Evolving grocery market forces investors to reassess supermarket investments

Grocery spending has increased significantly in recent years, but at the same time, supermarkets are facing various challenges. As a result, investors are adopting a more critical approach to evaluating supermarket real estate investments. The investment market is becoming increasingly segmented: while demand for core supermarkets remains strong amid limited supply, interest in the core-plus segment is often significantly lower. This shift has resulted in a decrease in the overall investment volume in supermarkets since 2023.

Supermarket turnover under pressure

For the first time^[1], the Dutch supermarket sector has surpassed the €50 billion turnover mark, representing an 8% increase compared to 2022. While this growth is positive for the sector, it is primarily driven by inflation and population growth. Simultaneously, supermarkets are facing various challenges. Rising personnel costs, higher purchase prices and rising rents are squeezing profit margins. According to the CBRE supermarket database, rent increases of 10% to 15% in 2023 are not an exception, and the average rent has increased by more than 2% in 2024. Additionally, the ban on tobacco sales, effective July 2024, is expected to impact supermarket turnover, with initial estimates predicting a loss of 5% to 7% in annual revenue^[2]. Although this decline may be partially offset by higher prices and slight growth in other product sales, a turnover decrease of 3% is anticipated for 2024^[3].

At the same time, the online grocery market continues to experience steady growth. Investments in logistics and the mechanization of distribution centers are impacting the profitability of traditional supermarket models aiming to enhance their online market share. The significance of online sales is evident in the turnover trends of market leader Albert Heijn, where over 11% of revenue comes from online sales. Online supermarkets like Picnic and Crisp are also continuing to invest and have reported profitability during certain periods of their Dutch operations. These trends support earlier forecasts that the online share of grocery turnover is expected to exceed 9% by 2030.

Consolidation in an increasingly saturated market

The growth of online grocery shopping and market saturation are slowing the expansion of the number of supermarkets. In 2024, the total number of supermarkets stands at 4,354^[4], just 3 more than in 2019. New supermarkets are mainly opened in new residential areas, such as an Albert Heijn in the new neighborhood De Krijgsman in Muiden and a Jumbo in Meerstad. At the same time, supermarkets are also closing—often after a takeover—in smaller villages or when the location is too small to achieve economies of scale.

Despite the nearly stable number of supermarkets, total floor space has expanded by more than 260,000 square meters over the past five years, indicating a continuing trend toward upscaling. This is particularly evident among discount chains like Aldi and Lidl, which are broadening their product range and becoming more competitive with full-service supermarkets. Recent mergers and acquisitions have led to such consolidation in the Dutch supermarket sector that 70% of supermarkets in the Netherlands now belong to Albert Heijn, Jumbo, Plus^[5], Aldi, or Lidl. These five major players account for over 75% of total supermarket floor space. In the next few years, we can expect more acquisitions, which will provide an interesting perspective on the future of supermarkets within the Superunie collective.

Search for additional revenue

The pressure on margins forces supermarkets to continuously look for new ways to increase their profits. One strategy is the sale of private labels, which are often preferred over A-brands. Margins on private labels are typically higher, and due to recent price increases, consumers are increasingly opting for cheaper private labels. In 2023, nearly 46% of sold products were private labels, marking a slight increase from the previous year.

Moreover, many supermarkets are expanding their product range to include non-food items and are increasingly leveraging online channels. Lidl, in particular, has been proactive in this area. Meanwhile, Albert Heijn is capitalizing on its enhanced distribution network. The presence of HEMA products on Jumbo shelves also exemplifies the growing variety of non-food products available in supermarkets. Additionally, these retailers are striving to increase their revenue by enhancing their market share.

Supermarkets are not only competing with one another but are also trying to seize revenue from food delivery and recipe box delivery companies such as Just Eat Takeaway.com, HelloFresh and Marley Spoon. This market is experiencing steady growth, projected to reach approximately €3.7 billion by 2024^[6]. This segment accounts for about 5% of total food and beverage spending in the Netherlands, which includes expenditures at supermarkets, delivery services, and the hospitality sector. The recipe box market is also part of this. It is therefore not surprising that Picnic has expressed its intention to secure a share of this revenue.

Investors more critical of supermarkets

The strong growth of online groceries and increasing pressure on supermarket margins seem to influence the attractiveness of investments in supermarket real estate. Nevertheless, investors remain generally optimistic about supermarkets, as the majority of revenue still occurs in physical stores. During the COVID-19 pandemic, supermarkets and convenience-driven retail real estate demonstrated their stability; from 2020 to 2022, investment volumes in supermarkets and neighborhood shopping centers with at least one strong supermarket remained high, with gross initial yields even dropping to 4.2%. Investors paid up to 23 times the annual rent for a good supermarket during these years.

Due to rising interest rates and price corrections in the real estate sector, gross initial yields for supermarkets have increased. Investors currently pay no more than 16 to 18 times the annual rent. These lower valuations have heightened investor interest in specific types of supermarkets, particularly among institutional and private (family-office) parties that have often previously raised capital. However, these investors now have stricter mandates for supermarket investments, making them more selective in choosing potential targets. This has led to an increasingly segmented investment market for supermarket real estate into Core and Core Plus investments, a development reminiscent of changes on the high street. Since 2017, the range of gross initial yields in the shopping streets of larger cities has increased from 4%-8% to 4%-11%.

Limited supply of core supermarkets impacts investment activity

Criteria such as dominance within the catchment area, supermarket size (from 1,500 sqm gross floor area), turnover (more than €200,000 per week), ownership situation, parking facilities, sustainability costs, and the tenant are becoming increasingly important to determine whether a supermarket belongs to the Core segment. However, the supply of supermarkets that meet these Core criteria is limited. Many investors selling their real estate often do so with the less attractive supermarkets in their portfolios. When supermarkets do not meet these criteria, investor interest significantly decreases, and bids are often much lower. Since owners are generally not compelled to sell their real estate, they often choose to retain the property when no bids at the desired level are received.

This development is reflected in the investment volumes of supermarket real estate and convenience-driven neighborhood shopping centers. With an investment volume of just over €230 million, 2023 was the quietest investment year for this type of real estate since 2016. The outlook for 2024 also seems quiet, as the investment volume so far remains under €100 million. As a result, the share of supermarket real estate in total retail investment volume has dropped back to a level comparable to the period before the COVID-19 pandemic, after peak years in 2019 and 2020.

The decreased investment volume in supermarket real estate is thus primarily due to a limited supply of Core supermarket real estate and not due to reduced investor interest in supermarkets, although the evolving grocery market is forcing investors to reassess supermarket investments. This is also evident from the fact that initial yields for supermarkets remain significantly lower than those of other retail segments, except for the best high street locations. This has led some investors to invest in alternative segments. Nevertheless, the right supermarket remains a safe option for many investors. With a correction of 25% to 35% in initial yields compared to the peak in summer 2022, combined with a drop in interest rates, the current market presents a favorable situation for purchases, provided the owner is willing to sell, of course!