Wegmans is a regional Northeast grocery retailer best known for its larger-than-average stores, its happy employees, and its leagues of brand loyalists. In 2015, Wegmans won the number 1 spot in the Harris Poll’s Northeast Region Grocery Store Brand of the Year, beating out even the beloved Trader Joes. It also bested Amazon in the 2015 Harris Poll Reputation Quotient® (RQ) and was crowned the company with the highest Corporate Reputation. The fact that Wegmans made the top 100 most visible companies is a feat in itself; as of the award, the grocer only had 85 stores located throughout New York, New Jersey, Pennsylvania, Massachusetts, Virginia, and Maryland. As of today, it has 88, with plans to build more—and to expand into new territory. Shouldn’t Wegmans’ regional domination be the model for many regional and community banks?
Recently, Wegmans announced plans to open a store in Cary, North Carolina. This will put Wegmans up against storied southern grocery chains such as Food Lion and Publix. Though Wegmans is beloved by Northerners (and Cary certainly has their fair share of them), grocery is still a competitive business with thin margins; according to the Food Marketing Institute, grocery stores saw an after-tax net profit of 1.5% in 2014. This will also be the first time that Wegmans occupies the same city as a Publix, which will lead to fierce competition between the two. Though an industry “trendsetter,” Wegmans will be the new player in this market and will have to be thoughtful about its approach to pricing, branding, marketing, and—an unknown or an afterthought to many outside of retail—its real estate strategy.
One notable feature of Wegmans’ expansion to North Carolina is that Wegmans will be leasing the space where they plan to put their store (Wegmans hopes to finalize a lease agreement this quarter). Perhaps an unconventional approach to those in the banking world, the act of leasing instead of purchasing land and buildings is a common approach taken by many retailers. A lease, for an expanding retailer, offers many benefits. Forgoing a full, bottom-to-top construction project means Wegmans can open sooner. Assuming that the landlord is in charge of renovating the building to fit Wegmans’ needs, Wegmans can focus on operational logistics instead of supervising a construction crew as they install windows and flooring. After a detailed analysis is complete, speed-to-market is key in expansion for companies (Walmart increased speed-to-market for its Walmart Neighborhood Markets by 50 days to achieve a faster return on their investment), and leasing helps accomplish that. Additionally, real estate requires time, energy, and resources spent on building maintenance, lawn and parking upkeep, and routine and emergency repairs. Leasing a property enables Wegmans to outsource these responsibilities and focus solely on core business functions: the important stuff needed to make a name for themselves in this new market and go head-to-head against Publix.
The speed, flexibility, and time-savings that Wegmans finds by leasing isn’t limited to the grocery industry. Retailers of all types have long held the belief that owning their real estate isn’t the most efficient use of their energy or capital. As of 2014, CVS leases 95% of its more-than-7,000 locations while Walgreens leases 80% of its 8,300 stores, both preferring not to tie up their capital in real estate. Toys R Us, AT&T, and many other retailers also lease most or many of their locations. Retailers that own their real estate are also seeing the value in selling it or entering into sales-leasebacks. Sears Holdings recently sold 235 Sears and Kmart stores, raising $2.7 billion to increase “financial flexibility” and business transformation.
In 2015, Sharp Electronics entered into a sales-leaseback for its corporate headquarters in Mahwah, NJ, unlocking $38 million in non-dilutive capital. Darden Restaurants, owner of Olive Garden and Longhorn Steakhouse, intends to enter into a sales-leaseback agreement for 430 properties that “will result in a more optimized capital structure and will create long-term shareholder value.” Macy’s, with its recent disappointing earnings, is also planning to sell much of its real estate to bolster its stock and enable it to redirect capital towards omni-channel and customer experience initiatives. Along with the ability to allocate greater capital to these initiatives, the real estate divestiture, part of Macy’s’ 2016 initiatives, will help Macy’s become more operationally efficient and productive, as well as increase shareholder value.
According to the available CoStar data, Wegmans seems to be taking leasing-as-strategy to heart. The most recent CoStar data on new Wegmans stores show that Wegmans has increasingly been leasing its new locations, especially for its stores beyond its home state of New York. According to CoStar, of Wegmans’ reported owned stores, 41% are New York stores while, of its leased stores, about 76% are outside of New York.
Wegmans and other retailers use leasing as part of their expansion and capital-raising toolkit. As every region has its successful regional grocery chain, every region will likely have a successful regional bank, and those that follow successful retailers’ strategy will fare better. In markets where a successful regional bank isn’t so delineated, there’s room for smaller banks to step up and grab that title, either through organic growth or M&As. Expansion through leasing, or raising non-dilutive capital through sales-leasebacks to facilitate customer acquisition and expansion, is an efficient way to speed up a bank’s pace in the race to the top.