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Gourmet stores give shoppers plenty to chew over.

After years of mediocre grocery shopping experiences, Manhattan's newly emerging gourmet foods playground is here to stay.

In spite of mounting competition between various upscale food markets--the 14th Street corridor is a particularly vivid example, with the Food Emporium, a Whole Foods store and a soon-to-open Balducci's lining up one after another--brokers say demand for gourmet foods is strong enough to support all of these stores.

What's more, the stores them selves have gained enough confidence for unprecedented expansions.

Balducci's alone is planning to open anywhere from six to 10 new locations in Manhattan in the next few years, and Whole Foods is not far behind, with plans underway for a new store in Tribeca and hopes for a long-awaited spot on the Upper East Side.

New York didn't always have it so good. According to Richard Hodos, president of Madison HGCD, upscale food markets are a relatively recent phenomenon, going back to the 1980's and 1990's. Before that, Manhattan's supermarket landscape left a lot to be desired, with the corner deli being one of the most convenient places to shop.

"The supermarkets that existed [then] were anything but super," Hodos explains. "There was D'Agostino, there was Christie's, there was A&P and there were smaller operations scattered throughout the city and that was it."

In Hodos' view, what really allowed stores like Whole Foods to emerge was the sudden availability of large blocks of retail space, coupled with new trends in food consumption. As expensive, exotic products like unpasteurized French cheese entered the U.S. market, New Yorkers developed a taste for organic and ethnic foods, the kinds of foods that couldn't be found at A&P.

"I think that shift happened in two phases--one was in the mid-1980's, when the gourmet trends started and a company like DDL Foodshow did a glamorous presentation of food on Columbus Avenue, which was better than Harrod's, better than anything I've see in my life," Hodos explains. "And that spurred supermarket chains like A&P to try to create upscale versions of [themselves].

"The second phase happened very recently; you can't talk about it without mentioning Whole Foods. It is really changing the way Manhattan is shopping for food--they came in a big way, with multiple stores and they are providing very high-quality products at a price-quality equation that consumers are comfortable with. For those interested in a 'better shopping experience' Whole Foods is definitely what people want, as evidenced by the lines."

According to Jeffrey D. Roseman, executive vice president with Newmark Retail and the broker recently appointed to be Balducci's leasing agent, the well-to-do Manhattenites are looking for creative ways to spend their money.

"New Yorkers are starving for good places to shop, for groceries and prepared foods," he says. "For such a long time, they've been forced to go to small, dirty supermarkets and now they are begging for upscale [stores.] People are making more money and are more willing to spend money on themselves and they realize that food is a luxury and a hobby for many."

But while gourmet food markets might be eager to take advantage of the demand for their products, the real estate side of the equation presents something of a problem.

Ideally, stores like Whole Foods would like to cover more areas in the city, particularly when it comes to uptown. But retail spaces of 40,000 s/f or 50,000 s/f are hard to come by and in many neighborhoods they may be priced above a food market's somewhat stringent budget.

"It all comes down to whether they can afford the space," Hodos says. "Space has been available downtown at relatively low rates and that's why they have been able to come into it. It's the perimeter of the supermarket, the bakery, the deli counter, the specialty foods, where all the profit is made, but the real estate in the center of a store costs the same as the real estate on the perimeter."

According to Cory Zelnik, president of Winick Realty Group, a food market's best bet for a home is in a new construction project, since those properties can accommodate a larger retail space than old buildings.

"On the Upper East Side, for example, you have conditions where [most buildings] are not set up to take a 40,000 s/f supermarket. And it's a very expensive town, so you learn to adapt. Historically, for companies coming into the city for the first time, it's very tough to get going. But now that everyone can see how Whole Foods has adapted, I think more people will come in and try to figure it out," he says.

In the view of Alan Victor, executive vice president with the Lansco Corporation, as the older supermarkets face rising rental rates, there might be more opportunities for the newcomers in midtown and uptown.

"A lot of the older, well-established markets have been in their locations for many years and their rents are very reasonable and, as a result, they can withstand the competition," he explains. "As their leases come due, you may see more of them not being able to stay in those locations."

Do the brokers think all of the expensive newcomers will be able to survive in a market rife with competition?

Jeffrey Roseman thinks that there is enough demand to go around.

"We've now learned a new way to eat," he notes. "We understand that there is a whole different world out there for places to buy food and I don't see it changing at all. Do you see gourmet coffee shops going out [of business]? I don't think so."

Hodos and Victor, however, are more cautious. "I think the ones that are clean and well-kept and well-merchandized will survive. The ones who will have their rents raised and could no longer maintain that delicate balance will have to close," Hodos notes.

"You will probably see a lot of the market in the center of the store diminishing--the canned foods, the paper towels--you will see a lot of the food markets giving up those items to big box stores. And there is always going to be some consolidation."

Adds Victor, "That's the wonderful thing about our capital system--the strong will survive and the weak will not."
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Title Annotation:Retail Sales & Leasing
Author:Misonzhnik, Elaine
Publication:Real Estate Weekly
Geographic Code:1USA
Date:May 18, 2005
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