The European Grocery Real Estate Market

European grocery real estate attracts investor appetite

– March 2021 – Contents

At a Glance 03 Real Estate Leasing Market 42

Introduction 06 Real Estate Investment Market 49

Consumer Market 10 Innovation and Trends 59 Drivers of Food Consumption 12 Outlook 65 Food Sales 16 E-Commerce and Grocery Sales 21 Bibliography 70

Operator Landscape 25 Contacts 77 European Grocery Operators 27

Operating Concepts 34

Current Developments and Outlook 38 Contents

02 At a Glance

03 At a Glance

01 The European grocery market is the largest retail sector in Europe, estimated 04 Consumers have historically shown reluctance in purchasing groceries online at €2.0 trillion in sales in 2020. While it benefits greatly from the daily needs of due to delivery costs, scheduling considerations, and the perishable nature of growing populations, allowing it to outperform various retail categories, the fresh produce. With many consumers being reluctant or unable to visit food overall revenue growth is still closely linked to consumers’ purchasing power. stores during the major pandemic-driven lockdowns across Europe, demand for In times of economic growth, stronger disposable incomes offer retailers home delivery rose rapidly, notably during periods of lockdown. Though online opportunities to introduce new higher-margin products and services, leading grocery e-commerce is expected to contract post pandemic, a proportion of the to higher growth rates. During periods of uncertainty, consumers generally COVID-19 shift in grocery spending towards online may remain permanent as focus on affordability, which slows overall revenue growth, but rarely leads to the online channel welcomes new customers. a decline. In the next five years, affordability, sustainability and quality are predicted to be the key drivers of grocery consumption in Europe. 05 The rise in online grocery sales accelerated the evolution of physical grocery stores. Many grocery retailers have increased their investments in strengthening 02 Attracted by employment opportunities, convenience or social considerations, their online capabilities and infrastructure. Despite rapid growth in grocery people across all generations have been migrating into cities. Urban populations e-commerce, physical stores continue to fulfil an irreplaceable role in the food across Europe are expected to grow by 3.4 percent by 2035. Well-connected distribution process, supporting both in-store and online grocery sales. grocery stores within growing conurbations are able to attract new consumers and offset periods of weak economic conditions.

03 Despite the COVID-19 pandemic halting much of the economic activity, the grocery sector grew at 3.2 percent in 2020 as it drew customers’ essential and sustenance needs away from restaurants and hotel accommodation. A portion of this short-term boost in grocery sales may become permanent as new working and living habits continue post pandemic. Future sales growth rates

At a Glance At are expected to normalize at slower rates of under 2 percent.

04 06 European grocery is a highly competitive, high-volume, but low-margin sector. 09 Though opportunities to access core grocery stock have historically been It is dominated by a few traditional operators with domestic market shares limited, the European grocery real estate investment market is gaining protected by local legislation. The supermarket format remains the preferred momentum with solid growth in investment volumes and increased market and still growing sales channel. Discount and convenience are newer formats share within the wider retail investment market. Average grocery investment and the fastest growing categories. in Europe has been reasonably consistent year on year at approximately €4.5bn annually over the last 6 years but grew by over 40 percent to approximately 07 Grocery real estate leases typically offer annual indexation and longer terms, €6.7bn in 2020 compared to 2019. As market conditions require increased often without break clauses, while major grocery chains generally provide investments into the business force grocery operators to raise capital, more strong covenants. This makes grocery real estate attractive to investors core product is expected to become available, primarily via sale and leaseback looking for longer and more secure income streams. A stable to moderate transactions. rental growth outlook, in comparison with other retail asset classes, provides security in a more volatile retail market. 10 Grocery real estate has over the years proven to be among the most stable commercial real estate asset classes in Europe in terms of pricing. JLL’s 08 Grocery stores attracted 37 percent of the total retail consumption in the EU view prime of net initial yields for quality grocery stock in Europe’s key retail (27 countries) in 2020. With European grocery retail investments accounting markets stood at 5.10 percent on average at the end of 2019 and moved inwards for only 10 percent of Europe’s overall retail investment volumes on average to 5.00 percent at the end of 2020 due to the increased investor appetite. De- between 2014 and 2020, real estate investors appear to have under-allocated spite an uncertain economic environment, the medium-term outlook on yields capital towards grocery real estate assets. A daily flow of footfall supporting for high-quality stock with robust and secure income remains stable across sales, the irreplaceable role of highly-accessible stores in the food distribution Europe. This is further supported by the current low to negative yields on process and diversification opportunities are among the defensive qualities long-term government bonds and the weak inflation outlook, on the one hand, attracting institutional capital. and sharp pricing of quality product in offices and logistics assets on the other. At a Glance At

05 Introduction

06 The European grocery real estate sector is emerging as a secure and defensive sub-sector within the wider retail investment market.

As well-located food stores remain an irreplaceable part of the food distribution process, it will appeal to investors searching for robustness and longevity of income and to investors willing to pursue alternative use opportunities.

07 Introduction

The European grocery real estate investment market is to be squeezed. The market is dominated by major national and international gaining momentum with growth in investment volumes grocery chains, operating well-developed store networks and modern store and increased market share. formats. However, the sector will need to address these margin pressures and economic uncertainty, magnified by the COVID-19 pandemic. Furthermore, Pension funds and institutional investors have long shown a particular interest changing consumer shopping preferences, driven by demographics, changing in the grocery sector, attracted by the robustness and longevity of income work patterns, technology and sustainability, will require a continuous provided by grocery real estate assets. Amidst the COVID-19 pandemic, investor assessment of current store portfolios. interest has surged as the grocery sector has proven to be a systemically relevant asset class and a crisis resilient investment, serving the fundamental Understanding grocery retailers’ changing property requirements will be key basic needs of consumers. Yet grocery real estate is still an under-allocated for investors. Good stock selection backed by residual values will provide asset class, despite attracting 37 percent of the total retail spend across the EU security and opportunity. Changing consumer grocery shopping preferences is (27 countries) in 2020. As capital targeting commercial real estate continues to a key driver for floor productivity for the various grocery store formats. With a grow and yield levels continue to compress, some specialised asset managers typical supermarket targeting 2 percent to 3 percent of their annual turnover as may seek to benefit from capital gains and offer quality portfolios to the market. rent, grocery operators are sensitive to changes in local catchments and remain focused on managing their cost base, including rents. Grocery operators have While access to core product has historically fluctuated, a range of opportunities options to utilise overcapacity in their stores, allowing their stores to evolve are emerging that will likely satisfy investor requirements, including grocery and tap into new income streams to maintain store productivity. Grocers who operators exploring sale and leaseback options and specialist value-add real typically operate hypermarket formats as part of their wider store portfolios estate investors who may prepare for exit upon completion of their business are concentrating on slightly smaller store formats compared to their historic plans. requirements. Grocery stores are well suited to embrace click-and-collect as a key driver for attracting new customers, supported by efficient supply-chains Grocery is Europe’s largest retail sector in terms of revenue and has seen and growing store networks in urban areas. Another emerging trend is

Introduction stronger growth between 2001 and 2020 on average than other traditional retail alternative uses with developers increasingly looking to transform some larger sectors, such as fashion, but, along with most retail sectors, its margins continue stand-alone sites into urban logistics hubs or to develop affordable housing.

08 This report provides a high-level overview of the European grocery real estate market.

It starts with the consumer market, including an outlook for food consumption across Europe and a summary of key consumer trends that operators will need to adjust to.

An overview of who’s who among the key operators and some operating concepts follows next.

The report subsequently outlines key lease terms and provides a perspective for the grocery real estate investment market in terms of investor demand.

The report concludes with an outlook of key innovations and trend developments in the grocery real estate sector, sets out opportunities expected to emerge, and offers risk mitigation solutions as the sector goes through a period of accelerated change. Introduction

09 Consumer Market

10 The European grocery market is the largest retail sector and closely linked to consumers’ purchasing power. In times of weaker economic conditions, expected to follow the COVID-19 pandemic, grocery basket sizes may shrink. However, well-located grocery stores in growing conurbations are able to offset this negative impact on overall store productivity by attracting new customers. Grocery e-commerce has accelerated during the COVID-19 pandemic, but the online grocery business remains challenging. The role of the physical grocery store remains irreplaceable. In addition to most of the grocery consumption being generated in-store, future profitable growth of grocery e-commerce is also largely tied to well-located bricks and mortar locations facilitating last mile fulfilment from stores.

11 Consumer Market

Drivers of Food Consumption

Europe’s largest retail sector is worth €2.0 trillion In less affluent catchment areas, consumers have a stronger preference for value and affordability, either through every-day low prices or promotional The European food market is the region’s largest retail sector, attracting discounts. In wealthier areas, consumers prefer to have more choice in €2.0 trillion in sales in 2020. This includes the sale of food, beverage and products and would happily visit multiple grocery brands in a week. The desire tobacco products. Food sales in the EU (27 countries) and the UK combined for choice offers grocers opportunities to innovate and introduce new products were worth €1.5 trillion. European grocery retailers attract 87 percent of all or services that may boost margins and impulse purchases. However, the recent food, beverage and tobacco sales, supported by their well-developed store success of discounter brands also encourages mainstream grocers to compete networks and modern store formats. The remaining share is sold in specialist at the value end of the retail spectrum. According to research by EY, quality, stores such as greengrocers, butchers and fish mongers as well as via affordability and sustainability will be key decision criteria for consumers market stalls. While the European food sector benefits from a daily flow of making grocery purchases in the next five years. footfall and growing populations, overall revenue growth is closely linked to economic prosperity and consumers’ purchasing power.

In times of growth, rising levels of disposable income offer consumers more options for buying food products, while consumers generally curb their expenses in times of uncertainty. The COVID-19 pandemic is a unique exception to this pattern as grocery operators have been able to continue operating while containment measures, implemented in large parts of European grocery retailers Europe, have affected consumer shopping behaviour in other sectors of the attract 87% of all food, retail market more heavily. Elevated levels of homeworking have further beverage and tobacco sales, boosted demand for grocery goods. supported by their welldeveloped

Consumer Market Consumer store networks and modern store formats.

12 EU27 Food Sales and Disposable Incomes

46 110

44 Food 105 Disposable Sales Income 42 Per Index 100 (100=2015) Household (€ `000s, real, 2015 Prices) 95 40

90 38 2004 2006 2008 2010 2012 2014 2016 2018 2020

Retail Sale of Food, Beverage and Tobacco Household Disposable Income 13 Source: Eurostat (February 2021), Oxford Economics (January 2021) Consumer Purchase Criteria Grocery Goods Germany

Quality Affordability EY Future Consumer Index: Sustainability What Criteria Financial Security will be Social Responsibility Selection important Privacy Time for you when Convenience shopping in five Transparency years' time? Service Flexibility Authenticity Speed

0% 10% 20% 30% 40% 50%

14 Source: EY Future Consumer index (June 2020) Drivers of Food Consumption Urban Population vs Total Population Growth 2021 – 2035 Growing conurbations to help physical store sales offset shifts in retail spending

Attracted by employment opportunities, convenience or social considerations,

people across all generations have migrated into cities. Forecast data, released 15% by Oxford Economics at the end of August 2020, shows the urban population across the EU (27 countries) is expected to grow by 3.4 percent, equaling 11.4 million people, between 2021 and 2035. Including the UK, the urban 10% population is forecast to grow 3.7 percent, equaling 13.2 million people, Total Growth (%) over the same period. Among the key grocery markets, urban population 5% growth by 2035 is forecast to be strongest in Sweden (+14.7 percent), the Netherlands (+8.4 percent) and France (+8.3 percent). The increase in Germany (+1.1 percent) is more moderate. 0%

Growing conurbations offer -5% well-connected grocery stores Italy EU27 Spain France Poland Finland

opportunities to attract new Sweden Germany Eurozone

consumers and offset a period Netherlands Czech Republic Czech of weak GDP growth. Kingdom United

Urban Population

Consumer Market Consumer Total Population

15 Source: Oxford Economics (January 2021) Food Sales Grocery sales outperform fashion sales in most mature European markets – COVID 19 has boosted grocery sales

Since 2001, grocery sales have outperformed fashion sales growth in the Eurozone and across the EU (27 countries). Fashion is the retail industry’s second- largest sector in most of Europe. A lion’s share of retail spending on clothing and accessories would typically flow towards shopping centres and high street locations where many fashion retailers can traditionally be found.

While there are exceptions across Europe, several countries have seen grocery retailers capturing a larger share of consumer spending over time in comparison with fashion sales, including Germany, the Netherlands, Sweden, Spain and Italy. As COVID-19 limits the need for new formal and leisure clothes for many consumers, at least in the short term, grocery retailers are expected to continue delivering better results than many fashion retailers.

Fewer people eating out or staying in hotel accommodation will result in an additional short-term boost for consumer grocery consumption. Social distancing measures, elevated levels of homeworking and consumer reluctance to eat out or order takeaway food due to COVID-19 has had a significant negative impact on the gastronomy sector across the EU and has mostly favoured retail spending in grocery stores. A proportion of this

Consumer Market Consumer short-term boost in grocery consumption may become more permanent as some employees may be expected to continue working from home post-COVID, shifting lunch spending away from restaurants and takeaway venues. 16 EU27 Fashion & Grocery EU27 Food Sales & Retail Trade Volume Index Catering Industry Trade Index

110 115 105 110 100 105 95 Turnover 100 90 Index Sales 95 85 (100=2015) Index 90 (100=2015) 80 85 75 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 80 75 Fashion Grocery Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3

Source: Eurostat (February 2021) 2011 2016 2012 2015 2019 2017 2013 2014 2010 2018 2020 2009 2007 2008

Food & beverage service activities Retail sale of food, beverage & tobacco

Source: Eurostat (February 2021)

17 18 Consumer Market Average Growth (% p.a.) Sales vrg ars te U 2 cutis, rvn y rtr o sld economic solid over thesameperiod,ahead of Eurozone inflation of 0.9percent. of return a average on percent by 1.7 of rise sales annual driven an recordedEurozone The expansion. countries), (27 EU the across on yearaverage a percent 1.8 by rose products tobacco and beverage food, for volume trade the 2020, and 2015 Between 2020. in pandemic COVID-19 the of effects the to due demand in boost a receivedtobaccoproducts and beverage food, in trade However,products. value the more foropted and spending grocery their in reined affected during the Global Financial Crisis and the Eurozone Debt Crisis as shoppers products foodwas for consumerdemand growth,for driver key a being prosperity economic With period. same the averageduring on percent 0.6 by rise levels sales annual saw Eurozone The countries). (27 EU the in 2020 and 2001 between terms, beveragetobaccoand products grownhas percent 0.8 by yeara average,on real in Amidst economic downturns and the rise of e-commerce, the trade volume in food, Food salesresilient through alleconomic cycles Food Sales - - - 0% 3% 3% 5% 2% 2% 6% 4% 1% 1% Source: Eurostat 2021);Note: 2021),ONS (February (February Thelong-term average growth rate for theNetherlands isbased ontheperiod 2006 Finland

Germany

Netherlands

United Kingdom Average Annual FoodSales Growth

Eurozone

EU27 2019 andfollowed by thewindfall that theCOVID-19 pandemic provided in2020. in again Spain rose between 2014 and 2020, driven sales by a return to Foodstrong economic growth until spending. their in reined consumers as significantly Finland’s fell Italy and impacted Spain in sales failure food 2013, and Nokia’s 2007 Between 2015. and until economy crisis Eurozone the as significantly diverged but 2007, in of started that Crisis Financial Global squeezing the until growth sales the and measures austerity food continuedstrong saw Finland and to Sweden Both levels. income disposable due gradual more been Global has Netherlands the the in growth during sales Food following. years headwinds the and Crisis 2020, economic Financial and more 2014 experienced between growth they sales although food solid seen also have markets, grocery largest three Europe’s UK, the and Germany France, decades. the two past over growth sales food robust seen have Poland and Republic Czech The

France

Sweden

Italy 2001 -2020

Spain 2015 -2020 Czech Republic – 2019.

Poland 2020

Food Sales

Stable food sales growth expected after COVID-19 Ongoing containment measures and potential lockdown measures will likely continue to fuel demand for food products, until the COVID-19 pandemic The COVID-19 pandemic has been a major challenge for European grocery subsides. The roll out of COVID-19 vaccines is expected to act as a turning point operators, notably at the beginning of the virus outbreak in 2020. Consumer in 2021, with social consumption in restaurants and tourists destinations and stockpiling and elevated levels of homeworking have boosted demand a return to the workplace expected to affect grocery sales. In addition, some throughout the year. While GDP for the EU (27 countries) fell by 6.7 percent consumers may rely on smaller budgets as a result of the projected economic year-on-year in 2020, food sales across the region were up by 3.2 percent downturn post COVID-19. However, most markets are expected to return to on 2019 levels. Despite strong revenue growth, many grocery operators faced food sales growth from 2022 onwards, albeit at a slower rate than before the significant unexpected costs due to hiring additional staff to keep stores COVID-19 outbreak. France, Germany and the UK are expected to be the largest stocked, implementing safety measures, catering for the massive surge in contributors to Europe’s long-term food sales growth. online orders and leasing additional warehouse space. As a result, profits have not kept pace with the strong growth in sales for most operators. Consumer Market Consumer

19 EU27 Food Sales & GDP Forecast Food Sales Growth Forecast 2001 – 2025 2021 by Country

0.0% Forecast -2.0% 120 Average Annual -4.0% 115 Growth (% p.a.) -6.0% 110

-8.0% 105 Index -10,0% 100 (100=2015, Italy EU27 Spain real) Czech France United United

95 Poland Finland Sweden Republic Germany Kingdom Eurozone

90 Netherlands

85 Food Sales Growth Forecast

80 2022 – 2026 by Country 1.8% 2011 2021 2019 2017 2015 2013 2001 2025 2023 2005 2009 2007 2003 1.6% 1.4% Average 1.2% Food Sales GDP Annual 1.0% Growth 0.8% (% p.a.) 0.6% 0.4% 0.2% 0.0%

Itlay EU27 Spain Czech Czech France United United Poland Finland Sweden Republic Germany Kingdom Eurozone Netherlands

20 Source: Oxford Economics (January 2021) E-Commerce and Grocery Sales The rise in online grocery sales will temper down

Grocery retail in Europe has been historically the most defensive sector against the shift in retail spending towards online. Consumers have shown reluctance in purchasing grocery goods online due to delivery costs, quality and the perishable nature of fresh produce, as well as the convenience of nearby grocery stores. According to Kantar, 8.8 percent of grocery sales in the world’s largest food markets in 2019 were generated through e-commerce. In Western Europe, this share was less than 5.0 percent, which is low when considering eMarketer’s estimate of 10.2 percent for the total e-commerce sales as a proportion of total retail sales in the same region. The UK was Europe’s largest online grocery market in 2019 with a 7.9 percent share. France followed at 6.2 percent, largely driven by the successful roll-out of pick-up points for online orders by the likes of Carrefour and E.Leclerc. Spain demonstrated an online share of 2.4 percent. The share in Germany was only 1.4 percent, according According to Kantar, the initial to HDE, due to the fragmented nature of the market and grocers’ low margins COVID-19 outbreak has resulted in limiting additional expenses for grocery deliveries. a 30% growth in online grocery sales globally. The COVID-19 outbreak has spurred growth in online grocery sales. According to Kantar, the COVID-19 outbreak has resulted in a 30 percent growth in online grocery sales globally. At the end of April 2020, the share of online grocery sales cumulatively reached 12.4 percent in the world’s largest food

Consumer Market Consumer markets, including France, Spain, the UK and China – up from 8.8 percent at the end of 2019. Further growth was constrained by the limited availability of delivery slots among operators and infrastructure unable to cope with the sudden rise in demand. 21 UK Share of Online Grocery Sales 2019 – 2020

All Online Retail Sales Online Grocery Sales E-Commerce and Grocery Sales 40% 35%

UK data on the share of online grocery sales, Office for National Statistics (ONS) 30% data in the UK shows a similar pattern. The share of online grocery sales as a 25% proportion of total retail sales in the UK has increased from 5.4 percent in 2019 20% to 9.2 percent for 2020 as a whole. New customers have been a key driver for 15% online sales growth as many were reluctant or unable to visit grocery stores 10% during major lockdowns. While customers returned to the store following the 5% 0%

relaxation of social distancing measures over the summer months, online sales Sales (%) Retail Total Share Online of growth rates remain elevated from pre-COVID-19 levels. A similar trend can also Jan 19 Jan 20 Apr 19 Apr 20 Oct 19 Oct 20 Feb 19 Feb 20 July 19 July 20 July Dec 19 Dec 20 Dec Mar 19 Mar 20 Nov 19 Nov 20 Nov May 19 May 20 May June 19 June 20 Sept 19 Sept 20 be observed from consumer research conducted by Afterpay in Germany, the Aug 19 Aug 20 Netherlands and Norway. Afterpay asked consumers if they had made more grocery purchases in the past two weeks than before the COVID-19 outbreak. Change in Number of As COVID-19 containment measures became stricter towards the end of 2020, Online Grocery Purchases 2020 growth in online grocery purchases accelerated again. Netherlands Norway Germany Average 140

120

100

80

60 The share of online grocery 40 sales as a proportion of total 20 0 retail sales in the UK has -20 17 27 37 47 15 19 21 23 25 29 31 33 35 39 41 43 45 49 51 53

increased from 5.4% in 2019 ( in % ) COVID-19 before and the difference Consumer Market Consumer Difference between the two respective weeks weeks respective the two between Difference

to 9.2% for 2020 as a whole. 13 Week Week Week 16 – Week 26 – Week 36 – Week 46 – Week Week 14 – Week 18 – Week 20 – Week 22 – Week 24 – Week 28 – Week 30 – Week 32 – Week 34 – Week 38 – Week 40 – Week 42 – Week 44 – Week 48 – Week 50 – Week 52 –

22 Source: ONS, Afterpay (January 2021) Online Food & Beverage Products Revenue Forecast Europe 30 40 E-Commerce and Grocery Sales 35 25 30 The growth in online grocery retail sales is expected to soften once the COVID-19 20 25 Annual pandemic subsides. Grocery e-commerce today remains challenging; however, Revenue Revenue 15 20 Growth grocery retailers continue to invest in their omnichannel capabilities. With drive (€ billion) 15 (%) 10 times being a major cost component to fulfilling online orders via home delivery, 10 5 various grocery operators are expected to introduce click-and-collect services 5 and explore utilising excess grocery space in larger stores for micro-fulfilment 0 0 purposes. While online is a difficult business model for discount operators, some 2021 2019 2018 2024 2022 2025 2023 have started to run trials with click-and-collect services due to the short-term 2020 impact of the COVID-19 pandemic on shopping behaviour and the longer-term Revenue Annual Revenue Growth structural change in the grocery market. Online Food & Beverage Products Revenue Forecast Europe

The growth in online grocery 10,000 10% retail sales is expected to 8,000

6,000 soften once the COVID-19 pandemic Revenue (€ billion) subsides as grocery e-commerce 4,000 11% 9% 14% today remains challenging. 2,000 9% 15% 8% 8% 16% 15% 0 Italy Spain Czech Czech France United United Poland Finland Sweden Republic Germany Consumer Market Consumer Kingdom Netherlands

2019 2020 % values show CAGR for the period 2019 and 2025 23 Source: Statista (January 2021) E-Commerce and Grocery Sales

Stores remain irreplaceable in food distribution but shopping process, instant gratification and zero to very low processing continue to evolve rapidly costs to the retailer. Edgar, Dunn & Company predicted in 2019 that the European click-and-collect market was expected to grow (11 percent CAGR) to Over the years, major grocery operators across Europe have been tentative €45.1 billion by 2023, outpacing the growth of the wider e-commerce market. with investing in their online grocery platforms due to profitability challenges, While click-and-collect does not eliminate the costs of picking grocery items, required capital expenditures and cannibalisation of sales from existing it emerges as the most efficient digital integration tool in retail and its stores. This has allowed pure-play e-tailers to gain a foothold in the market. effectiveness is directly tied to the quality of bricks-and-mortar locations and layouts. One example of an online grocer is Ocado. Ocado has developed in-house technologies to automate the costly stock picking process in warehouses and Despite the recent shift in grocery spending towards online, physical set out delivery routes. The share price has more than doubled due to the supermarkets continue to fulfil an irreplaceable role in food distribution. strong rise in online sales this year and the value placed by markets on their Almost 90 percent of all revenue continues to be generated from physical ability to resell their automation expertise to other retailers. Pure-play grocer supermarkets in Europe’s mature retail markets. Additionally, an increasing Picnic is growing rapidly in the Netherlands and Germany. It has focused on portion of e-commerce sales, such as click-and-collect, will remain tied to developing an automated distribution model, capable of reaching a drop-off physical stores. PwC’s Global Consumer Insights Survey 2020 highlights density of 14 deliveries per hour. This model enables Picnic to visit a single while two-thirds of urban consumers have bought grocery products online street once a day. Customers are given a 20-minute delivery time slot, with and indicate they will continue doing so post COVID-19, in-store grocery 95 percent accuracy and free delivery. shopping remains the preferred channel of choice. Online grocery shoppers prefer buying their larger ‘weekly shop’ online, including bulky and As customers increasingly embrace omnichannel retail and rapidly adopt non-perishable items, and make regular visits to local grocery stores to top online grocery shopping, many traditional operators are being forced to make up with fresh products. Nonetheless, grocery operators will need to assess necessary infrastructure investments to avoid margin erosion and consider what if they have appropriate space and layouts in individual stores to accommodate

Consumer Market Consumer services, convenience or click-and collect facilities they should offer in physical emerging omnichannel trends, such as click-and-collect, curb-side pickup, and stores to preserve their market shares. In this respect, click-and-collect is one last mile micro-fulfilment from stores. of the fastest-growing retail services. It offers consumers control over the

24 Operator Landscape

25 The European grocery sector is dominated by a small number of traditional grocery operators, often major players in their domestic markets. As occupiers, they are regarded as strong tenants, supported by resilient grocery spending in combination with protective local legislation, such as competition law and planning. The supermarket format represents the most widely used sales channel, though convenience and discount formats are currently the fastest growing categories.

Due to intense competition and emerging variability of sales channels, margins are narrow, which in turn encourages operators to diligently monitor their financial strength and employ various strategies to improve profitability. Strategies include optimisation of physical space, densification with accretive non-grocery uses, growth of store portfolios and merger and acquisition activity.

26 Operator Landscape

European Grocery Operators

Europe’s top grocers rank among the largest retailers globally Between 2014 and 2020, grocery sales have expanded by over 13 percent across the EU (27 countries). This growth, however, has been uneven. Discount European grocery operators have benefited from solid sales growth over the operators in particular, including Lidl, Aldi, E.Leclerc and Biedronka have past 20 to 25 years, fuelling proliferation of store networks, market entries and outperformed the market. Further growth in discount retail was driven by the expansion of product offering. As the sector evolved, competition intensified launch of Jack’s in the UK by Tesco in 2018 and the opening of French Supeco in-store and online, putting pressure on retailers’ profitability. This in turn has stores by Carrefour in 2019. The so-called ‘Local Heroes’, including Spanish led to restructuring and consolidation across the industry. Today, Europe’s Mercadona, the ‘smaller’ retailers Globus in Germany and Jumbo in the leading grocers are among the largest retail conglomerates globally. The Netherlands, have also seen solid growth in recent years. Growth has been combined annual revenue for the 20 largest European-based grocery groups more stagnant for several mainstream grocers, notably among those with exceeded €935 billion in 2019. This includes income from a range of grocery large exposure to hypermarket formats in out-of-town locations. facias, banners and formats, overseas revenue, and income from non-grocery operations.

Schwarz Group is Europe’s largest grocery group. In 2019, it reported annual revenue of €113 billion, ranking the company among the top-five largest retailers globally. With €89 billion in global sales, discounter Lidl contributed the lion’s share to Schwarz Group’s overall revenue. The next largest group is Aldi with the combined revenue from Aldi Nord and Aldi Süd estimated to be in the same range as its direct rival Lidl. While Schwarz Group’s Lidl and Aldi are currently Europe’s largest grocers, they do not typically have the largest market share in any of the countries they operate in. Carrefour and Tesco are Europe’s largest mainstream grocery groups and rank number one in their

Operator Landscape Operator respective markets.

27 Europe´s Largest Grocery Groups by Global Revenue 2019

Group Revenue Revenue 2019 120 100 80 Revenue 2019 60 (€ billion) 40 20 0 Aldi Rewe Tesco Metro Edeka Casino Migros Auchan E.Leclerc Carrefour Morrisons Système U Système Mercadona Sainsbury´s Coop Group Coop Intermarché Schwarz Group Schwarz Ahold Delhaize X5 Retail Group X5 Retail Jerónimo Martins

28 Source: Company Reports, Refinitiv (H1 2020); Note: Aldi figures are based on 2018 numbers published in Deloitte’s Global Powers of Retailing 2020 report. Revenue may include income from non-grocery and non-retail operations. Exchange rates are based on the 2019 average rate, source is Oxford Economics. European Grocery Operators

Low-margin grocery sector sets strong focus on managing markets. Schwarz Group has launched a cloud computing division and has the operational cost base acquired an online marketplace Real.de in order to better compete with Carrefour and Ahold Delhaize. Aldi Nord aims to develop affordable housing The grocery sector is generally a high-volume, but low-margin industry. on top of its stores, while Edeka has launched a food tech campus to drive Between 2015 and 2019, the average operating margin for Europe’s 15 food-product innovation. Dutch grocer Jumbo operates in-store food markets largest publicly listed grocery groups was 3.0 percent. The average net prof- to attract and inspire shoppers. In addition to implementing click-and-collect it margin across the sector was 1.5 percent. This compares to an average services as an alternative option for home delivery of online orders, supermarket 5.8 percent net profit margin for the 135 largest publicly listed retail chains continue to open smaller convenience stores in urban areas, including companies globally. The performance between individual grocery operators Sonae’s Meu Super Stores, Spar, Intermarché, Delhaize, Aldi, Lidl, Carrefour and is mixed. Stronger performers are distinguished by their efficient operations, others. Other notable initiatives include Lidl’s plan to open an in-store pub in relevant store concepts and optimised retail fleet. These attributes facilitate Northern Ireland. preservation and even expansion of their market shares by enabling them to best cater to the growing consumer demand for convenience, discount and During the initial COVID-19 outbreak in 2020, and despite a surge in sales due e-commerce. Due to thin margins and the need for continuous evolution, to consumer stockpiling, many grocery retailers have suffered a short-term grocery retailers remain highly diligent with their operational cost base, erosion of their profit margins, as they faced substantial temporary costs in including occupancy costs of their store portfolios. response to the virus. Grocers are expected to resolve these issues post COVID-19. Margin and profitability improvements are derived from many different areas, ranging from in-store optimisations to tapping into fast-growing profitable Operator Landscape Operator

29 Net Profit Margins for Top 15 Listed European Based Grocery Groups

6% 5% 4% Net Profit 3% Combined 5 Year Average Net Profit Margin (%) 2% Margin: 1.5% 1% 0% -1% ICA

-2% Tesco Metro Kesko Casino Magnit Axfood Colruyt Carrefour Morrisons Sainsbury´s Dino Polska Ahold Delhaize X5 Retail Group X5 Retail Jeronimo Martins

Net Profit Margins 5 Year Average (2015 – 2019) Net Profit Margins for H1 2019 to H1 2020 5 Year Combined Average Net Profit Margin

30 Source: Refinitiv (H1 2020); Note: Margins based on the financial performance of the wider grocery groups. European Grocery Operators Who’s who: opportunity, competition and regulations shaping Europe’s grocery landscape

There are notable differences in the competitive grocery landscape across the European regions, both in the make-up and dominance of key grocery retailers. The tables on the following pages illustrates the main differences between the regional European grocery markets.

Considered are differences due to: country, level of consolidation, market maturity, domestic or foreign ownership as well as barriers to entry, such as competition law and local planning legislation, which may offer protection to the market shares of established operators. Operator Landscape Operator

31 Europe’s Grocery Operator Landscape by Region

Western Europe

In France, Germany and the UK, domestic operators are the leading grocery chains with extensive store networks across their countries. Local competition authorities closely monitor merger and acquisition initiatives to ensure healthy market competition. None of the leading grocers, such as Carrefour and E.Leclerc in France, Tesco and Sainsbury’s in the UK or Edeka Group and Rewe Group in Germany, have a market share above 28 percent. Notable exceptions are the Netherlands, where the Albert Heijn supermarket chain has a 35 percent market share, and Belgium, where foreign operators, including the likes of Carrefour, Aldi, Lidl and Jumbo, attract over 42 percent of all grocery spending. Strict planning rules apply, limiting and slowing organic growth at a local level in most countries and allowing many existing supermarkets to thrive.

Southern Europe

Grocery markets in Southern Europe are the most diverse in terms of operator types and the number of active operators, with relatively lower market shares captured by the main operators. Consumer preference for fresh produce and the proximity of stores has allowed many traditional local and regional grocers to maintain their market share. The Eurozone crisis, which caused many consumers to rein in their spending, has created a shift towards value. However, economic recovery seen in recent years has encouraged mainstream grocers to accelerate store openings. Zoning, planning and licensing regulations have been fairly flexible in Italy, Portugal and Spain.

32 Spanish Mercadona is the largest operator in the region, attracting 25 percent of all grocery spending in Spain. It also entered the Portuguese market in 2019. Northern Europe

The Nordic grocery markets are highly consolidated. In comparison with the rest of Europe, the number of major grocery groups is low, particularly in Finland, Norway and Sweden. In Sweden, ICA Gruppen attracts over half of all grocery retail spending. S Group and K Group in Finland have a combined market share of more than 80 percent. In Norway and Denmark, the largest two grocery groups, Norgesgruppen and Coop in Norway and Salling Group and Coop in Denmark, attract over two-thirds of all grocery sales in each country. The barriers to market entry in the region are high due to strong customer loyalty, strict planning legislation and the geographical challenges of building economies of scale. Lidl is currently the most notable foreign operator and a discount chain in the region. Danish Netto left Sweden in 2019 and sold its division to Coop.

Central Eastern Europe

Major European grocery groups have gained a strong foothold in the region, attracting the majority of grocery spending in the key markets. Economic growth and rapid development of modern retail stock have allowed many operators to achieve strong organic growth over the past 20 years. Strong competition has also forced market exits by foreign operators, including Tesco, who announced the sale of its Polish division to Danish Salling Group, and Carrefour, whose Slovakian franchise partner closed all stores. Notable is the fast-rising popularity of Biedronka in Poland. While owned by Jerónimo Martins, it is run as an independent operator, allowing it to source products, set prices and brand itself locally. 33 Operating Concepts Overview of the most common types of grocery formats

The European grocery market continues to grow, but revenue and profits are unevenly distributed among the major operators. Much of the uneven distribution is linked to the various supermarket brands and underlying business models these operators run in combination with the store formats and existing real estate footprints. As a result, property requirements will continue to vary by both the operator and the fundamentals of each country’s real estate investment market, which will need to be taken into account by potential investors.

Across Europe, there is a wide variety of grocery real estate formats. Supermarkets, hypermarkets and convenience stores are the most commonly used formats. Supermarkets and hypermarkets are often stand-alone real estate properties or a part of larger retail agglomerations, such as shopping centres and retail parks, whereby the grocery operator acts as an anchor, or a part of a mixed-use development with residential, offices or other uses. Other grocery channels include forecourt retail, click-and-drive and click-and-collect facilities and cashier-less mini supermarkets, as well as food divisions within other stores, such as department stores or drug stores.

For this report, Grocery Real Estate has been defined as an asset, whereby

Operator Landscape Operator grocery typically contributes between 50 percent to 100 percent of the rental income, often supported by a wider retail and leisure offer in daily goods and services.

34 Most Common Types of Grocery Real Estate Formats

Supermarkets and Discounters Convenience Stores

The typical store size ranges from 500 to 1,500 Convenience stores typically range from 80 square square metres. metres to 400 square metres.

Stand-alone supermarket units may vary from Stores are often located in major urban areas, such 1,500 to 3,500 square metres in size, depending as retail high streets, central business districts or near on the market. transport hubs.

Supermarkets are the most commonly used store Revenue is driven by higher prices for products in type, often located in urban areas and residential combination with higher inventory turnover. neighbourhoods. This format is one of the strongest growing channels The format is used by traditional and discount for sales in urban areas. grocery retailers.

Hypermarkets

Historically, hypermarkets ranged from 10,000 to 20,000 square metres in size.

New stores now often range from 3,500 square metres to 7,000 square metres in size.

The food offering is bolstered by a selection of non-food products.

Hypermarkets are a key sales channel for grocers, with the grocery share of sales typically varying 35 from 30 percent to 70 percent of total sales, depending on the market. Number of Discount Stores & Market Share Europe

50 25 Operating Concepts 45 40 20 Discount concepts have experienced continuous growth 35 Number of 30 15 Market Share stores (‘000s) 25 Grocery Sales Europe (%) Grocery retail, when stripped down, has always been about product, turnover 20 10 15 and distribution. The growth and success of the traditional supermarkets in 10 5 Europe was driven by economic growth, a robust middle class, suburbanisation 5 and rising car ownership from the 1960s onwards. Over time, higher growth 0 0 1991 2011 1995 1999 1997 1993 2015 2017

has shifted from Western Europe towards Central-Eastern European countries. 2013 2001 2005 2009 2007 2003 Historically, traditional grocers put emphasis towards low prices, rather than Number of Stores Market Share % the value of brands. Stores often carried over 10,000 different products. The hypermarket further bolstered its supermarket offering with a wide range of non-grocery products, aiming to satisfy a customer’s routine shopping needs Space Productivity Germany in one trip. by Food Retailer 2019

Aldi Süd 9,130 The German discount retailers Aldi and Lidl introduced a more disciplined Lidl (Schwarz Gruppe) 7,420 approach with the opening of stores in affordable locations, typically ranging Aldi Nord 6,620 from 1,200 to 2,000 square metres in size and offering a smaller selection of Globus 6,120 Penny (Rewe Group) 5,170 just 1,500 core products. Analysis by Kearney of German grocery sales data Kaufland (Schwarz Gruppe) 4,930 shows that discounters benefit from inventory turnover levels being 2.5 to 3 E-Center (Edeka) 4,530 times higher than in traditional supermarkets. As a result of higher floor famila Nordost 4,510 productivity, discounters also have lower staffing and real estate costs as Edeka/E aktiv/E-neukauf 4,450 Netto (Edeka) 4,280 a percentage of sales. The success of the discount format underpinned real,- (Metro Group) 4,170 rapid store expansion. According to Nielsen, the number of discount stores Marktkauf (Edeka) 4,150 Rewe Center Operator Landscape Operator in Europe has grown from 15,300 in 1990 to 42,400 in 2017. While market 4,040 Rewe (Rewe Group) 3,970 saturation has slowed the opening of new discounter stores over the past Norma 3,530 decade, analysis by Nielsen has also shown that further gains in market share famila Nordwest 3,500 Gross revenue per sqm (€) have been driven by continued sales growth of branded products. 0 2,000 4,000 6,000 8,000 10,000 36 Source: Nielsen (2019, Analysis covers 19 European countries), GfK; TradeDimensions; BulwienGesa (2020) Operating Concepts

Consumer lifestyle changes create new convenience formats grocery groups have accelerated the development of smaller convenience stores. While these stores have a smaller grocery range, they offer fresh food, Urbanisation, declining household sizes, the rise of e-commerce, the increased accounting for up to 50 percent of the category sales. The continued growth value of leisure time and declining car ownership in major cities have shifted in supermarket, discount and convenience stores all cater to the needs of consumer shopping preferences over the past 20 years in Europe. Attributes, consumers looking to shop every three to four days. These new consumption such as freshness, quality, value-for-money, cost and convenience have preferences have taken hold at the expense of weekly visits to more distantly become more important for grocery shoppers, which has fuelled demand located hypermarkets, which in turn has caused a gradual erosion of floor for discount retail as well as higher frequency visits to nearby stores with productivity over time for the hypermarket format. smaller basket sizes. To meet the rising demand for convenience, major

UK Grocery Retail Market by Channel 2016 vs 2019 Market Value Market Share of Grocery Market

Supermarkets +1.2% Supermarkets 46% 48%

Convenience +3.3% Convenience 21% 21%

Discounters +12.1% Discounters 13% 10% Hypermarkets - 0.5% Hypermarkets 8% Revenue 9% Share Online +3.6% in billion Online 6% by channel GBP 6% in % Operator Landscape Operator Other -0.9% Other 5% 6%

0 20 40 60 80 100 0 10 20 30 40 50 2019 2016 37 Source: IGD (2019) Share of Sales Area in Modern Grocery Europe 2018 Current Developments and Outlook Grocery operators continue to grow their store portfolios 5%

European grocery retailers operate 195 million square metres of modern Drugstores grocery retail space, according to data published by LZ Retailytics in 2018. 14% Supermarket formats account for 32 percent of this space, while 26 percent Minimarkets 32% and 23 percent can be attributed to hypermarket formats and discount stores, Supermarkets respectively. The share of occupied space by store type varies significantly by market. For example, hypermarkets occupy the majority of space in France and the UK, while this format is hardly present in the Netherlands due to widely developed grocery store networks and planning legislation.

Supermarkets account for the largest share of sales area in Europe followed by hypermarkets and discounters. 23% Discounters

Operator Landscape Operator 26% Hypermarkets

38 Source: LZ Retailytics (2018) Current Developments and Outlook

which looks to undercut prices from the likes of Aldi and Lidl, has set its sights Sales Area of Modern Grocery on European expansion. Traditional grocers, often hypermarket operators, Channels Europe are also contributing to the growth of discount retail. Following Edeka’s acquisition in 2009 of Netto Marken-Discount in Germany, Carrefour launched the discounter Supeco in 2012 in Spain and exported the brand to France Supermarkets 61.7 65.8 and Poland in 2019. Tesco launched Jack’s in the UK in 2018. Hypermarkets 50.2 52.0 The supermarket formats and convenience store formats are expected to Discounters 45.2 Sales area 55.3 occupy an additional 4.1 million square metres and 1.8 million square metres in million Minimarkets 27.0 28.8 square of space, respectively, across Europe. Delhaize has opened 23 supermarkets Drugstores 9.4 metres in Belgium during the first half of 2020 and announced it would open an 11.1 additional 25 to 30 stores, mostly convenience oriented. Spar has introduced 0 10 20 30 40 50 60 70 a new 80 square metres Spar City format for high-traffic locations in the 2018 2023 Forecast Netherlands, targeting rapid expansion.

Source: LZ Retailytics (2018) The COVID-19 pandemic has forced grocery operators to focus their resources on limiting disruptions to their daily operations. However, well-capitalised LZ Retailytics’ forecast anticipates European grocery operators to expand their grocers are pressing ahead with expanding their store portfolios. Some are store footprint by 19.5 million square metres by 2023. Discount grocers are the actively targeting quality space that may become available due to potential most active operators looking for new space and are expected to grow their failures and restructuring of retailers and leisure operators as well as European store footprint by 10.1 million square metres to 55.3 million square non-retail occupiers. The expansion plans will lead to continued demand metres, overtaking the total space used by hypermarket formats. At the end for space by discount formats, convenience stores and supermarkets. Some

Operator Landscape Operator of 2019, Aldi indicated it was planning to double the number of stores in operators are keen to downsize larger supermarket and hypermarket stores, London to 100 by 2025. In tandem, Lidl announced it would accelerate its UK which may result in a redevelopment or sublease of excess space to smaller expansion by opening 230 additional stores by 2023. Lidl also indicated that non-food retail tenants, depending on the opportunity. it would open 50 additional stores in Italy. Russian hard-discounter Mere, 39 Current Developments and Outlook Retailers continuously adapt store concepts to meet local consumer demands and target profitable growth

Grocery operators have a range of options to maintain the performance of their stores in case of emerging regional overcapacity, although these will vary on a store-by-store basis. These options include introducing new services, renting out space to other businesses, right-sizing stores or removing them from the network entirely. Grocery store operators and real estate investors may also be able to unlock residual value by adding non-grocery uses to existing sites or redeveloping grocery stores into mixed-use properties.

Hypermarkets, in particular, have seen their traditional formats change over time and in some cases have introduced new concepts and alternative uses. For example, Dutch grocer Jumbo has added a Foodmarkt Café in some of their larger stores, allowing consumers to taste freshly made dishes by professional chefs. Another invention by Jumbo is the introduction of pharmacies in smaller villages to complete the convenience offer. In some cases, operators have also introduced in-store farms, such as Metro in Germany.

Major grocery operators benefit from widely developed store networks and sophisticated supply-chains. These stores are therefore well positioned to cater to the fulfilment of online orders via click-and-collect, allowing stores to

Operator Landscape Operator optimise the sales floor, re-allocate grocery space and benefit from additional impulse purchases by store visitors.

40 Current Developments and Outlook

Outlook: Continued consolidation of the European grocery For real estate investors looking to invest in grocery real estate, the size of the market grocery market and the variety of different operators offer a range of strategic options, catering to different risk and return profiles. However, a focused According to Harvard Business Review, a business that can significantly grow investment plan, underpinned by diligent stock selection and a flexible asset its market share is likely to generate higher profit margins than its direct management plan for the wider portfolio of assets to unlock latent value, competitors. Both McKinsey & Company and Oliver Wyman expect further remains key. consolidation of the European grocery sector, which will see two to four very strong grocery retailers with winning formats emerge in each country. Scale will drive financial strength and improve margins, but in many European countries, regulators are reluctant to allow further domestic takeovers. One alternative strategy is international consolidation, but this is fraught with risk, which risk, which will result in various supermarket chains in Europe changing ownership. Examples include the sale of the Leader Price chain by Casino Group to Aldi in France and an acquisition of 172 Supersol stores in Spain by Carrefour from the Lithuanian Maxima Group, which has decided to leave the Spanish market. However, international acquisitions can also be challenging as illustrated by Couche-Tard’s recent takeover attempt of Carrefour, which has caused concerns with the French government about food sovereignty and job security at one of the largest employers in France.

Looking forward, a large number of grocers will focus on optimising store performance. Stores that will see productivity erode, will likely trigger a

Operator Landscape Operator review that may lead to repurposing initiatives of excess grocery store space, most notably in hypermarket formats. This may offer real estate investors opportunities to unlock latent value, but this will depend on the asset, the market context and risk appetite. 41 Real Estate Leasing Market

42 Investors seeking secure income will appreciate the typically strong covenants and long lease terms of food stores, but need to be mindful of potential items, such as indexation caps, rare but possible break options, and sustainable occupancy costs. While the grocery sector offers a stable rental outlook, the overall lack of market transparency due to significant operator ownership requires a diligent market and competition analysis in each individual investment case. Locational issues, potential alternative use as well as asset management analysis is recommended to ensure investors have flexibility in the future use of the grocery space to drive returns and mitigate risks.

43 Real Estate Leasing Market

Grocery real estate typically provides longer leases, often without break clauses

European grocers typically sign longer leases in comparison to other retailers. Convenience food store and supermarket leases tend to be three to five years longer on average across Europe in comparison to non-food leases. In addition, the use of break options is less likely, especially in Europe’s most mature retail markets. There are various reasons why operators sign longer terms, including protection of market share, limited options for taking alternative space locally and amortisation of investments. In some markets, grocery retailers may have repeated options to renew their leases, which limit landlord opportunity to access potential rental upside. Due to the size and importance of major grocery chains as tenants, and their ability to release equity via sale and leaseback transactions, investors highly regard the covenant strength of grocers. Due to longer lease terms and strong covenants, food stores appeal to investors looking for longer and more secure income streams. Real Estate Leasing Market Leasing Estate Real

44 At a country level, there is great variety in the typical lease length for grocery Lease lengths also differ by location and retail asset type. In Germany, the stores. Core product in the UK generally commands 15+ year leases, while leases preferred lease length for stand-alone stores in downtown locations and stores for core product in Portugal generally range from 15 to 20 years. In contrast, the in quality shopping centres is typically five or 10 years, while out-of-town leases for core grocery assets in Spain tend to vary between seven to 10 years supermarkets and discounters see leases vary from 10 to 15 years or more. In the and in Italy between nine to 12 years. Across the Nordics, lease lengths for quality Czech Republic, a typical lease term for hypermarkets is 10 years with a further product tend to range from 10 to 15 years in Denmark and Finland, while the five-year extension, while supermarket leases are usually on a “five+five” year period typically ranges from eight to 15 years in Sweden. The preferred option term, giving retailer an option to renew for five years at an indexation-only in the Netherlands is 10 years, with a minimum of 5 years. In Poland, lease terms rental uplift. In secondary or tertiary locations, a tenant may request a range from five to 15 years with multiple extension options for hypermarkets three-year break option. and from five to 10 years for supermarkets without break options.

Typical Lease Length Food vs Non-Food Range of Typical Food Store Rents Stores Europe by City Size Europe

Food Stores Non-food Stores Supermarkets & Discount Grocery Stores

Major Cities 20 Medium-sized Cities 15 Cities < 50,000 inhabitants Typical Hypermarkets Lease Length 10 (Number of Years) Major Cities 5 Medium-sized Cities Real Estate Leasing Market Leasing Estate Real Cities < 50,000 inhabitants 0 < 500 sqm 500 – 3,500 sqm > 3,500 sqm 0 50 100 150 200 Unit Size Annual Rent (€/sqm) 45 Source: JLL (January 2021); Note: The typical lease length is based on an analysis of over 20,000 shopping centre leases across Europe. Food store rents are typically linked to inflation, but Rent levels are a key lever for managing margins indexation hurdles apply European grocery operators are highly focused on managing their operational Grocery leases in Europe are typically linked to local inflation metrics and are cost base due to their operational model. Grocery retailers typically target usually adjusted on an annual basis. Due to the strong negotiating leverage of 2 percent to 3 percent of their annual turnover as rent for supermarket stores grocery operators, contractual rent growth for core and core + grocery assets in Europe’s most mature markets. To gain market share, some operators engaged can be limited to 70 percent, 80 percent or 90 percent of the annual indexation, in competitive bidding to secure new space, which caused contracted rents especially for German retailers. Newly developed grocery stores may require levels to get too high. As the opportunity to grow market share became ‘ratchet’ rent structures during the first couple of years of a lease, while local limited over time, the focus has shifted on reducing rent levels for stores market practices may dictate additional provisions around the minimum that were deemed over-rented. and maximum amount of annual indexation. As a result, it requires asset managers and investors to successfully agree on the terms of the indexation, Germany and the UK are among Europe’s most well-developed grocery including potential hurdles, lease reviews and lease length to ensure the markets, with fewer options for operators to gain significant market share projected rental growth is achieved, particularly if rents are expected to keep via new store openings. Intense competition has eroded margins, despite pace with inflation. economic growth. Over the past five years, the rental outlook for food stores in both countries has softened. Although rental growth has been observed for In some markets, notable indexation practices exist. In the UK, upward-only convenience store formats in major urban areas in line with expansion trends, rent reviews in combination with long leases have long benefitted landlords average hypermarket rents in Europe’s most mature markets, including of grocery stores with stable and growing income streams. Due to the growing Germany, have seen a modest decline in recent years. In some cases, operators grocery e-commerce and the relatively large share of the hypermarket format, have exited under-performing corporate-owned stores by transferring stores to this model is becoming increasingly difficult to maintain. In Poland, grocery local franchise partners or selectively closing stores in markets with diminishing rents can be euro-denominated with Eurozone CPI-indexation as well as zI´oty consumer demand or intensifying local competition. For example, in order to

Real Estate Leasing Market Leasing Estate Real denominated with Polish CPI indexation, depending on the tenant, location or reduce costs, Carrefour announced in 2018 a plan to close 238 supermarkets in retail asset. France, which it had previously acquired from the Dia Group in 2014.

46 Where rents are too high, there is a major trend for retailers to seek restructuring of rents to appropriate rent-to-sales metrics, especially in locations where competition for market share has pushed rents to unsustainable levels. Potentially for the highly competitive but growing discount market, landlords have a better chance to achieve higher rent levels whilst these retailers compete aggressively for market share.

Grocery Real Estate Rent Index Annual Nominal Rental Germany & UK Growth Germany

18% 16.9% 2011 – 2015 2015 – 2020 140 16% 120 14% 100 12% Annual Average 10% 80 Average Rent Index 8% (100 = 2011) 60 Annual Rental Growth (%) 6% 40 4% 2.5% 20 1.9% Real Estate Leasing Market Leasing Estate Real 2% 0.6% 0.0% 0 0% -2% -0.5% 2011 2014 2016 2012 2015 2019 2017 2013 2018 2020 Prime High Street Hypermarket Supermarket, Germany United Kingdom Big 5 (100 sqm) > 5,000 sqm discounter > 800 sqm 47 Source: JLL, IPD (2020) Change in lease practices and limited market transparency

Potential changes in the common lease terms is another aspect investors and asset managers need to consider when assessing opportunities. This could be the case where a triple net lease is in place, but the adoption of a new lease model may require the landlord to take responsibility for property maintenance. For diligent investors, even in cases where a triple net lease applies, a thorough technical appraisal of the asset will be warranted. For grocery sale and leaseback transactions, it is still a key requirement to offer triple net leases in order to achieve best pricing.

Another aspect that investors need to consider is the relative lack of transparency in the grocery real estate market across Europe. Due to high levels of operator store ownership, long leases coupled with indexation hurdles, and relatively limited leasing and investment transactions, it has been more difficult to track market rents and yield levels across Europe. Real Estate Leasing Market Leasing Estate Real

48 Real Estate Investment Market

49 Activity in the European grocery retail investment market is gaining momentum as investors search for secure long-term income. While opportunities to access core product have historically been limited, more core product will become available as market conditions, which require investments into the business, force grocery operators to raise capital. The prime yield outlook is stable for most markets but is likely to compress in the most sought-after markets. Profitability issues will polarise the demand for space and affect pricing for less attractive grocery stores with shorter leases. Asset management repurposing plans, particularly with last mile logistics and affordable housing uses, will help mitigate risks and identify opportunities to add value.

50 Real Estate Investment Market

Rising investor interest in supermarkets and grocery- anchored real estate

A rising number of regional and local real estate investors are now targeting stand-alone grocery stores and grocery-anchored assets across Europe. A daily flow of footfall supporting sales, an irreplaceable role of highly accessible stores in the food distribution process and diversification opportunities are among the defensive qualities now attracting more institutional capital. Typical grocery-anchored real estate may include shopping centres and retail parks, as well as residential units and office real estate, whereby a food store would contribute to a better secured income stream and, in some cases, be part of a larger investment proposition. Grocery Real Estate Investment With respect to supermarket portfolios and stand-alone food stores as an Volumes 2014 – 2020 investment product, the European grocery real estate investment market has traded €4.5 billion in assets on average each year between 2014 and 2020, United Kingdom representing 10 percent of the capital flows into European retail real estate. Germany The UK and Germany, traditionally Europe’s largest retail investment markets, Finland France have drawn-in the lion’s share of capital, attracting €1.3 billion and €1.2 billion Spain on average each year, respectively. Finland is Europe’s third-largest destination Sweden for grocery real estate investments, benefitting from a number of large portfolio Netherlands Average transactions, followed by France and Spain. Portugal Annual Czech Republic Investment Real Estate Investment Market Estate Real Poland Volumes 2014 – 2020 0 200 400 600 800 1,000 1.200 1,400 (€ millions)

Source: JLL (February 2021); Note: JLL’s retail investment analysis excludes 51 any investment deal less than $ 5 million in value. Grocery stores attracted 37 percent of the total retail consumption in the EU a relatively strong franchise culture. As a result, opportunities for building scale (27 countries) in 2020. With European grocery retail investments accounting within a short time frame with high-quality grocery stock have historically been for only 10 percent of Europe’s overall retail investment volumes on average limited. However, some characteristics of the grocery sector, such as a stable to between 2014 and 2020, real estate investors appear to have under-allocated moderate rental growth outlook, may now appear more attractive and secure capital towards grocery real estate and grocery-anchored real estate assets. in comparison to a more volatile non-food retail market.

There are a number of reasons why investors have historically not found suitable investment product, such as high levels of corporate ownership, use of franchise models and the need for scale complicated by fragmented ownership. One example is the Netherlands, where the grocery sector is characterised by

Grocery Sales and Investments as a Percentage of Total Retail Sales and Investments

60% 50% 40% 30%

20%

10%

0%

Real Estate Investment Market Estate Real France Finland United Czech Portugal Spain EU27 Sweden Germany Nether- Poland Kingdom Republic lands

% Grocery Sales of Total Retail Sales 2020 % Grocery Investment of Total Retail Investments 2014 – 2020

Source: JLL, Eurostat, Oxford Economics (February 2021); Note: JLL’s retail investment analysis excludes any investment deal less than $ 5 million in value; 52 The share of grocery store sales of total retail sales is based on the total retail sales in non-specialised stores with food, beverage or tobacco predominating (NACE Rev. 2: G4711), as a percentage of the total retail trade, excluding motor vehicles and motorcycles (NACE Rev. 2: G47) for 2018 and adjusted by available growth rates for 2019 and 2020. European grocery real estate attracted 22 percent of capital retail real estate investment volumes amounted to €29.9 billion in 2020; flows targeting retail in 2020, up from 6 percent in 2016 representing a 21 percent year-on-year decline; but within this, grocery real estate investment rose by 43 percent to €6.7 billion over the same period. As A direct comparison between the share of grocery sales as a proportion of total fewer major retail park portfolios were traded in 2020, the combined volumes retail sales and the share of grocery real estate investments as a proportion of for grocery real estate and retail warehouse assets fell by 4 percent year-on-year total retail real estate investments is more complicated than it may appear at to €12.7 billion. However, the combined share reached 42 percent of the total first glance. Many food stores are often also part of larger retail developments retail investment volume for the same period. and mixed-use complexes, including shopping centres and retail warehouse parks (RWP). These assets offer investors an additional range of options in risk and return requirements on top of fully grocery-focused investment products.

Many successful retail warehouse parks that are sought after by real estate European Grocery Investment investors are often typically anchored by one or more strong grocery tenants Volumes by Deal Size due to their daily flow of footfall. While these assets have exposure to non-grocery rental income, they also offer more flexibility to tailor the 100% tenant-mix to the changing consumer demand in local catchments. Investment 80%

volumes into grocery real estate and retail parks combined reached €13.7 60% billion a year on average between 2014 and 2020, equating to a 31 percent 40% share of Europe’s total retail investment volumes over the same period. 20%

The share of grocery real estate investment as a proportion of total retail real 0% estate investment has grown from 6 percent in 2016 to 22 percent in 2020. 2014 2016 2015 2019 2017 2018 2020 Real Estate Investment Market Estate Real Investor demand notably strengthened in 2020 due to continued resilience in consumer spending in food stores during the COVID-19 pandemic. European 1. €5m – €25m 2. €25m – €250m 3. €250m – €350m 4. €350m – €500m 5. €500m +

Source: JLL (January 2021); Note: JLL’s retail investment analysis excludes any 53 investment deal less than € 5 million in value. Notable transactions in 2020 include Esselunga’s €435 million sale and leaseback transaction to UniCredit Bank in Italy and X+bricks Group’s acquisition of 120 German food stores, worth €500 million, in two separate transactions from TLG Immobilien. Annexum has acquired 55 Jumbo supermarkets and seven additional assets in the Netherlands for €325 million in a sale and leaseback transaction and has sold 13 assets of this portfolio to Portico for €82 million upon completion of the transaction. LCN Capital Partners has acquired 27 stores in a sale and leaseback transaction from Mercadona in Spain, while Cibus bought 111 Netto stores in Sweden from Coop for €178 million, following Coop’s acquisition of the Swedish Netto division.

Grocery real estate transactions ranging from €25 million to €250 million make up the largest share of Europe’s annual grocery investment volumes. Since European Grocery & Retail Warehouse Investment Volumes 2014, four portfolios were traded in Europe with a lot size between €250 million 18 60% to €350 million, seven portfolios that changed hands ranged between 16 €350 million to €500 million and only three portfolios fetched a price in 14 excess of €500 million. It is notable’ so the sentence reads: It is notable that 12 40% % of out of the 14 transactions larger than €250 million, 10 materialised outside the Investment 10 Volumes Total Retail two largest grocery real estate markets of the UK and Germany. The average (€ billion) 8 Investment Volumes price for an individual food-store was €7.5 million between 2014 and 2020. 6 20% However, some stores traded for well over €40 million, while many more, 4 typically part of a portfolio, achieved a price below €1 million per store. 2 0 0% Real Estate Investment Market Estate Real 2014 2016 2015 2019 2017 2018 2020

Retail Warehouse Grocery % Grocery % Grocery & Retail Warehouse 54 Domestic investors are most active in acquiring grocery stores

In recent years, investors have primarily been interested in two distinctive routes for acquiring food stores and grocery-anchored real estate; targeting either core or value-add product. Domestic investors have historically been most active, contributing two-thirds to the overall grocery investment volumes. As many domestic investors benefit from on the ground local market knowledge, supporting stock selection and asset management initiatives, they have acquired grocery assets across the wider risk spectrum. However, most investments are focused on either core or value-add strategies.

A clearer distinction prevails among major foreign investors. Sale and leaseback has been a popular route for some to gain access to core product. For example, Realty Income Corporation bought 12 Sainsbury’s Superstores in the UK in 2019, worth €490 million; while Apollo Global Management acquired a portfolio of 12 Géant Casino assets and 20 Monoprix and Casino stores for €465 million in the same year in France. Value-add investments have also been made by overseas investors, particularly focused on acquiring German portfolios, with shorter lease terms for refurbishment and rent renegotiation purposes. Real Estate Investment Market Estate Real

55 Stable outlook on pricing for quality grocery stock 2020, due to the increased volume of capital targeting quality grocery stock. In comparison, Europe’s weighted net initial yield for prime shopping centres has Grocery real estate has, over the years, proven to be among the most stable moved out 90 base points since 2018, exacerbated by the COVID-19 pandemic commercial real estate asset classes in Europe in terms of pricing. High-quality and the challenges it has created for ‘non-essential’ retailers. stock provides investors with secure long-term income, supported by long lease structures and limited break options, in combination with strong covenants At a country level, pricing for prime stock typically ranges from 3.60 to 4.50 percent and annual indexation of rents. JLL’s view of prime net initial net initial yields in Europe’s most mature markets, such as Germany, to sub 6.00 to 6.50 percent in for quality grocery stock in Europe’s key retail markets stood at 5.10 percent on the Central Eastern European markets of the Czech Republic and Poland. Sustain- average at the end of 2019 and moved inwards to 5.00 percent at the end of able rent levels are key in the current conditions to maintain sharp pricing.

Prime Grocery Real Estate Yields 2019 and 2020 6.50% 6.50%

7.00% 6.50% 6.00% 6.00% 6.00% 6.00% 5.25% 5.25% 5.10% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%

5.00% 4.50% 4.25% 4.20% 4.00% 4.00% 4.00% Net Initial 4.00% 3.75% Yields (%) 3.00% 2.00% 1.00% Real Estate Investment Market Estate Real 0.00% Germany France United Spain Sweden Finland European Netherlands Poland Czech Italy Kingdom Average Republic Q4 2019 Q4 2020 56 Source: JLL (January 2021); Note: Unweighted average for Europe’s prime grocery yield, UK’s prime grocery yield is based on long leases with CPI/RPI indexing. Range of Typical Food Store Yields by City Size Europe

Supermarkets & Discount Grocery Stores

Major Cities The yield spread for high-quality supermarkets and discounters in the major Medium-sized Cities European cities and medium-sized cities typically ranges between 50 to 100 Cities < 50,000 inhabitants basis points, when compared to smaller cities. The yield spread is slightly larger for hypermarket assets and in countries where shorter lease terms are common. Hypermarkets Major Cities With respect to pricing of quality grocery real estate stock across Europe, the Medium-sized Cities yield gap with the other prime retail assets has narrowed as a result of the Cities < 50,000 inhabitants

structural change in the retail market. This trend has been accelerated by the 4% 5% 6% 7% 8% 9% 10% COVID-19 pandemic, and the underwriting of residual value for alternative Net Initial Yield (%) uses. At the end of 2020, although mainly driven by some outward movement in yields for shopping centres in particular, core grocery real estate was more tightly priced than shopping centres and retail parks. It should be noted that Prime European Real Estate Yields this differs by country. For example, Germany’s best retail warehouse parks Q4 2020 (Weighted) are anchored by strong grocery tenants. Indexation hurdles have historically limited strong rental growth. As a result of stimulus measures in response to 7.00% 5.70%

6.00% 5.50% the COVID-19 pandemic and the relatively strong performance of Germany’s 5.35% 5.10% 5.00% 4.80%

retail market, prime retail warehouse park yields have compressed to historic 5.00% 4.40% 4.10%

low levels of 3.90 percent. This is broadly on par with pricing for quality grocery Net Initial 4.00% 3.50% 3.25% 3.20% 3.15% assets in Germany. In contrast, the UK’s prime retail warehouse park yields Yields (%) 3.00%

have moved out 150 base points to 6.25 percent over the past two years due to 2.00%

concerns around sustainability of rent levels. Consequently, the yield gap 1.00% between quality grocery and retail warehouse park stock in the UK was 225 0.00%

Real Estate Investment Market Estate Real basis points at the end of 2020. Compared with pricing of prime office space Offices High Industrial Grocery Shopping Retail across Europe, the yield gap remained broadly stable in 2020. However, it Street Centre Park increased over core logistics real estate stock due to unprecedented investor Q4 2019 Q4 2020 demand in this sector. 57 Source: JLL (January 2021); Note: Unweighted average for Europe’s prime grocery yield Despite the uncertain economic environment, the medium-term outlook on structural changes caused by the pandemic and by increased investor yields for high-quality stock across Europe remains stable in most markets, interest. supported by the robustness and longevity of income. The availability of long-term domestic capital targeting grocery stock may further compress yield With significant investments required by grocery operators to adapt operations, levels, notably in Germany and Spain. Key investment pricing drivers continue more store portfolios across Europe are expected to be brought to market. to be location resilience, covenant strength and substantial lease length. Traditionally, special purpose vehicles and joint ventures have also been an option for grocery operators as they sought to partner with property specialists to For leases that come up for renegotiation or are near a turnover-based rent capitalise on development opportunities as well as raise capital. In practice, some review, grocery operators will be keen to re-assess the post COVID-19 revenue grocery operators have found it difficult to fully align interests in such structures potential as consumers are expected to curb their expenses for food products and have increasingly opted for cleaner sale and leaseback arrangements. Sale and shift a portion of grocery spending towards online. Grocery operators may and leaseback transactions can be a viable way for investors to benefit from scale also seek to obtain rent reductions from landlords already pressured by fashion effects and enter into new markets when acquiring larger portfolios. Grocery retailers into longer-term concessions. This will polarise yield levels between operators are, in turn, able to use the unlocked fresh capital to invest into high-quality assets and weaker grocery stock. Nevertheless, repurposing of updated retail concepts while securing locations and market share through long retail space into urban logistics distribution centres may offer alternative lease terms. A strong tenant covenant and commitment to the locations is key options to drive investment returns. in order to maximise value as investors usually seek long-term stability.

Supermarkets are increasingly looking to sale and Asset management plan to consider alternative uses leasebacks as a way to unlock fresh capital In the current market, there can often be strong alternative-use value potential, Sale and leaseback transactions are an attractive route to release capital and particularly for urban locations. Residential use or last mile logistics are the both grocery stores and warehouses, as tenants, are appealing to investors most interesting. An asset management plan considering such alternative

Real Estate Investment Market Estate Real looking for long-term income. The last major peak in sale-leaseback uses, whether it is a conversion into an urban logistics hub, implementation of opportunities was after the Global Financial Crisis when a number of retailers a click-and-collect facility or development of affordable housing, will provide sought to recapitalise via this route. This trend is again emerging, starting investors with more options to engage pro-actively with tenants, identify before the COVID-19 pandemic, but now potentially magnified both by the opportunities for growing operational income and to mitigate risks. 58 Innovation and Trends

59 Consumer shopping preferences have always been highly dynamic and vary by market. There is a variety of consumer trends, but the accelerated shift in grocery spending towards online channels, implementation of click-and-collect services, the adoption of in-store technologies and consumers demanding more action on sustainability, are structurally changing consumption patterns in local catchments and the performance of individual stores. Grocers will have to respond as consumers get more choice of where to shop, but there is an opportunity for supermarkets to evolve and stay relevant to consumers.

60 Innovation and Trends

Click-and-collect, a major opportunity to drive footfall and According to Supermarket Income REIT (published by Panmure Gordon), impulse spending at physical stores traditional grocers are only able to make four deliveries of online orders to customer homes an hour due to the perishable nature of produce. Drive times Click-and-collect is one of the fastest-growing retail services. It offers consumers contribute up to 80 percent of the cost for fulfilling online orders, with the control over the shopping process, while incurring only limited additional remaining 20 percent related to picking and packing. While click-and-collect processing costs to retailers. Due to their sophisticated distribution networks, does not tackle the costs of picking grocery items, implementing major grocery stores that benefit from easy access, are well-suited to offer click-and-collect services in the existing store network is an attractive option click-and-collect. Before the COVID-19 outbreak, various major retailers reported to help manage fulfilment costs of online orders. The COVID-19 outbreak has that when click-and-collect was offered, between 40 percent to 70 percent of significantly accelerated click-and-collect service implementation among online orders were picked up in store and the remaining share were delivered to retailers. Tesco, Asda and Sainsbury’s have expanded their click-and-collect consumers’ houses. Click-and-collect services also support additional impulse slots in the UK, while drugstore dm-drogerie markt has launched a purchases instore, with 25 percent to 50 percent of shoppers across Europe click-and-collect service across the whole of Germany. Aldi and Lidl have estimated to buy additional products when collecting online orders in-store. started testing click-and-collect services in several stores in the UK and Edgar, Dunn & Company predicted in 2019 that the European click-and-collect Poland, respectively, to offer customers more fulfilment market was expected to grow to €45.1 billion by 2023 (11 percent CAGR). options. A French click-and-drive model, rolled-out Click-and-collect has become the fastest growing segment of e-commerce. across the larger supermarkets on the outskirts of cities by major grocery operators, has seen One example is John Lewis in the UK. Since 2014 the department store operator a strong uplift in demand. Carrefour has has seen the use of its click-and-collect service grow by over 50 percent. also opened its first fully automated Accounting for 57 percent, click-and-collect was the most used option for click-and-collect store in Paris, where fulfilling online purchases, with 25 percent of packages collected at John Lewis customers can pick-up goods without stores and 75 percent at Waitrose supermarkets. John Lewis also collaborates help from store employees.

Innovation Innovation and Trends with Co-op supermarkets for click-and-collect, and in July 2020 the partnership was extended to include over 500 grocery stores in the UK.

61 Margin pressures have made enhanced consumer of stores, it was also able to reduce its overall energy consumption as services and in-store technology a requirement illuminated pricing meant less need for overhead lighting.

For grocery operators, the growth in online retail is a trigger to improve Many supermarkets have already installed self-payment machines to of- the overall in-store shopping experience. Grocers are likely to look at a fer customers more choice in payment methods and free-up employees number of ‘tech’ areas to improve their operations. Business consulting for other tasks. European grocers are also testing the so-called ‘just walk firm McKinsey & Co. believes convenience store technology can generate out’ and ‘self-scan’ technologies, pioneered by operators in the US and 5 to 10 percent more sales and improve earnings before interest, taxes, mainland China. The ability to take out traditional tills or self-payment and amortization (EBITA) by 2 to 4 percent by reducing waiting time machines would allow grocers to free-up floor space for more products for consumers, lowering employee numbers and improving inventory or reduce the overall store size and employee numbers. However, this management. technology has not yet been widely adopted in Europe.

Artificial Intelligence is expected to deliver the most substantial return Major grocers are also experimenting with robots to provide customers on investment. The likes of Tesco and Carrefour have already entered an with information, monitor in-store activities, send alerts when store alliance for sharing and analysing customer data. 7-Eleven and Marks & spillages occur and create excitement for children. Recent experiments Spencer use Microsoft technologies to optimise store performance, include robot shopping trolleys that can scan products and eliminate understand trends and manage inventory. One example of using the need for queueing at checkouts. There are concept drones that Artificial Intelligence is dynamic pricing, with the main benefits being can monitor inventory in real-time and send low stock alerts to store higher inventory turnover and lower food waste, as it provides clarity employees, but a more basic and cost-effective solution could be an on competitive price points, required stock and maximum returns. When adio-frequency identification (RFID) antenna which scans the number of US grocer Kroger rolled out digital dynamic price tags across hundreds units on the sales floor and sends alerts if needed. Innovation Innovation and Trends

62 As consumer demand rises, sustainability is recognised as a For grocers with a physical store footprint, sustainability offers an opportunity source of competitive advantage to differentiate their brand. Initiatives often go beyond reducing GHG emissions and focusing on local communities. Carrefour created vegetable Since the Kyoto Protocol came into force in 2005, retailers have made strides in rooftop gardens in France, open to volunteers, while Delhaize has tested reducing greenhouse gas (GHG) emissions and their impact on the environment. an ‘urban farm’ on top of one of its stores to reduce GHG emissions from Most progress has been made with Scope 1 and Scope 2 emissions that are distributions. Marks & Spencer introduced urban farming in its London food typically under direct control. Initiatives often include energy efficiency, use of stores, while Edeka developed its Biomarkt concept. E.Leclerc dedicated renewable energy sources and reducing water consumption. One example is some under-utilised hypermarket space to selling second-hand goods, the world’s first zero-carbon store in Sweden operated by Lidl. Scope 3, value allowing them to enhance margins and differentiate their product offering. chain emissions, which often represent the largest source of greenhouse gases, is an area that needs more attention.

Developments in the run-up to COVID-19 have put sustainability back on top of the agenda for corporates and governments, as consumers demand more action from retailers to increase efforts. The demand for organic food and awareness of local produce and farmers has significantly increased. Fashion retailers have already experienced consumers’ intolerance for outdated practices, such as incinerating excess stock. According to The Global Consumer Report 2019, 73 percent of 25 to 34-year-olds in the UK, i.e., Millennials, are willing to pay more for sustainable brands. However, when considering grocery shopping, buying ethically sourced products adds an average of €560 a year to a household bill, compared to the cost of equivalent in-house brands.

Innovation Innovation and Trends This additional cost is still significant for many young households to spare on top of their spending budgets.

63 Grocery retailers have taken initiatives to reduce their impact on the environment but also recognise the industry still has a journey ahead before it becomes a fully circular economy. Physical stores can play a positive role in enhancing and advocating sustainability and strengthening ties with its consumers, particularly when expected legislation with respect to requirements around packing, energy consumption and waste, becomes more stringent. Various European grocers, including Waitrose, Marks & Spencer and Lidl are already focusing on reducing the need for plastic packaging.

The final verdict on what carves out a larger carbon footprint, physical grocery shopping or online grocery shopping in Europe, is not yet decided. Bulk transport of grocery goods reduces the overall carbon footprint and the distribution of goods via a store or warehouse to a customer’s house is a key differentiator in the overall emissions. A delivery van that is able to combine multiple drop-offs of online orders in one journey could theoretically be more eco-friendly in comparison to multiple consumers visiting a store by car. The introduction of electric delivery trucks and delivery bikes for last-mile delivery will strengthen this argument. However, this would not necessarily be the case if customers visit nearby stores via a combination of cars, electric cars, bikes or walking, in comparison with remotely located warehouses. Innovation Innovation and Trends

64 Outlook

65 Outlook

Amidst the COVID-19 pandemic, European grocery real estate has established also looking to adapt to broader societal trends, such as growing consumer itself as a systemically relevant asset class and a crisis-resilient investment. preference for value and affordability, along with consumer desire to shop The grocery real estate sector is emerging as a secure and defensive subsector more sustainably. within the broader retail investment market. As capital allocations towards commercial real estate still continue to rise, pension funds, institutional capital and dedicated long-income funds are likely to value the grocery sector due to the robustness and longevity of its income and diversification benefits. While real estate investors have historically under-allocated capital towards grocery real estate and grocery-anchored real estate assets, the investment case for this growing sector is becoming clear.

Clear Trends

For investors looking to acquire grocery real estate, trends shaping the grocery sector are clear and will support them with setting out the investment case, pricing-in risks and underwriting mitigating measures. The grocery sector benefits from a daily flow of footfall, but focus on protecting store margins is critical. Food sales are forecast to be affected in 2021 by the economic fallout from COVID-19, before returning to moderate growth in the years after. However, the grocery sector is performing in a more stable manner compared to other retail sectors. Furthermore, while a proportion of the shift in grocery spending towards online channels, observed during the pandemic, is likely to

Outlook be permanent, parts of this trend can be largely recaptured by the physical stores through well-executed click-and-collect services. The grocery sector is

66 Physical Space Appeal Alternative uses have grown in recent years and stand-alone grocery sites are more likely to be underwritten with high residual values. Some specialist Many stand-alone grocery stores are located near customers in highly accessible investors have developed affordable housing on existing grocery sites. Larger locations. Grocery operators will, in most cases, be keen to maintain presence developments, such as hypermarket stores, could be transformed into urban in local catchment areas to protect market share. While some operators may logistics hubs, supported by higher rent levels that some logistics operators are seek concessions from their landlords upon lease renewal, the majority continue willing to pay for highly accessible sites in major urban areas. Smaller asset to sign long leases. New stores that offer an opportunity to increase market management initiatives could entail repurposing space into click-and-collect share, may even see competitive bidding among operators. facilities to strengthen ties with local catchments and encourage impulse spending. Food stores will continue to fulfil an important role of the food distribution process in terms of direct sales as well as click-and-collect services and micro-fulfilment options tied to physical stores. Physical stores provide convenience to consumers looking to make regular visits to buy fresh produce, while in-store click-and-collect services offer consumers more control over the shopping process. For many grocery operators, physical space remains the most profitable model for food distribution. Although click-and-collect does not eliminate the costs of picking grocery items, it emerges as the most efficient digital integration tool in retail and its effectiveness is directly tied to the quality of bricks-and-mortar locations and layouts. In-store technology is recognised as an opportunity to enhance store performance. Technology to automate the stock-picking process for home delivery or click-and-collect is on the rise, but it remains costly at a time

Outlook when operators need to carefully weigh their return on investments.

67 Investment Opportunity

The European grocery real estate investment market is gaining momentum with solid growth in investment volumes and increased share of the broader retail investment market. The continued growth in e-commerce, accelerated by the COVID-19 pandemic, has added to the recalibration of grocery real estate investment from long leases and low returns to resilient and defensible investment products. This is further supported by the current low to negative rates of return on long-term government bonds and the weak inflation outlook, on the one hand, and sharp pricing of quality product on offices and logistics assets on the other. In light of strong investor interest, the grocery investment market is becoming more institutionalised, though local market knowledge and asset management know-how is still required to ensure long-term success.

Increased appetite among grocery operators for pursuing sale and leaseback transactions will provide investors with a window of opportunity to access core product. In some European markets, grocery operators prefer leasing space instead of ownership, whereby future merger and acquisition activity could trigger a sale and leaseback process of a property portfolio of a newly acquired grocery business. Additional quality stock is expected in the future as several specialist value-add investors complete their ‘work out’ business plans and prepare for exit. Outlook

68 69 Bibliography

70 Bibliography

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76 Contacts

Neil Lipscomb Henrike Waldburg Director, Retail Investment, Union Investment Real Estate GmbH International Capital Markets, EMEA Head of Investment Management Retail +44 (0) 207 399 5674 +49 (0) 40 34919 4154 [email protected] [email protected]

Tjard Martinus Olaf JanSSen Head of Retail Research, EMEA Head of Real Estate Research +31 (0) 20 540 5405 +49 (0) 40 34919 4354 [email protected] [email protected]

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