Monday, August 11, 2008

Arizona Region Market Report: Which Food Retailer Will Seize the Opportunity Offered by the Lack of a Grocery Store in Downtown Tempe, Arizona?

An urban food desert: Downtown Tempe--An Inconvenient (Shopping) Truth

There isn't a supermarket or grocery store offering fresh foods and basic groceries within 2.5 miles of downtown Tempe, Arizona (pictured above. Click on the photo to enlarge it). Therefore, its residents have to drive or take public transportation for a minimum 5 -to- 6 mile round-trip each time they need to shop for groceries.

Tesco has one of its small-format Fresh & Easy Neighborhood Market combination fresh foods and basic grocery markets at Baseline and Kyrene roads, about 2.5 -to- 3 miles south of downtown Tempe. Tempe, located in the Phoenix Metropolitan region, is Arizona's eighth-largest city, with about 170,000 residents.

This fall, Wal-Mart, Inc. will open one of the four of its new small-format (15,000 -to- 20,000) square foot combination Marketside fresh foods and grocery stores just down the street from that Fresh & Easy grocery market, also about 3 miles from downtown Tempe.

Two years ago, natural foods supermarket retailer Whole Foods Market, Inc. announced to much fanfare in the city that it would build a 55,000 square foot, two-level food emporium near the downtown and the campus of Arizona State University (which is right near the downtown core) as part of a new mixed-use retail and residential condominium development called the Mosaic project.

However, with the poor U.S. economy hitting Arizona and its commercial and residential development community so hard, that development is on hold, and many observers in Tempe say it isn't likely to be built anytime soon.

In addition, just last week Whole Foods Market, Inc. announced it was cutting in half the number of new stores it planned to open this year because of its poor quarterly sales and profit results announced last week. It's likely that even if downtown Tempe's Mosaic development were to go forward anytime soon, the Whole Foods store might not be a part of it.

According to a story in today's East Valley Tribune, a daily newspaper based in the Phoenix Metropolitan region, downtown Tempe hasn't had a full-service supermarket or food store since 2000, when Arizona State University bought and closed the IGA Stabler independent supermarket at Mill and University near the campus in the city's downtown area because it wanted to use the space for a campus building expansion.

Additionally, there was a food cooperative grocery market in the downtown for many years. However, that store closed its doors in 2006.

Statistics supplied by the city of Tempe say there are about 3,900 households in the downtown area west of Mill Road, and between Broadway Road and Rio Salado Parkway. Based on an average household size of three persons, that would constitute a neighborhood population base of nearly 12,000 people. additionally, it's estimated the daytime population of downtown Tempe is many more thousands of people on top of that 12,000 base population.

Despite that population base and the fact there currently isn't a supermarket in the downtown area, Tempe city officials and local real estate experts say they have found little if any interest from grocers of any kind in locating a retail food store in the area.

Tesco's Fresh & Easy is mentioned as one of the top candidates by more than one city official and developer because of the fact it already has a store in Tempe, along with the Phoenix Metro region being one of the grocery chain's three market regions in the Western U.S. Besides the Phoenix and valley region, Tesco has Fresh & Easy grocery stores in Southern California and in the Metropolitan Las Vegas region.

A Fresh & Easy grocery store also seems like a good fit for downtown Tempe as well because a small-format market like Fresh & Easy makes more sense than a 55,000 square foot, two-level supermarket like Whole Foods has been planning because of the smaller population base, along with much of the shoppers in the downtown area being Arizona State University students.

In fact, it seems to us that Fresh & Easy's focus on fresh, prepared foods and its limited assortment, reasonably priced basic grocery selection--along with its organic and specialty foods offerings--would be a good fit for the student population, as well as the non-student population in the downtown neighborhoods.

Additionally, downtown residents won't be able to buy basic grocery products, only natural and organic ingredient-based products, at the Whole Foods store it it ever does open downtown. Many shoppers want their Tide, Pampers, Nabisco Oreo Cookies and Coca-Cola available at the same store where they can also buy organic produce and grocery products. That's not the case at Whole Foods stores. This is even more important when there is only one (potential) grocery store in a neighborhood, such as would be the case in downtown Tempe.

Grocery store-less downtowns

Downtowns such as Tempe and numerous others (Phoenix, Los Angeles, Detroit and Oakland to name just four among the many) across the United States have a shortage of food and grocery stores, particularly those offering a decent selection of fresh foods and basic groceries at affordable prices, as we've written about extensively in Fresh & Easy Buzz. This phenomenon and these places are referred to as "food deserts."

However, as we've also written about frequently, there's a movement among cities to lure such food stores to both downtown areas, as well as to lower income inner city neighborhoods.

Tesco has even stated that part of its strategy with its Fresh & Easy Neighborhood Market USA small-format store grocery chain is to locate Fresh & Easy stores in such underserved neighborhoods.

Thus far, Tesco has opened two of its 68 Fresh & Easy grocery stores in urban neighborhoods underserved by food stores. Both of those stores are in Southern California. One is in the Eagle Rock neighborhood in Los Angeles, which is rapidly undergoing gentrification, and the other is in the low-income city of Compton in Los Angeles County.

Additionally, Tesco is building a store in another low-income inner city neighborhood in South Los Angeles which should open next year.

Further, the retailer has three stores on the drawing board for "food desert" cities in Northern California. One store is in San Francisco's Bayview-Hunters Point neighborhood, the second store in inner city Oakland, and the third store in Sacramento's low-income but rapidly gentrifying Oak Park neighborhood.

All three of these stores are scheduled to open next year as part of Tesco Fresh & Easy's push into Northern California and the Golden State's Central Valley. Thus far, Tesco plans to start opening next year 21 Fresh & Easy stores in the San Francisco Bay Area, 19 in the Sacramento Metropolitan region (in Northern California); five stores in the Bakersfield Metropolitan region, five units in the Fresno area (in the southern Central Valley), and one store in Modesto (in the Northern San Joaquin Valley), with many more being planned.

Downtown Tempe offers opportunity

Ironically, downtown Tempe, Arizona isn't a low-income area, although it lacks a supermarket. Rather, it's considered a moderate -to- middle income area. Additionally, because of its proximity to the Arizona State University (ASU) campus, it's an area with a higher than average percentage of residents who have college degrees, or in the case of the ASU students, residents who are in the process of obtaining a degree. Numerous campus professors and other employees, in addition to students, live near the campus and thus near the downtown core.

This fact is why Whole Foods Market, Inc. decided to locate a store in the downtown Tempe Mosaic development, which now has an uncertain future. Whole Foods' number one demographic criteria for where it builds and opens new stores isn't neighborhood income, although that plays a part.

Rather, the natural foods grocer's key demographic consideration is education level, specifically the percentage of residents in a given neighborhood who have a bachelors degree and post graduate professional and academic degrees. The higher the percentage of such college graduates, the more likely Whole Foods is interested in opening a store in that neighborhood, taking into consideration other criteria like there being a big enough population of people in the neighborhood as well of course.

The Lincoln, Nebraska example

The downtown Tempe area, with its close proximity to the ASU campus, reminds us of the University of Nebraska neighborhood where the Hy-Vee supermarket chain opened its first small-format grocery store in March of this year. Like downtown Tempe, the neighborhood in which the University of Nebraska, Lincoln campus is located was without a full-service grocery store. Hy-Vee decided it was a good location for the first of its small-format stores, as we wrote about here: The Small-Format Grocery Store Revolution in the U.S.: Hy-Vee, Inc. to Open it's First Small-Format Grocery Store in Lincoln, Nebraska.

We think downtown Tempe would be best served, like the Lincoln, Nebraska neighborhood, by a small-format grocery store like Tesco's Fresh & Easy or one of Wal-Mart's new Marketside stores, rather than a 55,000 square foot natural foods supermarket such as Whole Foods.

Locating a retail food store in downtown Tempe

However, in the case of Wal-Mart, we doubt it would consider locating one of its Marketside stores downtown, since it has one set to open this fall just 3 miles away.

The reason this is likely the case is that unlike Tesco, which is building its Fresh & Easy grocery stores about 2 -to- 3 miles away from each other in select market regions like the Phoenix Metro area, Wal-Mart is following more of a "fill-in," multi-format strategy with its Marketside format stores, in conjunction with its Supercenters, Wal-Mart (45,000 square foot) Neighborhood Market supermarkets and Sam's Club wholesale club stores in the market. [Read more about that strategy here: Wal-Mart's Small-Format Marketside Strategy is Currently Neither A 1,500 Store, $10 Billion A Year Mega Plan, Nor A Mere Four Store Test.]

In Tesco's case, it might be a better candidate to put a Fresh & Easy store in downtown Tempe, since its Tempe store at Baseline and Kyrene roads is itself three miles from downtown, which is within the retailer's "critical mass" store location range. Tesco currently has 20 Fresh & Easy stores in the Phoenix Metropolitan and East-West Valley region.

However, we're doubtful Tesco would locate a Fresh & Easy store in downtown Tempe for two primary reasons. First, we think the retailer, as would any grocer, is counting on residents who live in downtown Tempe, which is without a grocery store but 2.5 -to- 3 miles from the Fresh & Easy market, to provide a part of the shopper base for the Baseline and Kyrene store. Locating a Fresh & Easy grocery store downtown could cannibalize sales, or potential sales, at that Fresh & Easy location.

Of course, with a Wal-Mart Marketside store moving in right near the Baseline and Kyrene roads store, and which like Fresh & Easy will be counting on foot traffic from downtown Tempe in addition to in residents in the immediate neighborhood, this development might make it a good counter strategy for Tesco to go ahead and locate a Fresh & Easy store downtown, thereby cutting off some potential foot traffic to the Wal-Mart Marketside store. The 2.5 -to- 3 mile distance between downtown Tempe and the Baseline and Kyrene road Fresh & Easy store is within Tesco's range for locating Fresh & Easy stores after all.

Downtown Tempe: A perfect opportunity for Safeway's 'The Market'

The downtown Tempe site also presents a perfect opportunity for Safeway Stores, Inc. in terms of being a good potential site to locate its first small-format "The Market" format grocery store at in Arizona.

As we've reported, Safeway opened its first small-format grocery store, "the market by Vons" in Long Beach, California in May and is looking for other sites in California, including downtown Los Angeles and downtown San Jose in the San Francisco Bay Area.

Additionally, Safeway has said "The Market" format is a national strategy for the supermarket chain; that it could put the small-format stores in markets wherever Safeway has supermarkets, which would include Arizona, where it has well over 100 Safeway banner full-service supermarkets.

Like Wal-Mart, Safeway's strategy with its 15,000 -to- 20,000 square foot "The Market" format grocery stores--which are a semi-upscale combination grocery and fresh foods stores--is to use them as "fill-in" stores in conjunction with its full-size Lifestyle format supermarkets which operate under various banners.

In Arizona that banner is Safeway. In Southern California and Nevada the banner is Vons. The small-format stores will be named based on the supermarket banner Safeway operates in a given market. In Arizona the stores will be called "the market by Safeway. In Southern California, like the Long Beach store, it's "the market by Vons."

Locating its first "The Market" format store in downtown Tempe would allow Safeway to test the concept in Arizona against Tesco's Fresh & Easy and Wal-Mart's Marketside, which would be extremely interesting, especially to analysts like those at Fresh & Easy Buzz.

But doing so also would be a good test for Safeway in the market. Downtown Tempe is growing, and that growth is coming from urban professionals, along with baby boomer retirees with high incomes who want to change their lifestyles and move from suburbia into the city core for a variety of reasons.

Since Safeway is looking to "The market" format to be as much of an urban strategy as it will be a suburban one--evidenced by the potential store sites in downtown Los Angeles and downtown San Jose we've reported on and written about--downtown Tempe fits that strategy well. The relatively upscale "The Market" format stores also would likely be a hit with the ASU students and campus employees who live in and around the downtown area, as would a Fresh & Easy or Trader Joe's we believe.

AJ's Fine Foods and downtown Tempe

Another potential for downtown Tempe is AJ's Fine Foods, the upscale format of Arizona-based Bashas Family of Fine Foods, which operates 160 supermarkets under the Bashas, AJ's Fine Foods and other banners.

On August 6 we reported in this piece (scroll down at the link until you see the Phoenix Metro Market heading) that Bashas plans to locate a 9,000 square foot small-format version of its upscale AJ's Fine Foods market in downtown Phoenix, which like downtown Tempe is in need of a grocery store.

The typical AJ's Fine Foods store averages about 20,000 -to- 40,000 square feet (older stores smaller being at the smaller end of the range, newer stores generally at the bigger end). The stores sell an assortment of basic groceries but have an upscale positioning to them, offering lots of specialty and natural-organic products, in-store fresh, prepared foods, organic fresh produce and meats, along with conventional, and other premium food features.

The 9,000 square foot smaller-format version to go in downtown Phoenix will retain this merchandising philosophy but offer a limited assortment of items across all categories. It seems to us that this could be a perfect urban model for Bashas-owned AJ's Fine foods in its home state. It also seems downtown Tempe might just be the logical place for Bashas to locate its second smaller-format AJ's store after downtown Phoenix.

Downtowns are increasingly the place to be

There is a migration of young professionals and baby boomer retirees from the suburbs to the cities going on in much of the U.S. There's also a growing recognition by many food retailers that city downtowns and inner city neighborhoods present a new opportunity for growth.

These two combined developments lead us to believe downtown Tempe will soon find itself with more than one grocer wanting to locate a store in the downtown area near the university campus.

In fact, with commercial real estate prices much lower in the downtown area compared to just a year or two ago, now would be the perfect time for a grocery chain or independent to lock-up a site in downtown Tempe, which has attracted numerous upscale businesses like the Gordon Biersch brew pub-restaurant pictured in the photograph at the top of this story.

It's just a question of which grocery chain or independent that will be, in our analysis and opinion. If not, it should be the case. We named four potential grocers in this piece alone. Rather than seeing it as a public service for a grocer to locate a store in downtown Tempe, we see it as a real competitive opportunity.

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