Friday, March 14, 2008

Novato Grocery Wars

For many years the citizens of Novato have bemoaned the lack of good retailers in their town. Well things are certainly changing now, at least in the grocery sector, where two major supermarkets are under construction, a Trader Joe’s recently opened, Costco is expanding and a discounter called Grocery Outlet is planning to enter the market.

So is there room for all this additional supermarket space – or will the massive increase in competition force some existing grocery stores out of business?

In the incumbent corner, the supermarkets currently serving the community are:

Safeway, Novato Fair: 42,800 sq.ft
DeLano’s, The Square: 30,000 sq.ft
Harvest Market, San Ramon Plaza: 25,000 sq.ft
Costco, Vintage Oaks: 40,000 sq.ft (food section)
Safeway, Pacheco Plaza: 22,500 sq.ft
Trader Joe’s, The Village: 12,100 sq.ft

Total 172,400 sq.ft

Population 60,000
Sq.ft per Capita 2.9 sq.ft

By 2009, the following new additions will be open:

Safeway, Hamilton: 55,000 sq.ft
Whole Foods, Novato: 42,500 sq.ft
Grocery Outlet, Novato: 25,000 sq.ft
Costco expansion: 10,000 sq.ft (est. food section)

Total (existing & new) 304,900 sq.ft
Population 61,000
Sq.ft per Capita 5.0 sq.ft

Going from 2.9 sq.ft per capita to 5.0 sq.ft per cap is a major increase, which is certain to have some lasting impact on the existing food retailers in Novato. There isn't going to be a lot of population growth to support this additional floor space, so retailers are going to have to fight hard to grab market share.

The table below details my estimate of how grocery sales will be affected by the new competition. In total, annual supermarket sales will increase from $128.4 million to $164.7 million. This means supermarkets in Novato will hold on to a bigger share of resident spending on food by taking share from supermarkets outside Novato and from non-supermarket channels, such as convenience stores and specialty food shops.

Because of the increased floor space, the average trading level per square foot will decrease by 22% overall. Individual stores will be impacted to different degrees, depending on their individual competitive strengths. But it looks like some existing supermarkets will see their sales fall by 30% or more.

I’ve also assumed that the Safeway at Pacheco Plaza will not be replaced by a supermarket, but if one were to open it would really struggle to establish itself in this market.

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