As Cap-Ex Declines, Retailers Refresh for Less

The largest supermarket operators cut back on their capital spending as sales declined in the recent economic downturn, and are unlikely to increase spending unless both sales and profitability improve. That was the opinion of Andrew Wolf, Richmond, Va.-based managing director at BB&T Capital Markets, during a recent SN webinar called Maximizing Cap-Ex Returns, sponsored by Cummins-Allison Corp. These

The largest supermarket operators cut back on their capital spending as sales declined in the recent economic downturn, and are unlikely to increase spending unless both sales and profitability improve.

That was the opinion of Andrew Wolf, Richmond, Va.-based managing director at BB&T Capital Markets, during a recent SN webinar called “Maximizing Cap-Ex Returns,” sponsored by Cummins-Allison Corp.

These cutbacks in capital spending can be seen at the store level, where supermarket operators are seeking to minimize costs as they “Refresh for Less,” according to two architects from Charlotte-based Little Diversified Architectural Consulting, who also participated in the webinar.

Among a group of the largest chains analyzed by Wolf, spending ramped up significantly, to as much as 4% of sales in 2007, before dropping off dramatically as sales declined, to 2% of sales in 2010.

“Capital expenditures are down significantly since the double whammy of the 2009 recession coupled with food deflation and heightened competition that caused sales to decline,” he said. “And while there has been a modest recovery in sales trends, capital spending is still well below historical trends.”

The five chains analyzed — Kroger Co., Safeway, Supervalu, Whole Foods Market and Publix Super Markets — spent a total of about $4.1 billion on capital expenditures in 2010, down from 2001 spending of nearly $4.8 billion, unadjusted for inflation.

Investments during the decade shifted from new-store growth that actually exceeded population growth, to a focus on remodels.

Kroger, for example, did 50% more remodels in the last half of the last decade than the first half.

Jason Loucks, an architect in the Charlotte office of Little, said many of the new, ground-up stores currently being built are projects that are the result of deals made with developers before the recession.

“These projects have been too costly, especially when there is an abundance of prime real estate on the market,” he pointed out, citing the large number of abandoned retail properties in shopping centers around the country. “This vacant tenant space can be obtained at a fraction of the dollar on what it once was worth.”

“Five years ago, a non-conforming space or a space that had not previously been a supermarket would not have been considered,” he added. “It was considered just too costly to add key supermarket components. Now what once was considered nonconforming, is quite a bit easier to accept.”

In order to adapt to such nontraditional spaces, supermarket operators need to be flexible in their prototype designs, noted Henry Kwon, another architect from Little who participated in the webinar.

Operators should be prepared to work around existing equipment and utility rooms, for example, as these can be difficult to relocate. Supermarkets taking over existing structures should also take special note of the loading dock configuration.

“Make sure that location and orientation of the existing loading dock is supportive of store operations,” Kwon said. “The wrong orientation of it can cause a long product distribution flow from receiving area to remaining parts of the store.”

Care should be taken in the placement of floor sinks and freezer slabs and other supermarket design elements to avoid penetration into existing foundation and grade beams, he noted.

In order to “refresh for less,” supermarket operators have scaled back on their remodeling efforts in a number of ways, such as confining to efforts to within the existing four walls, rather than expanding; lengthening the time between remodels; and reducing the scope of remodels.

What was once a high-grade remodel might be reduced to a medium grade, a medium to a low, and a low to a new standard for a low-grade remodel, Loucks explained.

“This approach, though I'm sure is not preferred, allows grocers to live to fight another day, by allowing grocers to stretch their construction dollar just a little bit further,” he said.

Other trends in “refresh for less” remodels include focusing on core elements on the interiors; Kwon suggested simplifying decor and wall finishes by using more branded graphics, signage and paints in lieu of factory-fabricated elements.

Whether remodeling or taking over an existing structure, certain steps can be taken to minimize costs, Loucks and Kwon noted:

  • • Always conduct an audit of the existing space, including as many of the engineers as possible.

  • • Obtain “as-built” drawings for the site.

  • • Minimize plan changes that arise due to lack of up-front planning efforts.

See supermarketnews.com/webinar [4] for this and previous webinars.