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Business Observer Friday, Feb. 28, 2020 4 months ago

Bankruptcies teach valuable lesson: Publix is king

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A pair of new, upstart entries to the Florida grocery market entered the state in a flurry. They left fast, too.
by: Mark Gordon Managing Editor

Don’t mess with Publix.

That’s the biggest of several takeaways in the early 2020 shakeout in the grocery sector, with two chains — Lucky’s Market and Earth Fare — declaring bankruptcy within nine days of each other. Niwot, Colo.-based Lucky’s had six locations in the region, dotting the coast from Tampa to Naples, while Asheville, N.C.-based Earth Fare had four stores. That’s about 300,000 to 350,000 square feet of mostly prime, anchor-based commercial retail real estate, with stores, in total, that had some 1,000 employees.

“Florida is a graveyard for grocery stores that come in here and try to compete with Publix,” Sembler Co. CEO Greg Sembler says. St. Pete-based Sembler has built more than 50 Publix shopping centers, going back some 40 years. “Kroger looked at Lucky’s as a way to dip its toe into Florida, … but I’ve seen this before.”

File. St. Pete-based Sembler, run by Greg Sembler, has built more than 50 Publix shopping centers.

Both chains spent early February in fast-paced liquidation mode, with larger discounts being announced on social media every few days. Lucky’s, which blitzed Florida with more than a dozen stores starting in 2016 through an investment from grocery chain Kroger, listed about $600 million in liabilities on its Chapter 11 bankruptcy filing. The company, in the filing, adds that it had about $22 million of store operating losses and a $100 million net loss through Jan. 4. It projected that the 32 (of 39) stores it’s closing nationwide were on target to lose $30 million this year. Kroger, in a separate public filing, says it will take a $238 million hit on its Lucky’s investment.

Earth Fare, meanwhile, listed assets and liabilities of $100 million to $500 million in its Chapter 11 filing. New York-based private equity firm Oak Hill Capital Partners acquired an 80% stake of Earth Fare in 2012, valued at $300 million.

Focusing on natural, organic, wellness and gluten-free products, sometimes with hipster, better-for-you marketing campaigns, the chains entered the west coast of Florida in 2017 and 2018 with rapid expansion plans. (“Organic for the 99%” was one Lucky’s slogan, while Earth Fare boasted, “Live longer with Earth Fare.)

But multiple industry analysts and area developers say the missteps and mistakes, in hindsight, were exacerbated by classic market forces: Low-margins, high costs of customer acquisition and retention, logistics and distribution hurdles and heavy competition all played a part.

That, and Publix.

Big obstacle 

“It’s really difficult to compete with Publix,” says Jeff Green, a partner with national real estate advisory firm Hoffman Strategy Group, who adds that in scale, the only grocer in Florida that can come close to Publix is Walmart. “Publix can get higher-end customers and lower end customers, where Walmart really only gets middle and lower end.”

Lakeland-based Publix, Sembler points out, has 806 stores, or one per 26,000 people. It also has top-of-mind brand recognition, being Florida’s grocer since 1930. And it has seven distribution centers and three food manufacturing facilities in the state, which gives it a logistics edge.

Jeff Garrison, a partner with Fairburn, Ga.-based S.J. Collins, which has built several Whole Foods-anchored centers in the region, says, like Sembler, tight industry profits squeeze out everyone but the best players. “The compression of margins in the grocery store industry,” Garrison says, “has left little room to breathe for some chains.”

One notable error at Lucky’s, Green says, is another classic business slip-up: growing too fast. Backed by the Kroger investment, Lucky’s opened 20 stores in Florida in less than two years, with initial plans to hit around 50 stores by 2020. “But they came into Florida without any name recognition,” Green says. “They couldn’t get their footing.”

Earth Fare, meanwhile, might also have been doomed by both timing, in that its issues came on the heels of Kroger jettisoning Lucky’s, and with an ownership structure — private equity — that traditionally doesn’t exude patience. “If a grocery chain like Kroger can’t make it work,” Garrison says, “the venture capital people might be thinking, how can they do grocery well?”  

Another issue more specific to Earth Fare and Lucky’s was having a consistent business model — or lack thereof. Both chains, Garrison says, couldn’t decide what market to pursue: high-end or low-end. In turn, price points and marketing messages were jumbled. “And when you don’t know who you want to be, that presents a really big problem in business,” he says.

File. Earth Fare recently announced it would be shuttering all 50 stores in the chain and filing for bankruptcy. Locations included this one, in Lakewood Ranch in east Manatee County.

Green echoed those thoughts, specifically with Earth Fare — which he says many consumers believed to have Whole Foods’ higher prices without the higher-end goods. Jay Jacobowitz, an industry analyst with Retail Insights and merchandising editor for WholeFoods Magazine (not connected to the Amazon-owned grocer) says Earth Fare’s identity crisis was in both real estate and shopping aisles.

“We were always perplexed at Earth Fare’s real estate choices, which were significantly lower potential than Whole Foods Market, Trader Joe’s and even North Carolina’s other specialty chain, The Fresh Market,” Jacobowitz writes in a Feb. 3 WholeFoods post. “It seemed to us having a premium market position, with its premium retail price point, was incompatible with locations in less wealthy, less well-educated trade areas.”

On the inside, Jacobowitz says Earth Fare’s merchandising strategy chronically struggled. “At one point,” Jacobowitz writes, “I remember walking into case stacks of Coca Cola, front and center.”

'Florida is a graveyard for grocery stores that come in here and try to compete with Publix.' Greg Sembler, Sembler

Fill the holes

The issues at Lucky’s and Earth Fare could be an opportunity for other grocers. Within a few days of Lucky’s announcing its bankruptcy, several companies reached agreements to buy the soon-to-be vacant stores, in potential acquisitions awaiting bankruptcy court approval.

Batavia, Ill.-based discount grocer Aldi, a unit of a $50 billion German grocery chain, has an agreement to purchase two Lucky’s, one in Sarasota and one, yet-to-be opened, in Venice. Jacksonville-based Southeast Grocers, parent of several chains, including Winn-Dixie, plans to buy one Lucky’s in Fort Myers and one Naples, among five statewide. Publix, also with a plan to buy five Florida Lucky’s, signed an agreement to buy a separate Naples Lucky’s, while Alachua-based discount chain Hitchcock’s Market intends to buy a Lucky’s in St. Petersburg.

The fate of one more Lucky’s in the region, currently under construction in Cape Coral, is undetermined. The builder, Dan Creighton of Cape Coral-based Creighton Construction & Development, in a prepared statement says, “We are not privy to Lucky’s Market’s next steps.” Also, through mid-February the four Earth Fare locations in the region — Lakewood Ranch, Lutz, Oldsmar and Seminole —didn’t have any announced replacements.

Outside the chains that have already made purchase agreements on shuttered Lucky's locations — which the bankruptcy court could reject due to higher offers — there are two grocery entities that could seize the opportunity to expand in or enter Florida. Those companies are Trader Joe's and Lidl, respectively.

Trader Joe's has 19 stores in Florida, including four on the west coast. (Relatives of the Albrecht family in Germany own both Trader Joe's and Aldi, but the corporate entities aren't connected.) Lidl, meanwhile, also owned by a German firm, flooded the U.S. market in 2017, with a much-hyped plan to open 100 stores in 18 months, under a banner to "Rethink Grocery." The discount grocer, with more than 10,000 stores in some 25 countries, instead, was a much-hyped flop in the U.S. Problems ranged from poor real estate selection to poor product selection, and the chain never got out of the Northeast. But Lidl, which rhymes with needle, will make another go at the U.S., S.J. Collins' Garrison says, and the Sunshine State's population growth will be too good to pass up. "They had some stumbles," he says. "But eventually, they will be in Florida."

File. Grocery retail developer Jeff Garrison says tight margins in the industry make it tough for newcomers in the Florida market to compete.

Retail landlords and developers will also need to get creative on finding replacements for deserted stores. That could be tenants such as gyms or specialized athletic centers, like cheering/cheerleader facilities, Garrison and Green say. Other centers nationally in similar predicaments have broken the spaces up into co-work space or medical offices, Garrison says.

Yet few replacement tenants can fill up cash registers and parking lots like good grocery stores could. Gyms, for example, normally don’t pay the kind of rents a grocer does, Green says. “There will be a big issue in terms of the empty shells,” Garrison says. “From an ownership standpoint it’s an absolute nightmare.”

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