Grocery Anchored

Written by Tyler Kastelberg

March 20, 2022

Happy Sunday!

I caught up with John Grellner this past week. John is a freelancer on Bullpen and a grocery-anchored retail expert. We had a fascinating conversation about the intricacies of grocery-anchored retail, and I thought I’d share some of the insights in this week’s newsletter. You can read the full grocery-anchored retail article here.

… but first, forward this to a couple of friends who might find this topic interesting, and tell them to subscribe here. I send one weekly email — no spam. 

Does a Whole Foods command a higher valuation than a Kroger?

Grocery valuations will be largely driven by the local brand following of the store. While Publix has a big following in most of the southeast, HEB has a cult-like following in Texas. A Kroger in Florida isn’t as attractive as a Kroger in Ohio, where their headquarters is located. 

You also want to consider the local demographics of the area when determining the value of a grocery store. A Food Lion in an area with a high median income will not perform as well as a Whole Foods or Trader Joe’s. 

Grocery lease red flags

Grocery leases are typically for a 20-year term, plus a number of options for the grocer to extend the lease. After the first 10 years of the lease, the landlord is incentivized to renegotiate a new lease with the grocery store – it reduces the risk of their portfolio and gives them an option to sell the property.

A short lease term on the anchor tenant is an enormous risk to a buyer, and most won’t take the risk without a considerable reduction in the valuation. As such, most owners will renegotiate the grocery lease before listing the property.

THE most important grocery lease metric

When considering the health of a grocery tenant, the most important metric is their occupancy cost.

Occupancy cost is calculated by dividing the store’s all-in rent payment (including CAM) by the store’s sales. A healthy store will have an occupancy cost that is 1% to 3% of its sales. 

When occupancy cost is below 1%, you probably have upside on the lease price. When occupancy cost is above 3%, you might be concerned that the store’s lease won’t be renewed.

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