The grocery real estate sector
Europe
Food is Europe’s largest retail sector by income and experienced higher growth between 2001 and 2020 than other traditional retail sectors, like fashion.
While the COVID-19 pandemic halted a great deal of economic activity in 2020, Europe’s grocery sector recorded estimated sales of €2 tn and grew by 3.2%, as it satisfied the essential needs of customers who could not go to restaurants or stay at hotels. Future sales growth is expected to stabilise at a lower rate, below 2%, once work and life habits begin to normalise.
Although there is still uncertainty around the long-term implications of the pandemic, The European Grocery Real Estate Market report, produced by JLL and Union Investment, tries to identify the longer-term trends that will affect this sector:
Despite the growth of online food sales during the pandemic, the rate is expected to fall after COVID-19. Low-profit margins will not sustain generalised online sales and retailers will continue to invest in their physical stores, improving the shopping experience and, in some cases, using the physical stores as distribution centres for online sales. Meanwhile, some online food spending may be permanent, driven by new customers.
Real estate investment in grocery stores has also proven to be one of the most resilient parts of the retail investment market. Average investment in supermarkets in Europe has been reasonably consistent over the past six years, at approximately €4.5 billion per year, but it grew by more from 40% to approximately €6.7 billion in 2020 compared to 2019, and in 2021 was 30% higher than 2019.
Investor interest in supermarkets and grocery-anchored real estate assets will continue to rise. Since well-located food stores remain an irreplaceable part of the food distribution process, they will continue to attract the interest of investors seeking longer and more-secure income streams. Investors looking for opportunities for alternative uses will also be interested.
Despite the pandemic, employment opportunities and social considerations will continue driving migration to cities, and Europe’s urban population is expected to rise 3.4% by 2035 (3.7% including the UK). Well-connected grocery stores in growing urban centres can attract new customers and offset the periods of weak economic growth. Increasingly, developers are also seeking to transform some larger standalone facilities into urban logistics hubs.
The global growth in income from the grocery industry is strongly linked to customers’ purchasing power and the change in customer preferences, which will require continuous evaluation of current store portfolios. The changes to shopping preferences, driven by demographics, changing work patterns, technology and sustainability, will be key factors in the productivity of the various grocery store formats. The capacity to adapt to these changing preferences will be key to the food sector.
Spain
The reduction in the number of people eating outside the home since the COVID-19 outbreak is one of the factors giving an extra short-term boost to consumption in the grocery sector. Social distancing measures, teleworking and the reluctance of some consumers to leave the home has had a major negative impact on the eating out industry, while favouring retail spending in grocery stores. Some of this short-term momentum may prove permanent, as many employees will continue to work from home (either completely or in a hybrid form) even after the health situation normalises, displacing spending at restaurants and takeaways.
Within the retail sector, supermarkets are the asset type that has shown greatest resilience to the effects of the pandemic, swiftly adapting to new food purchasing and consumption habits. Longer opening hours, higher numbers of local stores, premium products at affordable prices and the incorporation of features that ease the shopping experience (wide corridors, high ceilings, efficient, bright spaces, large parking areas, etc.) are some of the reasons behind the good performance of this asset class.
Both national and international grocery groups and brands continue to expand
In European countries like France, Germany and the United Kingdom, the leading supermarket chains are national operators with wide store networks across their countries. Local competition authorities closely monitor mergers and acquisitions to ensure healthy competition in the market. None of the main supermarkets, 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%.
In Spain, according to Alimarket data, 65% of sales are controlled by ten groups, among which figure not only the large distribution chains like Mercadona, Dia, Carrefour, Eroski, Lidl, El Corte Ingl.s and Alcampo, but also some regional groups like Consum and Covir.n.
The intense competition and the emerging variability of sales channels in the grocery sector keep margins tight, which encourages operators to employ a range of strategies to improve profitability, including physical space optimisation, densification with accretive nonfood uses, expanding their store portfolios and mergers and acquisitions.
Upturn in corporate operations and new players in the grocery market
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