Once upon a time, grocery, quick service restaurants (QSR) and beauty retailers were considered on the edge of being obsolete. Many things were available online, including lipstick, eyeshadow and perfume. Furthermore, delivery services became available to bring cooked and uncooked food to folks at home.
Then, a funny thing happened after the COVID-19 shutdowns. Consumers wanted a dollop of experience with their retail experience. Bricks-and-mortar became popular once again.
“We are seeing an increased focus on experiential retail that offers personalized services,” according to Richard Rizika, partner and co-founder of Beta Agency. “Retailers are placing more emphasis on stores to create experiences that are more challenging to provide online.”
However, Rizika and other retail experts tell Connect CRE that while demand has been robust, supply not so much.
Does Size Matter?
One question that comes to mind is what the grocery, beauty and QSR tenants are looking for in their space. According to Stephanie Skrbin, it depends.
“A coffee tenant like Dutch Brothers does more of a kiosk location and only needs about 1,000 to 1,500 square feet,” said Skirbin, who is a retail broker with Axiom Retail Advisors. Meanwhile, the QSRs look for additional space, which can be anywhere from 2,000 square feet to 3,200 square feet.
Datex Property Solutions CEO Mark Sigal added that fast-food restaurants also like drive-throughs, “but in many markets, this is a scarce option and subject to zoning and usage restrictions.”
Meanwhile, some beauty product retailers—think Ulta Beauty—prefer larger formats up to 12,500 square feet, while others—think Sally Beauty—prefer smaller footprints of 3,000 square feet or less, Sigal said.
Then there are the grocers. Sigal pointed out that grocery chains cover a range of square feet, with Trader Joe’s seeking an average of 12,500 square feet, Sprouts and Whole Foods looking for 25,000 to 30,000 square feet and traditional markets interested in 75,000 square feet.
Chris Premac added that discount grocers are targeting former large retail pharmacy spaces, like former Rite-Aid locations. “They can take advantage of the size and prime corner locations,” observed Premac, who is Coreland Companies’ Vice President.
Additionally, the downsizing and departure of big-box retailers have provided interesting opportunities for grocers. “While supermarkets still prefer to build their prototypical footprints, with all the recent vacancies from big-box stores, there have been a lot of opportunities for grocers to take over these larger spaces,” said Sean Unsell, RDC Associate Principal. “It’s quicker and more sustainable to renovate an existing building than to build from the ground up.”
However, retail isn’t just about size. Keisha Virtue, JLL Retail Research Manager, explained that fast-food retailers focus on stand-alone locales with the above-mentioned drive-through lanes. Meanwhile, grocers look for space in centers that are close to high-density neighborhoods. “Beauty retailers perhaps have the most flexibility,” Virtue observed. “They typically take space in malls, community and neighborhood centers.”
In some cases, beauty retailers might end up with shop-in-shop arrangement with another retailer. Ulta Beauty taking space in a Target store and Sephora’s setting up shop in a Kohl’s department store are a couple of examples.
Can They Find The Space?
There’s a large gap between what grocery, beauty and fast-food retailers want in a space and their ability to get it. Similar to the entire retail sector, quality square footage has been difficult to find.
“There is a scarcity of available space, a scarcity of new development,” Sigal observed. “Furthermore, only a subset of the available spaces will fit the footprint and market needs of a given retailer in these categories.”
But what about the bankruptcies taking place in retail? Virtue acknowledged that store closures could bring more than 150 million square feet of retail space to the market. However, “there will not be anywhere near perfect alignment of vacated space and demand,” she said.
For example, on the “eating out” side of retail, casual dining brands have gone out of business in recent years. Unfortunately, “these building sizes are often not convertible for a fast-food brand,” according to Mike Philbin, Northmarq senior vice president and co-founder of National Restaurant Group.
On the other hand, if the QSR developer has enough capital to work with, a larger casual dining restaurant could be demolished, replaced by a fast-food restaurant. “The advantage of the larger lot size is the ability for a larger drive-through stack or even multiple drive-through lanes,” Philbin said.
The Takeaway
The experts agreed that retail demand and supply depend on consumer demand. This isn’t really news, but it does add complexity to the retail decision-making process when dealing with size and location. “It’s not a one-size-fits-all scenario,” Unsell commented. “Brands need to know their customer base, and they need to stay competitive in the market they’re in.”
Hence, it’s important to keep an eye on consumer behavior. “In times of great uncertainty, consumers tend to stick to necessities and value-oriented retailers,” Virtue commented. “Hence the demand for less expensive restaurants and the emphasis on grocery.” Meanwhile, the demand for beauty has outgrown in other areas, including social media influencers.
In short, “the fast-food, grocery and beauty sectors have demonstrated resilience and adaptability in response to the pandemic’s challenges,” Rizika said. “By evolving with consumer preferences and strategically remerchandising stores, these retail sectors continue to grow.”