Grocery-anchored centers continued to be an attractive property type for investors in 2017, with sales volumes increasing by 5.3 percent. The asset class remained stable amid a period of low retail transaction volumes. But after grocery store expansions went bananas in 2016, the industry took a minute to digest in 2017. Openings of new grocery stores reached 13.4 million square feet of space, which is a decrease of 28.8 percent year-over-year, according to JLL’s Grocery Tracker 2018 report.

“It’s not surprising that overall grocery store expansions fell in 2017, when compared to the boom in 2016. The largest grocery chains are feeling pressure from specialty grocers, discount grocers and wholesale clubs. But we are seeing strong local chains competing head to head, and winning. Locations within the trade area and in the right markets is key. More than one-third of new store openings were in just three states: California with 1.6 million-square-feet, and North Carolina and Virginia with growth of 2.7 million-square-feet across both states. Retail follows rooftops, so the states with strong population growth will continue to see an influx of grocers,” said James Cook, Director of Retail Research, JLL.

Grocers that had strong performance showed an appetite for three main experience drivers:

Diet and discount embracers: Grocers like Aldi, Lidl and Grocery Outlet are showing shoppers that quality doesn’t have to come with a high price tag – the discount grocers are regularly 30 percent cheaper. Gluten free and vegan-only diets aren’t going anywhere any time soon, so these grocers are embracing the trend – Aldi has launched LiveGFree, while Lidl prides itself on a stellar vegan supply option.

Label-less: Grocers are embracing private label product, which allows brands to quickly respond to market changes while eliminating third party costs. They are both debuting private labels and adding to existing product lines to build brand allegiance and improve margins, which can often be single digit numbers, but once private labels are introduced, margins can more than double. Albertsons has grown its private label, O Organics products by 50 percent and hit $1 billion in sales, a 15 percent increase after adding items to the line in 2017.

More mobile: Between online shopping, grocery delivery and click and collect, grocers are focusing on digital platforms to appeal to shopper’s desire for convenience and multi-channel shopping options. That said, online penetration in the sector remains incredibly low at 0.8 percent – so look for grocers to use digital integration to enhance, not replace, existing customs. Kroger opened its 1000th ClickList store, which is curbside pick-up, and has seen digital sales more than double since the launch.

While grocers are taking a break on new store openings, investors’ hunger for grocery-anchored shopping centers isn’t satiated yet. JLL’s Retail Investment Sales leader, Chris Angelone shared that it’s increasingly more difficult to make a general statement about the sector. “Owning a property anchored by one of the top grocery chains is no longer a guarantee of strong performance. Investors are now looking to hedge risk by finding pockets of geographic safety for their acquisitions. Owning retail is like owning an operating business, and investors need to keep in mind changing consumer preferences,” Angelone added.

“The grocery sector in the year ahead will be an eventful one. We expect increased competition from foreign chains and non-grocer domestic companies entering the space, which will spur major advancements in technology. Grocers will be changing the way consumers shop, interact with their brand and products,” said Taylor Coyne, Senior Retail Research Analyst at JLL.

Trends to watch in 2018

Smaller and more focused stores: Smaller footprints have more opportunities in urban locations and in mixed use projects. Grocers like Aldi and Trader Joes benefit from the flexibility to take smaller spaces in vertically integrated projects. Some brands will continue expanding footprints, but traditional and legacy grocers may begin focusing on existing inventory and investing in improving the shopper experience.

Data driven technology: As shoppers demand more digital integration, retailers have new access to unprecedented amounts of data. This data will provide greater efficiency in operations and enhanced customization of products for consumers.

Blockchain:  Blockchain is a digital technology that has been talked about at length in the media, but also tough to easily explain. For the grocery industry, blockchain has the capability of improving food safety, allowing products to be recalled more quickly, and improving inventory management. With blockchain’s ability to improve data management between stakeholders in the supply chain, the grocery industry is prime for integration.

Partnerships and consolidations: The acquisitions with the greatest implications will occur between grocers and non-grocery companies, like Kroger’s potential partnership with Ace Hardware, that focus on innovation and technology that can build upon digital networks, logistics, delivery, and customer engagement.

Rapid checkout: Expect grocers with existing rapid checkout technologies to continue to roll out programs across the country and for others to join the ranks of several grocers who have been testing checkout free concepts. Walmart is expanding Scan & Go mobile checkout to 100 more stores and Kroger’s Scan, Bag and Go will be in 400 stores in 2018, and AmazonGo opened to the public in the beginning of 2018.

For more insights on how these trends impacted the grocery sector in 2017, download JLL’s Grocery Tracker 2018 report.