I’ve often thought that if you really want to understand where grocery retail is headed, don’t start with the earnings reports – don’t bother with the press releases. And certainly don’t put too much stock in polished investor presentations. CEOs can be astonishingly optimistic when they speak to Wall Street. Every annual report talks about opportunity. Every earnings call talks about “opportunity” and “confidence about the future.”
Well, optimism is cheap, but concrete isn’t.
Today, building a modern 60,000-square-foot supermarket can easily cost more than $30 million. By the time you’ve purchased the land, poured the foundation, erected the steel, installed refrigeration systems, laid the parking lot and stocked the shelves, you’ve made one of the largest financial commitments any food retailer can undertake – a fraught decision in a region as over-stored and competitive as this market.
In that sense, a supermarket isn’t simply another store, it’s a kind of declaration.
It’s management saying, “We believe this community will continue to grow and shoppers will support another location. We’re betting labor will remain available. We believe financing makes sense, and we plan to be relevant 20 years from now.”
That’s conviction… poured in concrete.
That’s why it pays to pay close attention to who’s still building and who isn’t.
Fifteen years ago, opening new stores was almost expected among successful supermarket operators. Giant Food, Safeway, Harris Teeter, Food Lion and The Giant Co. routinely announced multiple projects every year. Growth was measured in ribbon cuttings, and expanding into promising neighborhoods was simply part of doing business.
Today, the Math Has Changed (to Say the Least)
Construction costs have climbed sharply. Financing was a no-brainer when interest rates were near zero, but it’s more expensive now – if you can find suitable real estate. Prime locations in the mid-atlantic are hard to find. Most have been taken in established markets.
Labor shortages remain a challenge. And then there are the investments: retailers are plowing resources into technology, e-commerce, automation, remodels, and even supply chain improvements. Every dollar committed to one initiative is a dollar that can’t be spent somewhere else.
That makes every new supermarket one of the clearest possible expressions of management’s confidence – in the industry and the region.
Look around the Mid-Atlantic, and an interesting pattern begins to emerge. Aldi continues opening stores. Lidl remains committed to expansion. Publix is still entering new markets. Sprouts continues growing. Two of our regional stalwarts Weis Markets and Giant Food have also added locations in the past two years. Even Whole Foods is experimenting with new formats while adding locations.
Many conventional supermarket operators, meanwhile, have chosen a different path. Rather than placing large bets on new construction, they’re directing capital toward remodeling existing stores, improving operations, and protecting established, existing market share.
And I don’t think there’s anything inherently wrong with that strategy. In a lot of cases, it’s probably the most financially prudent course to take.
But, that said, it’s a different statement.
One group is investing primarily in tomorrow; the other, primarily, is investing in today.
Follow the Money
More than anything you’ll get on an earnings call, capital allocation often reveals what executives truly believe about the future. Companies can describe ambitious long-term visions in presentations, promise innovation, transformation, and growth.
Capital tells a more honest story.
When a retailer commits more than $30 million to a new supermarket, it’s making a prediction about the next two decades – not merely the next quarter. Management is “ponying up,” and wagering that demographic trends, consumer behavior, competitive conditions, and its own operating model will produce acceptable returns for years to come.
Clearly those are enormous assumptions.
Perhaps that’s why new store announcements have become more meaningful than ever.
Each groundbreaking is more than another pin on a map. It’s a visible expression of confidence in an increasingly uncertain business environment.
So while this year’s market study once again documents which retailers gained share and which lost ground, I find myself paying just as much attention to the construction cranes.
They may be the most honest forecast our industry has.