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THE SUPERMARKET STRIKE

Grocers' Losses Spill Over

Merchants that share shopping centers with picketed markets are suffering drops in sales. The downturn also is hurting landlords' bottom lines.

November 13, 2003|Roger Vincent | Times Staff Writer

These are dog days for a Pasadena pet groomer and a lot of other small-business owners who keep shop in the shadow of a supermarket.

Sales have fallen as much as 20% at Bathe R Doggie since workers at the nearby Vons walked off the job and set up pickets last month, said owner Mike Wiges.

"Customers tell me they have been intimidated about coming in," Wiges said. "A lot of our older customers in particular are afraid of any conflict" with strikers patrolling the Orangewood shopping center on California Boulevard.

Such a downturn has been typical for merchants who share parking lots with strike-affected grocers in Southern California's ubiquitous neighborhood shopping centers, according to landlords and retail industry analysts. Many stores adjacent to the supermarkets have suffered sales losses of 30% to 50%, said Burt P. Flickinger III, a consultant for retailers and shopping center owners in California and throughout the country.

Analysts say nearly all of the 859 Vons, Ralphs and Albertsons markets affected by the strike are in shopping centers or have neighboring businesses that benefit from supermarket traffic. But "the shopping centers at lunchtime look like you would expect to see them at midnight," said Flickinger, managing director of New York-based Strategic Resource Group.

The loss of sales by tenants, be they grocery stores or dry cleaners, also hurts landlords.

The real estate industry has made a practice of creating venues where customers could service most of their routine daily needs in one stop. Just a few years ago, "market and drug centers were perceived to be invulnerable" by investors, said James Rosenfield, national director of retail services for Cushman & Wakefield, a New York-based real estate services firm.

Some grocery chains own their buildings, but many of them -- and nearly all of the other merchants in the centers -- pay rent to the centers' owners. Contracts vary, but it is common practice for renters to pay landlords a premium of 1% to 8% of their gross sales in addition to their rent, or to give landlords a percentage of sales after an agreed threshold has been reached.

As such, supermarkets, drugstores and other large merchants that act as customer magnets are crucial to landlords' bottom lines.

"Our tenants' primary source of advertising is being next to a supermarket," said Thomas Wilson, director of property management for Duckett-Wilson, a West Los Angeles real estate company that owns about 70 shopping centers, including Orangewood in Pasadena.

"We designed the shopping center for cross-shopping," he said, noting that his tenants "have cultivated customers of the supermarket to be their customers." But with the California supermarket industry undergoing fundamental change, that has undermined investors' assumptions.

"As the discount, drug and club retailers vacuum volume out of supermarket-anchored shopping centers, the customer count contracts," Flickinger said. "As sales slip significantly, the value of many -- particularly shopping centers in outlying areas -- starts to drop."

Competition from giant discounters such as Costco Wholesale Corp., Wal-Mart Stores Inc. and Sams Club has contributed to supermarket chain bankruptcies or liquidations in the Midwest and South, Flickinger said, and their moves into Southern California will create financial uncertainty for regional supermarket chains and their landlords for the foreseeable future.

Leading supermarket chains may lose about 20% of their sales volume over the next four years as the discounters move in, Flickinger predicted. That would be in addition to sales attrition from growing competitors such as drugstores, "dollar" stores and discount supermarkets that offer minimum service.

For now, landlords also may be affected by the reluctance of new tenants to open shop during the strike because performance during the first few months in operation may be crucial to a small merchant.

"I can't quantify it, but I imagine some people negotiating with us are probably stalling or giving it additional thought before they sign," Wilson said. At the same time, merchants in shopping centers anchored by competitors of the strike-affected supermarkets are benefiting from a run-up in business that may match the losses being suffered at centers that are being picketed.

"We are hearing that sales at some of the shops in our centers are down, but at the same time sales at specialty markets and drugstores are up," said Jennifer Hieger, a spokeswoman for Irvine Co. , the giant developer in Orange County that owns about 20 centers anchored by a supermarket or other large retailer. Stores in the orbit of tenants such as Trader Joe's, Gelsons, Bristol Farms, Smart & Final and Wholesome Choice have benefited, she said.

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