Amazon rivals turn to legal fine print to
stem Whole Foods strategy
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[October 24, 2017]
By Jeffrey Dastin
SAN FRANCISCO (Reuters) - Whole Foods
Market met a new foe this summer during talks to lease a top retail
space in a San Francisco mall: the Target next door.
As City Center mall's largest tenant, Target Corp had a say over changes
to the property. According to people familiar with the lease
discussions, Target balked at sharing the mall with Whole Foods because
it feared competition from the grocery chain's new owner, Amazon.com
Inc.
Early attempts to persuade Target failed, and Whole Foods may now have
to concede certain Amazon initiatives - such as lockers where customers
can pick up goods ordered online - if it wants the location, the people
said. Talks are ongoing.
A Reuters examination of real estate agreements and interviews with 20
retail landlords, lawyers and brokers show that the strings attached to
operating in malls like City Center present an emerging and
little-scrutinized challenge to Amazon's quest to re-shape Whole Foods.
Across the United States, large retailers including Target, Bed Bath &
Beyond Inc and Best Buy Co Inc have legal rights in many lease
agreements that allow them to limit what Amazon can do with nearby Whole
Foods stores, and where it can open new ones.
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Documents reviewed by Reuters show bans on Amazon lockers and delivery
operations near a Target store in Illinois and also in Florida, where a
new Whole Foods is set to open. Lockers for retrieving online orders are
a way for Amazon to spur sales through the grocery chain.
In Manhattan and other locations, the leases of Whole Foods' big box
neighbors bar it from selling a range of goods that Amazon has in its
massive online inventory, from electronics to toys and linens.
Even Whole Foods stores that do not share space with major rivals can
face constraints imposed by local governments. A city council resolution
in White Plains, New York, restricted the hours when Whole Foods can use
a loading dock prior to the grocer locating in the mall.
Amazon declined to answer questions about how these restrictions across
the country impact its plans.
In a statement, Target said it is "focused on what’s best for the
company and delivering on the reasons our guests love Target. Our more
than 1,800 stores across the country are a strategic asset and a vital
part of Target’s future."
The company did not discuss details of the restrictions reported by
Reuters, but said, "It's inaccurate to characterize lease agreements as
our corporate strategy."
Reuters could not determine the full extent of limits on Whole Foods
stores because lease deals vary from mall to mall, and many are not
public. While restricting how neighbors operate is a standard practice
in retail, Amazon is new to feeling the heat.
Some mall owners and real estate brokers say Whole Foods will still find
landlords who are eager to have the high-profile tenant driving traffic
in their malls, and see rivals trying to keep Whole Foods out as
short-sighted.
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But with nearly all of Whole Foods' 473 stores subject to lease
agreements and plans to add up to 85 stores, according to regulatory
filings, Amazon has launched into brick-and-mortar with more constraints
and entrenched enemies than in the online world it dominates.
"Many people assume this big, 800-pound gorilla is going to come and
beat up all of these retailers," said Terrison Quinn, a senior vice
president at brokerage SRS Real Estate Partners. "I just don't think
that's going to be the case."
DOZENS OF RESTRICTIONS
Amazon wasted no time in making changes when the $13.7 billion Whole
Foods deal closed in August. The world's largest online retailer cut
grocery prices, started selling its Echo home speaker in stores and
disclosed plans to add lockers to some locations and Whole Foods items
to Prime Now, its two-hour delivery program.
Analysts expect such moves will boost online orders and revenue for
Amazon. But big box rivals have a number of ways to fight back.
Retailers routinely negotiate guarantees that their landlords will not
alter malls in a way that hurts sales, whether leasing to a strip club
or starting construction projects without approval, real estate lawyers
said.
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The Target store at the Stonestown Galleria is seen in San
Francisco, California, U.S. on September 25, 2017. REUTERS/Jeffrey
Dastin
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These leases, which often last 10 to 20 years with options to renew,
may even name competitors barred from opening a store.
A 16-page memo in July detailing the lease restrictions governing
Miami's Pinecrest Place mall, obtained by Reuters, offers a glimpse
of the legal protections retailers are securing.
Target required an affiliate of national landlord Regency Centers
Corp to bar "Any lockers, lock-boxes or other type of storage system
that is used to receive or store merchandise from a catalog or
online retailer."
The document then specifies more than a dozen other restrictions for
the mall, from leasing space to a pet shop or toy store to operating
"a fulfillment center in connection with receiving, storing or
distributing merchandise from a catalog or online retailer."
Regency announced in April that Whole Foods will open in the center,
meaning the store cannot have Amazon lockers or fulfill orders for
Prime Now.
A May memo of lease for a Target in Evanston, Illinois, obtained by
Reuters, contains similar prohibitions against lockers and online
fulfillment.
In another case, Target raised similar concerns about Amazon for a
prospective Whole Foods location at the Stonestown Galleria in San
Francisco, people familiar with the matter said.
A Reuters analysis showed that 7 percent of existing Whole Foods'
U.S. stores are within a quarter mile, or roughly five-minute walk,
of a Target. For a graphic, click http://tmsnrt.rs/2yAt3nu
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OPPOSITION ABOUNDS
Target is not alone in placing limits on Amazon.
Lidl, a German grocery chain expanding in the United States, said in
a deal this year it would "prohibit the operation of pickup
facilities" by rivals such as "Wal-Mart and Amazon... that sell
grocery items" near a planned store on Long Island in New York,
according to a person familiar with the matter. The language is
becoming common, the person said.
Will Harwood, a spokesman for Lidl, said, "We adhere to industry
norms and standard real estate practices when securing sites."
A Bed Bath & Beyond store in lower Manhattan bars its next-door
tenant - Whole Foods - from selling linens, bathroom items,
housewares and frames, its memo of lease said. The company declined
to comment.
And a Best Buy store just north of Miami has the exclusive right in
its shopping center to sell electronics. A lease carve-out, which
states other tenants can sell gadgets on less than 250 square feet
of floor space, allowed for the mall's Whole Foods to display the
Echo speaker, according to a memo seen by Reuters and a reporter who
visited the location.
"It is pretty standard for anchor tenants of a shopping center to
reserve the right in their leases to prohibit improvements to a
center - including the addition of new tenants - without approval
and consent," said Jeff Shelman, spokesman for Best Buy.
Gabe Kadosh, vice president at real estate firm Colliers
International, said Amazon and Whole Foods "want to have freedom to
do whatever they want. The challenge is in brick and mortar, and in
multi-tenant shopping centers, you can't just do that."
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(Reporting by Jeffrey Dastin in San Francisco; Additional reporting
by Melissa Fares and Ashlyn Still in New York, Richa Naidu in
Minneapolis and Zachary Fagenson in Aventura, Florida; Editing by
Jonathan Weber and Edward Tobin)
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