Retail real estate is a study of opposites. At one end, there is a lack of space and very low vacancies. At the other end, there are bankruptcy cases and more bankruptcy cases.
However, retail encompasses many uses, products, services and space requirements. Metrics differ depending on the sector.
For example, according to Mark Sigal, Datex Property Solutions CEO, the strongest merchant categories in retail based on sales growth since the pandemic are:
Sigal and other retail experts shared their insights with Connect CRE, explaining the situation behind these three retail areas.
COVID, Grocers and Fast Food
But first, a little history.
In the years before 2020, e-commerce was starting to come into its own. Then the pandemic struck. While the subsequent lockdown imposed hardship on much of the retail sector, quick-service restaurants (QSRs) and grocery stores performed well.
“During the onset of the pandemic, grocery stores were deemed essential businesses, and we experienced panic buying products like meat and toilet paper,” said Sean Unsell, associate principal with RDC. People in quarantine were also more interested in buying food at the “deemed essential” grocery stores to cook at home.
At the same time, fast-food restaurants operated their drive-throughs as normal. “People wanted to get out of the house but were cautious about exposing themselves to COVID,” said Stephanie Skrbin, a retail broker with Axiom Retail Advisors.
Still, QSRs and grocers had to adapt to the changing situation. “Chipotle, Panera Bread, Starbucks and others all pivoted and primarily focused on drive-through locations,” Skribin commented. Added Coreland Companies’ Vice President Chris Premac: “Both grocers and QSRs had to adapt quickly and developed new delivery models and mobile pickups.”
According to Sigal, COVID ended up being a resurgence in grocery stores. “Many forget that when Amazon announced their plans to acquire Whole Foods in 2017, the market caps of the major grocery chains cratered overnight,” Sigal said. “The category was written off by many as the latest retail segment to get Amazon’d.”
However, JLL Retail Research Manager Keisha Virtue painted a somewhat different picture. In 2019, grocery chains experienced robust year-over-year sales growth. During 2020, pandemic quarantines put pressure on QSR growth. However, “as consumers prepared more food at home, grocery sales jumped 9.4% above 2019,” Virtue explained.
She added that fast food and beauty sales increased by 18.8% and 22.0% respectively in 2021.
And, Speaking of Beauty . . .
The beauty sector—cosmetics, spas, hair salons—faced numerous challenges during the pandemic. Beauty stores weren’t considered “essential businesses” at the time. In addition, “there was reduced demand for cosmetics due to remote work and social distancing,” explained Richard Rizika, partner and co-founder of Beta Agency.
Meanwhile, salons and spas were ordered to shut down to stop the coronavirus spread. “Some businesses risked fines for staying open and taking care of customers in the short term,” Unsell said. As a result, consumers took self-care into their own hands. “They ordered products online and learned techniques from online tutorials,” he said.
Today’s Situation
JLL’s Virtue explained that demand for the three categories remains healthy, even as yearly sales gains are shifting the further away we move from the pandemic. Both grocery corporations and QSR companies have announced massive expansions, while health and beauty operators plan to open more than 300 new stores.
“During the fourth quarter of 2024, demand in these sectors reflects a blend of pre-pandemic consumer demand and a shift in consumer preferences and economic concerns,” Rizika noted. Along those lines, demand for affordability combined with busier lifestyles are driving consumers to retailers that can offer value and convenience.
Northmarq Senior Vice President and Co-Founder of the National Restaurant Group Mike Philbin pointed out that the intrinsic value of QSR keeps demand high. “They’re able to survive on smaller lots with adaptable footprints,” he said. “If a tenant does vacate, hundreds of replacement tenants are available because of advantageous locations with drive-through access.”
Furthermore, the casual dining appetite has cooled as chains struggle with labor costs, paper and food. “The cost to build has made it all but impossible to develop new restaurants, rather than growing through acquisitions of vacant restaurants,” Philbin observed.
While grocery chains are performing well (despite inflation and supply chain shortages), they’re also facing a fragmented demographic, with discount options (Aldi) and unique offerings (Trader Joe’s). “In some cases, people want high-quality products that offer healthy alternatives to fast food,” RDC’s Unsell observed. “Single-ingredient whole foods have also gained popularity on social media as more people cook at home.”
Meanwhile, hair salons and spas are operating. Furthermore, beauty products benefit from social media influencers and a general desire for self-care and well-being. “There’s been a resurgence in demand, as consumers return to social activities and seek self-care merchandise,” said Rizika with the Beta Agency.
Unlike grocery stores and QSRs, beauty retailers tend to face higher competition from e-commerce merchants. Datex’s Sigal explained that such supplies need to “thread the needle” between commodities that can be purchased online versus lifestyle delivery. Still, “the outcome of looking one’s best and feeling beautiful is worth that something that only brick and mortar can provide,” he said.