The next revo­lu­tion

E-com­merce is poised to dis­rupt gro­cery and food distri­bu­tion busi­nesses

Houston Chronicle Sunday - - BUSINESS - By Paul Taka­hashi

SHARA Ser­rano pulled into the Kroger park­ing lot and waited a few min­utes as a store clerk loaded her trunk with the gro­ceries she or­dered on­line ear­lier that day.

“The con­ve­nience has been ab­so­lutely great,” the Mey­er­land mother of two said, “es­pe­cially when I don’t have the time to go shop­ping with the kids.”

Ser­rano is one of mil­lions of con­sumers whose on­line shop­ping habits are trans­form­ing the gro­cery busi­ness, fu­el­ing de­mand for new food man­u­fac­tur­ing plants and cold stor­age fa­cil­i­ties. In the Hous­ton area alone, cus­tomers like Ser­rano have spawned a frenzy of in­dus­trial de­vel­op­ment.

Goya Foods, for in­stance, re­cently an­nounced plans to nearly dou­ble its Hous­ton man­u­fac­tur­ing foot­print. The New Jersey-based food com­pany is adding 324,000 square feet of new ware­houses, of­fices and sup­port build­ings to its 380,000-square-foot man­u­fac­tur­ing and distri­bu­tion fa­cil­ity in Brook­shire, west of Hous­ton. The plant’s ex­pan­sion will help Goya reach new con­sumers across the Bayou City and the western U.S.

Pre­ferred Freezer, a New Jersey­based cold stor­age com­pany, last year opened its fourth fa­cil­ity in the Hous­ton area. The 180,000-square-foot cold stor­age fa­cil­ity in Pasadena, southeast of Hous­ton, can hold 10 mil­lion cu­bic feet of frozen meats, seafood, pro­duce and juice, held at tem­per­a­tures rang­ing from 36 de­grees to mi­nus 4 de­grees. From there, the frozen food is dis­trib­uted to gro­cery stores, restau­rants and food ser­vice com­pa­nies, both in the U.S. and abroad.

Ex­perts pre­dict that for­eign gro­cers, in­clud­ing Ger­many-based Aldi and Lidl, will have to build their

own ware­houses once they reach crit­i­cal mass.

To meet the grow­ing de­mand for con­struc­tion, Hous­ton-based en­gi­neer­ing firm Lock­wood, An­drews and New­nam re­cently ex­panded its food distri­bu­tion and man­u­fac­tur­ing ser­vices in the south­ern U.S.

LAN, a sub­sidiary of plan­ning and ar­chi­tec­ture firm Leo A Daly, plans to pro­vide plan­ning, de­sign, site se­lec­tion and con­struc­tion man­age­ment ser­vices to clients in the grow­ing in­dus­try.

“Gro­cery is one of the last re­tail cat­e­gories to really ex­pe­ri­ence a dra­matic revo­lu­tion in the on­line space,” said Kelli Hollinger, di­rec­tor of Texas A&M’s Cen­ter of Re­tail­ing Stud­ies. “As more and more con­sumers have pos­i­tive ex­pe­ri­ences with meal sub­scrip­tion ser­vices or try­ing out click-and-col­lect, that’s go­ing to rapidly change con­sumer be­hav­ior.”

No more cleanup on aisle 10

Al­though gro­ceries lag home goods and ap­parel in on­line sales, it’s one of the fastest­grow­ing e-com­merce seg­ments. About 1 in 5 Amer­i­can house­holds shop for food on­line.

Busy fam­i­lies are us­ing gro­cery de­liv­ery star­tups like In­stacart and Shipt. Work­ing pro­fes­sion­als are buy­ing din­ner kits from meal-sub­scrip­tion com­pa­nies like Blue Apron and Hello Fresh.

And Ama­zon has taken no­tice. The e-com­merce gi­ant last year bought Austin-based Whole Foods for $13.5 bil­lion.

De­mand for food pro­cess­ing, prepa­ra­tion and stor­age fa­cil­i­ties is grow­ing with Hous­ton’s ris­ing pop­u­la­tion and e-com­merce pref­er­ences.

“We are see­ing more of those food-re­lated users float­ing around,” said Chad Par­rish with First In­dus­trial Realty Trust, one of the largest U.S. own­ers and de­vel­op­ers of in­dus­trial real es­tate. “You will see more and more of those users com­ing into the mar­ket.”

Fig­ur­ing it out

It’s still un­cer­tain how much e-com­merce will ac­cel­er­ate de­mand for food pro­cess­ing and stor­age fa­cil­i­ties, said Rusty Tam­lyn, a com­mer­cial real es­tate bro­ker with HFF.

“It’s really early on,” Tam­lyn said. “Ama­zon hasn’t fig­ured out how to op­er­ate Whole Foods yet and if they’re go­ing to use their stores as distri­bu­tion cen­ters. Ev­ery­one’s been try­ing to fig­ure out how to de­liver gro­ceries and not lose a ton of money.”

De­liv­er­ing gro­ceries has al­ways been a chal­lenge for tra­di­tional gro­cers and e-com­merce star­tups. Com­pa­nies such as Pea­pod have been try­ing since the 1990s to make the low-mar­gin gro­cery busi­ness prof­itable in the on­line era.

Most ex­perts be­lieve food will be de­liv­ered, not out of re­gional ware­houses and distri­bu­tion cen­ters, but from ex­ist­ing gro­cery stores clos­est to con­sumers. Fo­cus­ing on the “last mile” of distri­bu­tion is key for the gro­cery in­dus­try, where prod­ucts like ice cream can eas­ily melt in Hous­ton sum­mers.

“It’s a tough busi­ness for peo­ple to try to make money on home de­liv­ery of per­ish­ables,” Tam­lyn said. “A lot of peo­ple lost mil­lions of dol­lars with home de­liv­ery.”

Aaron Hin­derer, di­rec­tor of sales and op­er­a­tions for Pre­ferred Freezer, said e-com­merce’s im­pact hasn’t yet hit the com­pany’s cold­stor­age busi­ness in Hous­ton. The com­pany has four cold­stor­age fa­cil­i­ties in Hous­ton where mil­lions of pounds of frozen foods are stored.

Hin­derer es­ti­mates frozen food for on­line sales rep­re­sents about 5 per­cent of Pre­ferred Freezer’s over­all busi­ness. That in­cludes an­cil­lary prod­ucts like gel-packs, which are used to keep pre­pared din­ners cold in meal kits.

How­ever, Hin­derer ex­pects the e-com­merce side of the busi­ness to ex­pand.

“E-com­merce is grow­ing,” Hin­derer said. “It’s still a very small part of our busi­ness, but it’s tak­ing away mar­ket share.”

Shop­ping lists to Click­List

Gro­cers are in­creas­ingly of­fer­ing curb­side pickup and home de­liv­ery ser­vices to com­pete with e-com­merce ri­vals.

Kroger, one of the largest gro­cery chains na­tion­ally, be­gan of­fer­ing on­line gro­cery shop­ping two years ago in Hous­ton. The Cincinnati-based gro­cer launched Click­List, which al­lows cus­tomers to or­der gro­ceries on­line and have them avail­able for pickup or de­liv­ery.

To­day, 57 of Kroger’s 111 stores in the Hous­ton area of­fer curb­side pickup, while 30 stores also of­fer home de­liv­ery. Pickup costs $4.95 per or­der, and home de­liv­ery costs $11.95 per or­der.

Al­though on­line or­ders rep­re­sent less than 10 per­cent of its busi­ness, Kroger ex­pects it will grow. Al­though Kroger de­clined to dis­close ex­act num­bers, it said thou­sands of Hous­ton fam­i­lies have used Click­List since it launched. The com­pany plans to ex­pand Click­List to more than 20 lo­cal stores in 2018.

“We see e-com­merce as the way of the fu­ture,” said Ja­son Payne, Kroger’s e-com­merce man­ager over­see­ing Hous­ton. “We’ve put a great deal of in­vest­ment in e-com­merce.”

Each of Kroger’s Click­List lo­ca­tions fea­tures a ded­i­cated e-com­merce space span­ning 450 to 1,000 square feet. In­side, there are com­puter ter­mi­nals track­ing on­line or­ders, freezer and re­frig­er­ated spa­ces as well as a dry foods stag­ing area.

Out­side, the su­per­mar­ket is mapped out much like an e-com­merce ful­fill­ment cen­ter. Black stickers on the ground note aisle and shelf num­bers. An army of 15 to 60 e-com­merce clerks push­ing carts full of black bins fan out across the store, pick­ing up items us­ing hand­held scan­ners that tell them which prod­ucts to pick up and what route to take around the store.

On­line shoppers can leave notes for their clerks, telling them to pick up fruits of a cer­tain ripeness or ex­actly which brands of tooth­paste they like. Or­ders are scanned mul­ti­ple times to en­sure ac­cu­racy.

This year, Kroger will also de­but its own meal kits in 20 stores across Hous­ton. The semi-pre­pared kits, sim­i­lar to Blue Apron, will of­fer din­ner for two adults be­tween $14 and $20, Payne said.

Brick and mor­tar sur­viv­ing

H-E-B also of­fers curb­side pickup and home de­liv­ery, but the San An­to­nio-based gro­cer is dou­bling down on its brick-and­mor­tar lo­ca­tions, open­ing nine Hous­ton stores in 2018 across hip ur­ban neigh­bor­hoods and fam­ily-friendly sub­urbs.

Gro­cery stores, which have added banks, gas sta­tions and flower shops in re­cent years, still have much to of­fer on­line shoppers, like Mey­er­land mother Ser­rano, H-E-B pres­i­dent Scott McClel­land said.

“We think the rise of e-com­merce, of peo­ple or­der­ing gro­ceries or hav­ing home de­liv­ery will in­crease, but we don’t think the rel­e­vance of a gro­cery store done right is go­ing to go away,” McClel­land said. “What you put into the store, how peo­ple uti­lize a gro­cery store, may change, but we still think there’s a place for gro­cery stores.”

Nancy Sarnoff con­trib­uted to this re­port.

Mark Mulligan / Hous­ton Chron­i­cle

Above: Pre­ferred Freezer’s 10-mil­lion-cu­bic-foot cold stor­age fa­cil­ity is kept at mi­nus 4 de­grees. The build­ing hosts 25,000 pal­let po­si­tions. Be­low: Kroger e-com­merce clerk An­to­nio Valderas picks out items from an aisle as he fills Click­List on­line or­ders.

Michael Ciaglo / Hous­ton Chron­i­cle

Mark Mulligan / Hous­ton Chron­i­cle

Pal­lets of goods are loaded and un­loaded in the dock area at Pre­ferred Freezer’s 10-mil­lion­cu­bic-foot cold stor­age fa­cil­ity in Pasadena. The load­ing dock is kept just above freez­ing be­fore prod­ucts are placed in the stor­age area, which is cooled to mi­nus 4 de­grees Fahren­heit.

Michael Ciaglo / Hous­ton Chron­i­cle

Kroger e-com­merce clerk An­to­nio Valderas scans baby food as he fills Click­List on­line or­ders in West Univer­sity Place. Fifty­seven of Kroger’s 111 stores in the area of­fer curb­side pickup.

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