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Arizona’s Grocery Industry Hopeful For A Bright Future

Shelby Market Profile

by Alissa Marchat/staff writer

This time last year, grocers in Arizona were feeling optimistic about the state’s economy in the year ahead, and 2016 did not disappoint, Arizona Food Marketing Alliance (AFMA) President Tim McCabe tells The Shelby Report. The Grand Canyon State’s unemployment rate has continued to fall overall, down to 5.5 percent from last year’s 6.1 percent. While that number is still above the national average, which was just under 5 percent in the most recent Bureau of Labor Statistics report published Nov. 4, McCabe points to some Arizona food retailers’ “aggressive plan to open new stores” as one reason to be hopeful that the state’s economy is continuing to improve.

“Right now, it’s Fry’s that has the most aggressive plan for opening new stores. Sprouts continues to open new stores as well. Those seem to be the two that are opening new stores, and we’re hearing of some other retailers that are contemplating opening new stores as well,” McCabe said. “I think the retailers now are taking a look at opportunities to open new stores, and that’s the first time that’s happened in over 10 years.”

Early in 2016, Fry’s announced plans to invest $260 million in the state by building six new Marketplace stores and one new store in Tucson; adding multiple fuel centers at the properties; and undertaking expansion and remodeling projects at existing stores. The Kroger-owned banner said the growth initiative was expected to create more than 2,000 full- and part-time jobs. The Marketplace stores were planned for Mesa, Phoenix (two stores), Litchfield Park, Chandler and Peoria. As of late October, the retailer had opened four of the planned Marketplace stores, in Mesa, Litchfield Park, Chandler and Phoenix.

New Sprouts stores that opened in Arizona in 2016 are located in Chandler, Queen Creek and Mesa. The Mesa store was the grocer’s 250th location, reports ABC15.

Natural Grocers also is expanding in the state. It opened a new Tucson store in late September at 5600 E. River Road, the company’s 12th Arizona store. Earlier in the year, it opened two new stores in Gilbert at 1625 E. Williams Field Road and 2151 E. Baseline Road. The company said in a press release that the Gilbert stores would employ approximately 60 people.

Although the Arizona marketplace seems to be improving, McCabe doesn’t expect much in the way of new competitors entering the region, which is good news for existing store operators.

“It’s a challenge for anybody to come into this market new because this is considered one of the most competitive markets in the country. It’s very difficult for somebody to come in and start from scratch because most of the stores here are newer stores,” he said. “Most of the stores here are larger from a square footage standpoint. The food retailers believe in Arizona. They feel there’s a very good, bright future for population growth in Arizona. So they’re willing to invest in this marketplace, betting on the fact that it’ll pay off in the long run.”

Deflation still poses a challenge

Although retailers like Fry’s, Sprouts and Natural Grocers are growing in Arizona, the state still is facing the deflation being seen across the country, making it difficult for grocers to grow their sales.

“A lot of the major commodities—milk, eggs, several items in produce and meat—their prices have actually gone down, and…when you’ve got deflation, it’s a challenge to try to grow your dollar volume,” McCabe said. “It’s great for the consumers because they’re paying lower prices than they were a year ago. But it’s a challenge for the retailers because if you’re selling the same items, your dollar sales are down, and that creates an issue because, obviously, other expenses such as labor and utilities, any overhead items, continue to go up.”

Despite those difficulties, McCabe believes Arizona’s retailers are pushing through by trying to be more competitive, lowering their prices and turning more product.

“There’s always a little bit of a risk when you do that,” McCabe added. “But I think they’re doing OK. It’s just that they could be doing better if it weren’t for deflation.”

Legislation may ease retailers’ burdens…

McCabe also believes there’s reason to be hopeful on the legislative front as the country’s political landscape changes over the next few months and years.

“We are excited about the potential future ahead for us on deregulation, we hope,” McCabe said. “I don’t think most people realize that our industry is the most regulated industry in the world. Whether you’ve got fuel pumps out front—or all the way through the store to the back door—you’ve got federal regulations, state regulations, county regulations, city regulations. And most of our food retailers here, their standards are even much higher than what the government sets, especially in food safety. But there are still so many regulations that we consider frivolous, and at the end of the day, the consumers start paying more for the product. But we’re very optimistic that there’s some good changes ahead.”

In particular, McCabe points to the new overtime rule as one regulation that may be overturned by the incoming administration. He also hopes to see some new legislation issued in relation to service animals. A recent rash of national news headlines have highlighted the problem of illegitimate service or comfort animals plaguing not the just grocery retail industry, but also the restaurant and airline industries.

“We respect the people that have legitimate comfort animals or service animals, but now it just seems to be getting carried away, and it’s being abused,” McCabe said, pointing to instances of consumers bringing birds, monkeys and even snakes into grocery stores and calling them comfort animals. “It creates issues in the stores. And we feel that there’s probably some new rules that we need to work out with the federal government and ADA (the Americans with Disabilities Act), to try to be able to do some things or possibly modify some rules that help protect the other consumers in our stores…We just passed a law in Arizona a couple of years ago that clarifies the fact that you can only have a dog or a small pony as a service animal to bring into a store or an establishment.”

Another small victory for Arizona retailers is that its statewide ban on bag bans may be upheld. Arizona last year was the first state in the nation to prohibit municipalities from enacting their own bans on plastic bags through its Senate Bill 1241. While that bill passed, a lawsuit later was filed against it, arguing that the legislation was unconstitutional. According to McCabe, the problem was that the bill contained legislation regarding two separate issues.

“So this year we passed some legislation that split those two; one of them was an energy related item about reporting your energy usage for large stores, and the other one was the specific pre-empt from preventing municipalities from regulating bags or containers,” he said. “We put them in two separate bills this year, and they both passed. So we’re very optimistic that our Senate Bill 1241 will stay intact.”

…But there are still legislative battles to be fought

The grocery industry just wouldn’t be the grocery industry if there weren’t some kind of legislative battle brewing on the horizon, and there are still plenty of those around this year despite McCabe’s general sense of optimism. One potential problem is the possibility of the Dodd-Frank Act, which regulates the financial services industry, being rolled back.

“We have very strong opinions about the regulation of credit card fees,” McCabe said. “The banks and credit card companies for a long period of time were just raising those fees with no controls at all. Now those fees are some of the highest expenses today that a grocery store or convenience store will have. That’s one regulation that we felt was very necessary because it really helps the consumers, and it’s already saved the consumers billions of dollars in the last couple of years.”

He assures Arizona grocers that Dodd-Frank is one piece of regulation that the AFMA will watch closely.

In addition to such national issues, state-specific issues also are causing concern.

While the state recently defeated Proposition 205, which would have legalized marijuana in the state, Proposition 206 regarding the minimum wage is causing retailers headaches. Voters passed the legislation this year, and Arizona’s minimum wage now is set to rise from $8.05 per hour to $12 per hour by 2020. The increases will be incremental, with the first increase, to $10, taking effect in 2017. The legislation also guarantees sick leave or paid time off for employees.

“This will have an impact on our smaller independents,” McCabe said. “Not just the idea that the wage will be going up, but also that now they’ve got five paid sick days that they’ve got to consider. So we’re very concerned about that.”

While McCabe concedes that the legislation will be a boon to more than 700,000 Arizona workers, he worries that it will have a chilling effect on retailers and on the availability of entry-level jobs.

“These businesses are still struggling with deflation, and they’ve now all of a sudden got to come up with more money for labor. So they’ve got some choices to make. Either they have to find a way to grow their sales, drive more business into their stores, or raise prices or cut payroll in different ways. And there’s a real concern of what’s going to happen to these entry-level jobs.”

One particular city, Flagstaff, voted to raise its minimum wage to $12 per hour immediately, gradually raising it up to $15. A city that relies heavily on tourism, McCabe worries Flagstaff may see more immediate and dramatic effects on business than the rest of the state.

Another troubling piece of local legislation, says McCabe, is the city of Cottonwood’s decision to raise the legal age to purchase tobacco products from 18 to 21.

“It pushes all the business to all the retailers that are right outside the city of Cottonwood… We feel that this is a regulation that should be dealt with statewide and not city by city because it creates confusion to people, and obviously it hurts the retailers that are inside those city limits,” he said.

While McCabe believes the tobacco age should be addressed statewide, he does not anticipate Arizona following in the footsteps of Hawaii and California, which have both raised their tobacco ages to 21.

“I don’t think there’s an appetite to address that issue right now. There’s a lot of other priorities that exist in Arizona,” he said.

And with the help of Arizona’s governor, Doug Ducey, McCabe sees a path to address the issues facing Arizona retailers today.

“We have a very, very business-friendly governor. He’s helped deregulate,” McCabe added. “He doesn’t just talk the talk; he walks the walk. And we’re very grateful to him. I think it will help businesses out on a state level to be able to grow, and now if we can control some of the federal regulations the same way, that will be very helpful as well.”

*Editor’s note: This Arizona Market Profile also appears in the January 2017 print edition of The Shelby Report of the West.

About the author

Kristen Cloud

A former newspaper editor and publisher who has handled digital duties for The Shelby Report since 2011. She once enjoyed leisurely perusing the grocery store aisles but, since having a baby in 2016, is now an enthusiastic click-and-collect shopper.

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