportunities was after the Global Financial Crisis when a number of retailers
sought to recapitalise via this route. This trend is again emerging, starting
before the COVID-19 pandemic, but now potentially magnified both by the
structural changes caused by the pandemic and by increased investor
interest.
With significant investments required by grocery operators to adapt operations,
more store portfolios across Europe are expected to be brought to market.
Traditionally, special purpose vehicles and joint ventures have also been an
option for grocery operators as they sought to partner with property specialists to
capitalise on development opportunities as well as raise capital. In practice, some
grocery operators have found it difficult to fully align interests in such structures
and have increasingly opted for cleaner sale and leaseback arrangements. Sale
and leaseback transactions can be a viable way for investors to benefit from scale
effects and enter into new markets when acquiring larger portfolios. Grocery
operators are, in turn, able to use the unlocked fresh capital to invest into
updated retail concepts while securing locations and market share through long
lease terms. A strong tenant covenant and commitment to the locations is key
in order to maximise value as investors usually seek long-term stability.
Asset management plan to consider alternative uses
In the current market, there can often be strong alternative-use value potential,
particularly for urban locations. Residential use or last mile logistics are the
most interesting. An asset management plan considering such alternative
uses, whether it is a conversion into an urban logistics hub, implementation of
a click-and-collect facility or development of affordable housing, will provide
investors with more options to engage pro-actively with tenants, identify
opportunities for growing operational income and to mitigate risks.
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Innovation and Trends
60
Consumer shopping preferences have always been highly dynamic and vary by market.
There is a variety of consumer trends, but the accelerated shift in grocery spending towards online channels, implementation of click-and-collect services, the adoption of in-store technologies and consumers demanding more action on sustainability, are structurally changing consumption patterns in local catchments and the performance of individual stores.
Grocers will have to respond as consumers get more choice of where to shop, but there is an opportunity for supermarkets to evolve and stay relevant to consumers.
61
Click-and-collect, a major opportunity to drive footfall and impulse spending at physical stores
Click-and-collect is one of the fastest-growing retail services. It offers consumers
control over the shopping process, while incurring only limited additional
processing costs to retailers. Due to their sophisticated distribution networks,
major grocery stores that benefit from easy access, are well-suited to offer
click-and-collect. Before the COVID-19 outbreak, various major retailers reported
that when click-and-collect was offered, between 40 percent to 70 percent of
online orders were picked up in store and the remaining share were delivered to
consumers’ houses. Click-and-collect services also support additional impulse
purchases instore, with 25 percent to 50 percent of shoppers across Europe
estimated to buy additional products when collecting online orders in-store.
Edgar, Dunn & Company predicted in 2019 that the European click-and-collect
market was expected to grow to €45.1 billion by 2023 (11 percent CAGR).
Click-and-collect has become the fastest growing segment of e-commerce.
One example is John Lewis in the UK. Since 2014 the department store operator
has seen the use of its click-and-collect service grow by over 50 percent.
Accounting for 57 percent, click-and-collect was the most used option for
fulfilling online purchases, with 25 percent of packages collected at John Lewis
stores and 75 percent at Waitrose supermarkets. John Lewis also collaborates
with Co-op supermarkets for click-and-collect, and in July 2020 the partnership
was extended to include over 500 grocery stores in the UK.
According to Supermarket Income REIT (published by Panmure Gordon),
traditional grocers are only able to make four deliveries of online orders to
customer homes an hour due to the perishable nature of produce. Drive times
contribute up to 80 percent of the cost for fulfilling online orders, with the
remaining 20 percent related to picking and packing. While click-and-collect
does not tackle the costs of picking grocery items, implementing
click-and-collect services in the existing store network is an attractive option
to help manage fulfilment costs of online orders. The COVID-19 outbreak has
significantly accelerated click-and-collect service implementation among
retailers. Tesco, Asda and Sainsbury’s have expanded their click-and-collect
slots in the UK, while drugstore dm-drogerie markt has launched a
click-and-collect service across the whole of Germany. Aldi and Lidl have
started testing click-and-collect services in several stores in the UK and
Poland, respectively, to offer customers more fulfilment
options. A French click-and-drive model, rolled-out
across the larger supermarkets on the outskirts
of cities by major grocery operators, has seen
a strong uplift in demand. Carrefour has
also opened its first fully automated
click-and-collect store in Paris, where
customers can pick-up goods without
help from store employees.
Innovation and Trends
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Margin pressures have made enhanced consumer services and in-store technology a requirement
For grocery operators, the growth in online retail is a trigger to improve
the overall in-store shopping experience. Grocers are likely to look at a
number of ‘tech’ areas to improve their operations. Business consulting
firm McKinsey & Co. believes convenience store technology can generate
5 to 10 percent more sales and improve earnings before interest, taxes,
and amortization (EBITA) by 2 to 4 percent by reducing waiting time
for consumers, lowering employee numbers and improving inventory
management.
Artificial Intelligence is expected to deliver the most substantial return
on investment. The likes of Tesco and Carrefour have already entered an
alliance for sharing and analysing customer data. 7-Eleven and Marks &
Spencer use Microsoft technologies to optimise store performance,
understand trends and manage inventory. One example of using
Artificial Intelligence is dynamic pricing, with the main benefits being
higher inventory turnover and lower food waste, as it provides clarity
on competitive price points, required stock and maximum returns. When
US grocer Kroger rolled out digital dynamic price tags across hundreds
of stores, it was also able to reduce its overall energy consumption as
illuminated pricing meant less need for overhead lighting.
Many supermarkets have already installed self-payment machines to of-
fer customers more choice in payment methods and free-up employees
for other tasks. European grocers are also testing the so-called ‘just walk
out’ and ‘self-scan’ technologies, pioneered by operators in the US and
mainland China. The ability to take out traditional tills or self-payment
machines would allow grocers to free-up floor space for more products
or reduce the overall store size and employee numbers. However, this
technology has not yet been widely adopted in Europe.
Major grocers are also experimenting with robots to provide customers
with information, monitor in-store activities, send alerts when store
spillages occur and create excitement for children. Recent experiments
include robot shopping trolleys that can scan products and eliminate
the need for queueing at checkouts. There are concept drones that
can monitor inventory in real-time and send low stock alerts to store
employees, but a more basic and cost-effective solution could be an
adio-frequency identification (RFID) antenna which scans the number of
units on the sales floor and sends alerts if needed.
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As consumer demand rises, sustainability is recognised as a source of competitive advantage
Since the Kyoto Protocol came into force in 2005, retailers have made strides in
reducing greenhouse gas (GHG) emissions and their impact on the environment.
Most progress has been made with Scope 1 and Scope 2 emissions that are
typically under direct control. Initiatives often include energy efficiency, use of
renewable energy sources and reducing water consumption. One example is
the world’s first zero-carbon store in Sweden operated by Lidl. Scope 3, value
chain emissions, which often represent the largest source of greenhouse gases,
is an area that needs more attention.
Developments in the run-up to COVID-19 have put sustainability back on top
of the agenda for corporates and governments, as consumers demand more
action from retailers to increase efforts. The demand for organic food and
awareness of local produce and farmers has significantly increased. Fashion
retailers have already experienced consumers’ intolerance for outdated
practices, such as incinerating excess stock. According to The Global Consumer
Report 2019, 73 percent of 25 to 34-year-olds in the UK, i.e., Millennials,
are willing to pay more for sustainable brands. However, when considering
grocery shopping, buying ethically sourced products adds an average of €560
a year to a household bill, compared to the cost of equivalent in-house brands.
This additional cost is still significant for many young households to spare on
top of their spending budgets.
For grocers with a physical store footprint, sustainability offers an opportunity
to differentiate their brand. Initiatives often go beyond reducing GHG
emissions and focusing on local communities. Carrefour created vegetable
rooftop gardens in France, open to volunteers, while Delhaize has tested
an ‘urban farm’ on top of one of its stores to reduce GHG emissions from
distributions. Marks & Spencer introduced urban farming in its London food
stores, while Edeka developed its Biomarkt concept. E.Leclerc dedicated
some under-utilised hypermarket space to selling second-hand goods,
allowing them to enhance margins and differentiate their product offering.
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Grocery retailers have taken initiatives to reduce their impact on the
environment but also recognise the industry still has a journey ahead
before it becomes a fully circular economy. Physical stores can play a
positive role in enhancing and advocating sustainability and strengthening
ties with its consumers, particularly when expected legislation with
respect to requirements around packing, energy consumption and waste,
becomes more stringent. Various European grocers, including Waitrose,
Marks & Spencer and Lidl are already focusing on reducing the need for
plastic packaging.
The final verdict on what carves out a larger carbon footprint, physical grocery
shopping or online grocery shopping in Europe, is not yet decided. Bulk
transport of grocery goods reduces the overall carbon footprint and the
distribution of goods via a store or warehouse to a customer’s house is a key
differentiator in the overall emissions. A delivery van that is able to combine
multiple drop-offs of online orders in one journey could theoretically be more
eco-friendly in comparison to multiple consumers visiting a store by car. The
introduction of electric delivery trucks and delivery bikes for last-mile delivery
will strengthen this argument. However, this would not necessarily be the case
if customers visit nearby stores via a combination of cars, electric cars, bikes or
walking, in comparison with remotely located warehouses.
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Outlook
66
Amidst the COVID-19 pandemic, European grocery real estate has established
itself as a systemically relevant asset class and a crisis-resilient investment.
The grocery real estate sector is emerging as a secure and defensive subsector
within the broader retail investment market. As capital allocations towards
commercial real estate still continue to rise, pension funds, institutional capital
and dedicated long-income funds are likely to value the grocery sector due to
the robustness and longevity of its income and diversification benefits. While
real estate investors have historically under-allocated capital towards grocery
real estate and grocery-anchored real estate assets, the investment case for this
growing sector is becoming clear.
Clear Trends
For investors looking to acquire grocery real estate, trends shaping the grocery
sector are clear and will support them with setting out the investment case,
pricing-in risks and underwriting mitigating measures. The grocery sector
benefits from a daily flow of footfall, but focus on protecting store margins
is critical. Food sales are forecast to be affected in 2021 by the economic
fallout from COVID-19, before returning to moderate growth in the years after.
However, the grocery sector is performing in a more stable manner compared
to other retail sectors. Furthermore, while a proportion of the shift in grocery
spending towards online channels, observed during the pandemic, is likely to
be permanent, parts of this trend can be largely recaptured by the physical
stores through well-executed click-and-collect services. The grocery sector is
also looking to adapt to broader societal trends, such as growing consumer
preference for value and affordability, along with consumer desire to shop
more sustainably.
Outlook
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Physical Space Appeal
Many stand-alone grocery stores are located near customers in highly accessible
locations. Grocery operators will, in most cases, be keen to maintain presence
in local catchment areas to protect market share. While some operators may
seek concessions from their landlords upon lease renewal, the majority continue
to sign long leases. New stores that offer an opportunity to increase market
share, may even see competitive bidding among operators.
Food stores will continue to fulfil an important role of the food distribution
process in terms of direct sales as well as click-and-collect services and
micro-fulfilment options tied to physical stores. Physical stores provide
convenience to consumers looking to make regular visits to buy fresh
produce, while in-store click-and-collect services offer consumers more
control over the shopping process. For many grocery operators, physical
space remains the most profitable model for food distribution. Although
click-and-collect does not eliminate the costs of picking grocery items,
it emerges as the most efficient digital integration tool in retail and its
effectiveness is directly tied to the quality of bricks-and-mortar locations and
layouts. In-store technology is recognised as an opportunity to enhance store
performance. Technology to automate the stock-picking process for home
delivery or click-and-collect is on the rise, but it remains costly at a time
when operators need to carefully weigh their return on investments.
Alternative uses have grown in recent years and stand-alone grocery sites
are more likely to be underwritten with high residual values. Some specialist
investors have developed affordable housing on existing grocery sites. Larger
developments, such as hypermarket stores, could be transformed into urban
logistics hubs, supported by higher rent levels that some logistics operators are
willing to pay for highly accessible sites in major urban areas. Smaller asset
management initiatives could entail repurposing space into click-and-collect
facilities to strengthen ties with local catchments and encourage impulse
spending.
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Investment Opportunity
The European grocery real estate investment market is gaining momentum
with solid growth in investment volumes and increased share of the broader
retail investment market. The continued growth in e-commerce, accelerated
by the COVID-19 pandemic, has added to the recalibration of grocery real
estate investment from long leases and low returns to resilient and defensible
investment products. This is further supported by the current low to negative
rates of return on long-term government bonds and the weak inflation outlook,
on the one hand, and sharp pricing of quality product on offices and logistics
assets on the other. In light of strong investor interest, the grocery investment
market is becoming more institutionalised, though local market knowledge
and asset management know-how is still required to ensure long-term success.
Increased appetite among grocery operators for pursuing sale and leaseback
transactions will provide investors with a window of opportunity to access
core product. In some European markets, grocery operators prefer leasing
space instead of ownership, whereby future merger and acquisition activity
could trigger a sale and leaseback process of a property portfolio of a newly
acquired grocery business. Additional quality stock is expected in the future
as several specialist value-add investors complete their ‘work out’ business
plans and prepare for exit.
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Examples of retail legislation
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https://verbund.edeka/verbund/presse/mediathek/edeka-verbund_unternehmensbericht-2019.pdf.
Edeka results
“Urban Population.” Oxford Economics, Oxford Economics, Jan. 2021,
https://www.oxfordeconomics.com/.
Urban population growth
Van Rompaey, Stefan. “Carrefour Launches Second New Concept in a Week | RetailDetail.”
RetailDetail, RetailDetail, 18 Dec. 2019,
https://www.retaildetail.eu/en/news/food/carrefour-launches-second-new-concept-week.
Carrefour city centre concept
Vidalon, Dominique. “Carrefour to Open Two Supeco Discount Stores in France | Reuters.” Reuters,
Reuters, 4 Sept. 2019, https://www.reuters.com/article/us-carrefour-store/carrefour-to-open-two-
supeco-discount-stores-in-france-idUSKCN1VP1HT.
Supeco store opening
Week, Retail. “The Global Consumer 2019 | Research Centre | Retail Week.” Retail Week, Retail Week,
6 Dec. 2018, https://www.retail-week.com/research/the-global-consumer-2019/7032356.article.
Consumer willingness to pay for sustainably sourced goods
Weinswig, Deborah. “European Grocery Discounters: Small Stores – Big Threats?” Fung Business
Intelligence Centre, Fung Business Intelligence Centre, Nov. 2015, https://www.fbicgroup.com/.
Discounter profile
“What Traditional Retailers Can Learn from the Discounters – Article – Netherlands – Kearney.”
Global Management Consulting Firm – Kearney, Kearney, https://www.nl.kearney.com/nl/consumer-
retail/article/?/a/what-traditional-retailers-can-learn-from-the-discounters. Accessed 31 Jan. 2021.
Business models supermarkets and discounters
Wood, Sarah. “Lidl Piloting Click and Collect in Poland Has Stores across Gloucestershire.” Glouces-
tershire Business News – Punchline Magazine, 27 May 2020, https://www.punchline-gloucester.com/
articles/aanews/lidl-piloting-click-and-collect-in-poland-has-stores-across-gloucestershire.
Click-and-collect trial Lidl Poland
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Neil LipscombDirector, Retail Investment, International Capital Markets, EMEA
+44 (0) 207 399 [email protected]
Tjard MartinusHead of Retail Research, EMEA
+31 (0) 20 540 [email protected]
Contacts
www.jll.euJones Lang LaSalle© 2021 Jones Lang LaSalle IP, Inc. All rights reserved. The information contained in this document is proprietary to Jones Lang LaSalle and shall be used solely for the purposes of evaluating this proposal. All such documentation and information remains the property of Jones Lang LaSalle and shall be kept confidential. Reproduction of any part of this document is authorized only to the extent necessary for its evaluation. It is not to be shown to any third party without the prior written authorization of Jones Lang LaSalle. All information contained herein is from sources deemed reliable; however, no representation or warranty is made as to the accuracy thereof.
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Henrike WaldburgUnion Investment Real Estate GmbH Head of Investment Management Retail
+49 (0) 40 34919 [email protected]
Olaf JanSSenHead of Real Estate Research
+49 (0) 40 34919 [email protected]
Publishing information:Published by: Jones Lang LaSalle and Union Investment Real Estate GmbH Responsible for the content: Tjard Martinus (Author)
Neil Lipscomb, Kate Edwards, Henrike Waldburg, Olaf Janßen, Felix Brandt, Henri Eisenkopf, Kseniya Merritt, Roman Müller, Laura Roll
Art direction and final artwork: Sophie Herken, Susann DonathProofreading: Allison Parkinson