More Than You Wanted to Know About Fungibility

This past Friday afternoon, I was visiting with a broker friend and three industrial developers over a beer when the subject changed to Kroger, Knoxville’s currently reigning real estate villain. As you may know, Kroger purchased a parcel of land adjacent to their existing Marketplace store on Kingston Pike near Cedar Bluff with the intention of building a new store (presumably abandoning the one they are operating now).

According to one of the developers, it is a scandal that Kroger would pave another greenfield site when there are so many vacant “big boxes” they could renovate and expand, if necessary. Besides, the Marketplace store is perfectly adequate, he opined.

 I am not able to comment on the adequacy of the store or the internal operations of Kroger; however, my friend, the developer of industrial buildings, had completely overlooked the idea of fungibility. Subject to zoning restrictions, site functionality, transportation considerations etc., an industrial building can be sited anywhere. Kroger, on the other hand, must evaluate the additional requirements of visibility, traffic patterns, demographics and others to identify a successful location. Simply put, the location of a Kroger is non-fungible; the average industrial building is much less so.

Besides, I am firmly convinced that Kroger’s decision to purchase/ develop this property and move its store is largely a stratagem to safeguard market share by denying one of their competitors the opportunity to out position them. Kroger has long been the dominant grocer in Knoxville, but the expansion of Food City, Walmart, Target, Fresh Market. EarthFare and Aldi, and the rumored entry of Publix, Costco and Trader  Joe’s, threatens their share of the grocery dollar.