Grocery Store Trends Open Air Conference Miami, Florida March 2, 2017 Ted Frumkin Jeff Chamberlain Joe McKeska Chief Development Officer S VP Real Estate and Facilities President S prouts Farmers Market Publix S upermarkets Elkhorn Real Estate Partners Phoenix, Arizona Lakeland, Florida Oak Brook, Illinois
Grocery Store Trends 2017 ICSC OAC Miami Trends in Grocery Retailing – Major Themes Changes in the grocery retailing landscape Traditional grocery retail impacts and priorities Industry growth and investment trends Mergers and acquisitions trends Key takeaways for landlords and investors Q&A 2
Grocery Store Trends Changes in the Grocery Retailing Landscape 2017 ICSC OAC Miami Grocery shopping transformation being driven by the collision of changes in demographics, shopping behavior, and technology Changes include ethnic, cultural, socioeconomic, and generational Technology enabling and driving rapidly changing channel and format disintermediation Aggressive new competitor entry such as meal subscription services, boutique restaurants, and non- traditional retailers selling food Continued increase in the number of channels through which consumers purchase food Includes increase in digital and e- commerce options available to meet changing consumer expectations 3
Grocery Store Trends Changes in the Grocery Retailing Landscape 2017 ICSC OAC Miami Source: The race to reinvent grocery shopping by Bricks Source: Coca Cola Meets Clicks – January 2017 Retail Research Council Report January 2017 Source: Coca Cola Retail Research Council Report January 2017 4
Grocery Store Trends Traditional Grocery Retail Impacts and Priorities 2017 ICSC OAC Miami Physical stores will continue to drive vast majority of sales for foreseeable future According to recent Coca Cola Retail Research Council report, grocery shopping in the future will become much more omnichannel and omniformat, lifestyle driven, highly personalized, and digitally integrated E-commerce still only 2% of sales but growing rapidly with recent Nielsen and Food Marketing Institute (FMI) study projecting that e-commerce may capture 20% of the food-at-home market by 2025 Certain categories are more vulnerable and will erode more quickly with the Nielsen/FMI projecting 40% of center store grocery categories moving on-line New formats and channels will not only impact sales, but will also pressure profit margins given venture capital funding/loss leader approach and high brick and mortar fixed and variable operating costs 5
Grocery Store Trends Traditional Grocery Retail Impacts and Priorities 2017 ICSC OAC Miami Source: Experian Lifestyle Segmentation Source: Coca Cola Retail Research Council Report January 2017 Source: Walmart Corporate Web Site, Walmart Pickup – Grocery Facility in Bentonville, AK 6
Grocery Store Trends Industry Growth and Investment Trends 2017 ICSC OAC Miami Heavy focus on improving existing business models to increase competitiveness Numerous initiatives and investments in improving traditional points of differentiation such as quality/price equation, fresh departments, and overall shopping experience Resultant brick and mortar investment priorities include remodeling existing stores and replacing older stores to implement initiatives thereby improving productivity and profitability of retail square footage New store growth taking place but slowing and mostly limited to in-market opportunistic or new market growth in alignment with longer term strategies Capital savings being shifted to digital and e-commerce platforms to better compete given accelerating changes in shopping behavior and consumer expectations 7
Grocery Store Trends Industry Growth and Investment Trends 2017 ICSC OAC Miami Walmart Number of 2015 2016 2017 New Stores (US) = 230 130 55 Source: Photo by Neil Stern: Aldi Takes a (slight) Detour on Road to 2000 US Stores – Forbes 2/17 Source: Walmart 10/16 Investor Presentation Kroger New Store & Remodel Project Counts 2013 - 2016 Project Type 2013 2014 2015 2016 Totals New Stores 17 33 31 50 131 Relocations 7 12 12 20 51 Closures (28) (48) (37) (17) (130) New Stores (1) (4) (3) 6 53 52 (1) Excludes acquisitions % Increase from 2013 = 1.97% Project Type 2013 2014 2015 2016 Totals Major Remodels 158 156 183 150-170 Minor Remodels 190 221 246 - Total Remodels 348 377 429 ? Source: Kroger 11/16 Investor Conference Presentation 8
Grocery Store Trends Mergers and Acquisitions Trends 2017 ICSC OAC Miami According to a recent study completed by the Food Partners, the number of bankruptcies has remained fairly constant since 2010 The number of stores being acquired has increased during this time even accounting for the three largest transactions Grocery retailers and strategic private equity players are becoming more willing to invest/acquire both e-commerce companies and unique formats Notwithstanding Walmart (e.g. - Jet.com), this is still nascent as most retailers are focusing on either developing these capabilities internally or partnering with third parties to deliver the same All of this points to continuing industry consolidation as competitiveness and pressures on brick and mortar retailers increases at an accelerating pace Near term M&A activity will most likely be in the arena of local and regional chains and smaller independents given that the logical large consolidations have been completed over the last few years including ABS/Supervalu, ABS/Safeway, and Ahold/Delhaize 9
Grocery Store Trends Mergers and Acquisitions Trends 2017 ICSC OAC Miami Number of Supermarket Bankruptcies by Year Average Stores per Transaction 16 80 Source: The Food 71 Source: The Food 14 70 Partners NGA 14 Partners NGA Presentation 2/17 Presentation 2/17 60 12 50 10 43 40 8 7 30 6 30 6 26 5 18 4 20 12 4 3 3 16 14 10 4 13 2 1 1 1 0 0 2010 2011 2012 2013[1] 2014[1] 2015[1] 2016 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Avg. Stores per Trx. Avg. Stores per Trx. (Excl Large Trx)[1] [1] Albertson’s, Safeway and Delhaize acquisitions in 2013, 2014 and 2015, respectively Supermarket Bankruptcy Detail No. of State Stores Sold Company Date Filed Stores Filed Status Fairway Group Holdings Corp. 5/3/2016 15 NY Emerged 4,500 4,164 Fresh & Easy 10/30/2015 97 DE Liquidated Source: The Food 4,000 Haggen 9/9/2015 164 DE Sold Partners NGA The Great Atlantic & Pacific Tea Co. 7/19/2015 297 NY Liquidated 3,500 Presentation 2/17 Dahl's Foods 11/10/2014 10 IA Sold Associated Wholesalers 9/9/2014 n/a DE Sold 3,000 Farmers Foods (Highland Springs and Webb) 6/2/2014 2 VA Closed 2,500 3,400 C&K Market 11/19/2013 60 OR Emerged 2,006 1,889 Fresh & Easy Neighborhood Market 9/30/2013 167 DE Sold 2,000 Midwest Gourmet Foods (Fox & Obel) 9/19/2013 1 IL Unknown 1,500 877 Mi Pueblo San Jose 7/22/2013 21 CA Emerged 1,335 979 Belle Foods 7/1/2013 57 AL Sold 1,000 749 510 Pro's Ranch Markets 5/29/2013 11 CA Sold 500 1,012 979 Liborio Market 4/13/2012 8 CA Liquidated 130 764 671 Michael’s Fresh Market 12/30/2011 7 IL Unknown 0 Associated Grocers of Maine 8/26/2011 n/a ME Dismissed 2010 2011 2012 2013[1] 2014[1] 2015[1] 2016 Azteca Ranch Market 8/1/2011 n/a CO Liquidated Stores Sold Stores Sold Through Large Transactions[1] Moo & Oink 8/24/2011 4 IL Liquidated Andronico's Market 8/22/2011 7 CA Sold A.G. Ferrari Foods 3/30/2011 13 CA Sold Rizk-Co-Zann Foods Corporation 3/10/2011 1 PA Dismissed 10
Grocery Store Trends 2017 ICSC OAC Miami Key Takeaways for Landlords and Investors 11
Grocery Store Trends 2017 ICSC OAC Miami Q&A 12
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