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Amazon's grocery play likely to capitalize on retail sites distressed by virus

SNL ImageAmazon's new grocery concept will take cues from its convenience store Amazon Go, experts say.
Source: AP Photo

Amazon.com Inc. will have its pick of the nation's distressed retail real estate as it pushes deep into the brick-and-mortar market with a new grocery concept , experts said.

The Seattle-based e-commerce company will have supreme negotiating and pricing power even more than traditional grocers, given its brand and the havoc the coronavirus outbreak has wreaked on the commercial real estate market, particularly retail.

"If you're a landlord and you're looking at one or two of your anchor tenants falling over, and Amazon walks up and says, 'Hey, would you like us to build this new concept grocery store at the end of your mall? Then the answer is, 'Yeah,'" said James McCann, CEO of McCann Investments, which invests in early-stage grocery tech companies. "They are going to be getting very good deals as a result of the current real estate market."

Amazon has been quietly planning new locations for its grocery store format over the past year, but experts say the company recently expedited efforts to snap up real estate vacated by retailers ailing from the coronavirus crisis. The company declined to comment on its real estate strategy, and nondisclosure agreements with landlords make it difficult to track the scale of Amazon's plans. But McCann and other experts said the e-commerce giant will need hundreds of sites to compete against major grocery players like Walmart Inc., The Kroger Co. and Target Corp.

"Grocery is a scale business, and you have to have scale to play it," McCann said in an interview.

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The major retail real estate investment trusts that own strip centers and the bulk of enclosed malls will be scurrying to fill space vacated by bankrupt and downsizing retailer tenants in the months ahead. The pandemic and attendant economic shutdown have created ideal conditions for Amazon to execute its plan, according to Orin Rosenfeld, president of Boca Raton, Fla.-based Rosenfeld Realty Advisors.

"They're hitting this at the perfect time," Rosenfeld said in an interview. "Every landlord will be groveling for anybody to take the space."

Retail-ready sites

Citing conversations with an anonymous retail REIT board member, Bill Bishop of Brick Meets Click, a longtime adviser to the retail food industry, said Amazon has agreements-in-principle for "dozens and dozens" of leases with the unnamed REIT. Across the country, the company will capitalize on existing, distressed sites rather than embarking on its own ground-up development, he said.

"They're used to being asset-light," Bishop said of Amazon. "And given the relatively challenged circumstances of a lot of the asset owners today, I think they'd get where they need to be economically" without owning and operating the real estate itself.

SNL Image

A customer shops at Whole Foods. Amazon is hunting for real estate for its new grocery chain at an opportune time, analysts say.
Source: Whole Foods Market

Sites of interest will include end-of-mall units and big boxes vacated by the likes of Kmart or Best Buy Co. Inc., in addition to typical grocer space in a grocery-anchored shopping center. According to the real estate tracking firm Planned Grocery, Amazon so far has identified nine U.S. locations, including four in California and one in Naperville, Ill. The stores will be located in real estate formerly occupied by tenants including Ralphs, which is owned by Kroger, and Dominick's Supermarkets Inc.

In recent weeks, Amazon secured leases for two Fairway Market stores in New Jersey through a bankruptcy auction, according to media reports. Those deals come on top of planned stores inside a former Toys "R" Us location in the Woodland Hills neighborhood of Los Angeles and a former Babies "R" Us site in Irvine, Calif., that is expected to open in 2020.

Leveraging big data

Big data will light Amazon's way. Analysts said the company will leverage its massive database on consumer behavior to select sites, and the result will likely be a real estate clustering in suburban areas around major cities. Amazon wants to transition and become the main provider of essential household items, according to Bishop.

"Household essentials are what blew out and really crippled a lot of fast-moving consumer retailers in the first week or two of the pandemic," Bishop said. "What I see them doing is using Prime members' demand patterns to define the new category household essentials. Some of it is consumables, some of it is not consumable, like toilet paper. And then really strengthening their supply chains."

The new Amazon store may cater more to a value-oriented demographic, offering a range of items different from what affluent Whole Foods Market Inc. shoppers are used to, said Jon Springer, executive editor of Winsight Grocery Business, a trade publication. Amazon bought Whole Foods in 2017, but experts say the company realized it needed to go mainstream to attract the masses.

"They will probably have an assortment that is somewhat unique and probably geared a little bit more toward Amazon's own brands," Springer said in an interview. "The idea with discounters today is not necessarily that it's a store for poor people, but it's a store for smart people who want to save money. If they are wealthier and want to save money, all the better."

Amazon's new grocery concept, in any case, is not expected to look much like the typical self-service Kroger or Safeway grocery store. Amazon may have a handful of large-format locations, but heavy automation will allow for a smaller footprint — an average of around 35,000 square feet, experts said. There will also likely be "click-and-collect" micro-fulfillment centers and last-mile delivery services. The future of the grocery business is in high-tech, small boxes without cashiers, said Rob Wilson, a managing director and partner in L.E.K. Consulting's Chicago office who focuses on food and beverage.

"In general, it's going to bring grocery up a level," Wilson said of Amazon's new grocery concept. "If I had to read between the lines, Amazon is going where the consumer is. They're doing last-mile delivery to the house, but they also want to, at least in a small way, start playing in the physical store, click-and-collect format."