Costco expansion nears completion

The 30,000 sq.ft expansion of Vintage Oak's Costco is scheduled to be completed in August. According to the Novato Advance, the City is very excited to get its hands on the additional sales tax revenue that the expansion will bring. They estimate that this will amount to $150,000 each year; based on a sales tax rate of 0.75%, that means they expect the 30,000 sq.ft expansion to make $20m in annual sales, or $670 per square foot. I bet it does a lot better than that.

“The Costco project in its entirety will most likely be done by the end of August or early September, so that’s looking pretty promising,” said Kathy DeOchoa, general manager of Vintage Oaks. “We’re really excited to have it close to completed. It’s going to give people a great reason to come and stay, and shop in Novato, as well as in the shopping center, so we’re really excited to see them expand.”

The City will need every cent, given the current slowdown in consumer spending and the rocketing foreclosure rate in Novato.

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.

Tough January for Retailers

The slowdown in consumer spending is evident in the reported sales results, with many stores reporting a decline in year-on-year sales.

Retailers with outlets in Marin include department stores Nordstrom and Macys, whose same-store sales in January were both approx. -7% lower than the same period last year. Target was down -1.1% and Gap dwn -2%, while Ann Taylor and Abercrombie & Fitch each saw 0% growth.

Talbots, which runs Talbots and J Jill brands at The Village at Corte Madera, saw its quarterly sales fall by 6%, and responded by announcing that it would increase to 100 the number of underperforming stores it plans to close. Chicos, also with a new store at The Village, had a shocker, with January same-store sales down -22%.

Best performer among the large stores was Costco, whose same-store sales for the January period increrased by 7%. Sales at Ross were up 1.1%.