Why grocery retail will remain a core product in the future.

“Handel ist Wandel - Trade is change” is a well-known saying. But at the moment this is more than just an empty phrase, as general market conditions change for the worse. And change faster and with more far-reaching consequences than ever before.

For many investors, this raises the question of which retailers in the future will still be able to attract customer traffic to a particular location, and which types of retail property will be able to guarantee stable cash flow. The answer is: The large-scale grocery trade will play a key role here, especially in Germany. Angelus Bernreuther explains why:

Reason 1: Online resistance

Online commerce has already put many industries under considerable pressure. What began with consumer electronics and books has gone on to fully impact former stationary key industries, especially the shopping centers and high-street mainstays of clothing and footwear. None of this leaves existing locations and retail properties unaffected.

Germany’s main shopping streets, particularly outside the very large cities, are all recording declines in pedestrian traffic. Former traffic magnets such as the department stores are as equally effected by this as shopping centers. However, a glance at the grocery trade shows a pattern of welcome stability, which can be expected to continue. Here, the share captured by online commerce is a mere 1%. While online growth is expected, it’s likely to be to a much smaller extent than with products that are logistically much harder to distribute. As a result, the grocery sector in Germany is understandably highly prized by investors.

In contrast to other, more centralized European countries such as Great Britain, the German polycentric structure helps a lot in this regard. Lots of small outlets ensure enough convenient local suppliers, while larger outlets proliferate in the bigger towns, with a wide range of further shopping in the big German conurbations. Nowhere else in Europe is the density of competition in the food trade as great as in Germany. In other words, nowhere else does the customer have as much geographical proximity to the food trade as in Germany. The level of customer choice is extremely high.

Reason 2: Customer traffic anchor for all trading situations

Food is purchased on regular basis and from sizeable household budgets. Germans spend more than half of their disposable income on local shopping, with people buying grocery and drugstore items several times a week. Large supermarkets such as Kaufland, that sell a large amount of fresh produce and carry an average range of 30,000 different product items, serve this market especially well. As operating businesses positioned between discounters and smaller supermarkets, these large-area food stores also serve a wider catchment area. The large supermarket thus also acts as a driving force for a range of affiliated businesses, whether as a standalone, in a retail park, in a shopping center or even for inner-city locations.

Sustainable customer traffic at the main anchor store serves to support other traders. In other words, the rents from such a retail property remain relatively secure. Moreover, for the importance of a local community as a retail location, this is a key factor in securing retail ‘centrality’. The well-established trade principle, that “turnover results from the traffic and rent results from the sales” should continue to hold validity well into the future.

Reason 3: Flexibility

Retail locations will still have to be adapted to meet local needs, under the motto ‘mixed-use’, with themes of urbanity and diverse usage becoming more prominent in the future. Converting assets, especially in the inner cities where they may have played a more prominent shopping role, along with the refurbishment of shopping centers, will demand more flexible solutions. These will provide even further opportunities for investors, with even the largest supermarket chains chasing ever more central locations. Kaufland has long been pursuing this avenue, favourgin space-saving construction through socalled elevated markets, with parking on the ground floor and a sales area above.

These open up opportunities for multiple usage at the location in question, such as integrating residential, offices, services, hotels or leisure facilities. Ultimately, it’s a function of the location. As a general rule, the bigger the city, the more possibilities are conceivable, especially in the more central locations. However, it is important that the different uses, such as delivery and housing, are carefully coordinated to avoid tension. So can both investors and the local community contribute to sustainably living and shopping together.

The convenient local shopping outlet will become an even more core asset than it is today, and grocery-store dominated assets will remain much in demand.

Other assets previously considered core, such as shopping centers, will increasingly need to be extensively revitalized. Much effort will be made to upgrade the gastronomic offerings and add leisure facilities to both increase the quality of visitors’ stay. But the largescale supermarkets will continue to guarantee both the stability and the visitor frequency to a city or town, whether as a stand-alone outlet, in a shopping centre or retail park, or downtown.

Dr Angelus Bernreuther

Head of Relationship Management, KAUFLAND