Because of changing consumer habits, mounting competitive pressures and forecasts of a further ecommerce “explosion,” the grocery industry is expected to face tremendous transformation over the next 10 years, reports CBRE, the global industrial real estate services firm.
It says the industry is heading into a near-term future that features a fully-automated checkout process, greater emphasis on prepared meals, proliferation of smaller, convenience-store style grocery outlets, and collaboration between the grocers and nontraditional partners, like gyms and restaurants.
CBRE notes that grocery-anchored shopping centers are favored by real estate investors due to the industry’s steady if slow sales growth and minimal ecommerce penetration, relative to other categories.
Still, grocers in the United States face significant pressure to adapt to changing consumer preferences, new store formats, automation and delivery demand, say the CBRE researchers.
“The store will remain central to the grocery industry, but its format and function will be reshaped by multiple factors over the coming years,” says Melina Cordero, CBRE’s Global Head of Retail Research.
“Grocery operators must diversify their offering to best compete, which will lead to varied store formats for different markets, nontraditional merchandise assortments and an even greater focus on customer convenience.”
Although companies in this sector are experiencing significant costs arising from investments in ecommerce capabilities, growth in this area is expected to be modest.
Ecommerce currently accounts for about 2-3% of the total grocery market (between $17 billion and $26 billion). This contrasts with 9.9% for the overall retail market.
However, the market share of online grocery services is seen increasing by 5% to 10% by 2022 and will fundamentally alter, but not replace, the bricks-and-mortar store, CBRE asserts.
“The store will remain critical to grocery revenue and profit, but expect significant changes in layout, design and product and service offerings as grocers adopt more and more omnichannel strategies,” the researchers predict.
Ecommerce and other changes in product and services driven by improvements in technology are reshaping how the physical store space is used. In large format stores, space is being reallocated to accommodate click-and-collect counters and curbside pickup. More traditional and specialty stores will shift space toward distribution uses.
CBRE says high logistics costs are a major limiting factor to grocery ecommerce growth, with last-mile delivery costs representing the biggest single stumbling block for growing that business.
In fact, another recent study shows that grocery operations are losing money on deliveries. The average delivery costs the consumer $8.08, while it costs the grocer $10.01.
Last-mile delivery costs represent a whopping 41% of grocers’ total ecommerce delivery costs, followed in ranking by sorting costs at 20%, parceling at 16%, and warehousing at 13%.
“Rising consumer expectations for speedier delivery at lower cost are further putting pressure on grocers’ profit margins,” CBRE says. “As consumers grow accustomed to ever-shortening delivery time and low- or no-cost shipping in other retail categories, these expectations will carry over to grocery shopping.”
Some grocers have been experimenting with third- party logistics providers, like Kroger has done with Ocado, while others choose to build their in-house capabilities, like Ahold did when it acquired Peapod. Others opt for a blending of the two.
“Expect further experimentation and partnerships in the grocery logistics space, especially as new third- party technology platforms and logistics solutions like Takeoff enter the market,” CBRE predicts.
Takeoff is building a nationwide network of local in-house grocery micro-fulfillment centers powered by robots and artificial intelligence. The company’s approach is to build mini-robotic fulfillment centers inside of grocery stores.
Each facility typically takes up about 6,000-10,000 square feet, which represents about one-eight or less of the space contained in a typical supermarket.
In addition, grocers are seeking to solve the last- mile dilemma by developing curbside pickup programs. These have proven popular among many consumers, but which also require changes in store footprints and operations.
Last-mile costs also mean ecommerce home delivery sales will grow faster in high-density urban areas than in lower-density suburban ones, where the click-and-collect model can be expected to see more growth, CBRE points out.
Architects Foresee More IRE Growth
Spending on nonresidential building is expected to increase almost 4% this year and an additional 2.4% next year, according to projections released by the American Institute of Architects.
The results were revealed by the AIA Consensus Construction Forecast Panel in its midyear update.
“Industrial construction is seeing a very healthy rebound, while institutional construction remains on a late-cycle growth path,” notes AIA Chief Economist Kermit Baker.
“While some individual construction sectors are projected to see declines over the next 18 months, the consensus is that overall building construction activity will continue to expand.”
The consensus outlook that nonresidential construction activity will continue to expand reflects a belief in the underlying strength of the economy, including a strong jobs market with low unemployment and rising wages, particularly in the lower income ranges AIA also points to such positive factors as restrained rates of inflation and resulting low interest rates experienced throughout the economy and a resilient stock market.
There is a growing list of concerns that would point to slower economic growth in the coming quarters, Baker warns. He also cites a recent economic outlook survey by National Association of Business Economics which puts the odds of a national economic recession starting by the end of 2019 at only 15%.
However, the NAB survey has the odds of a recession starting by mid-year 2020 rising to over a third, growing to 60% by the end of next year.
Another complicating factor is the set of tariffs on imports to the United States, thought to benefit U.S. producers. Deutsche Bank Global Research estimates that fully 30% of imports are part of the global supply chain of U.S. manufacturers, meaning the tariffs on imports can be detrimental to American companies, Baker points out.