October 24, 2017 / 11:00 AM / a year ago

RPT-INSIGHT-Amazon rivals turn to legal fine print to stem Whole Foods strategy

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    By Jeffrey Dastin
    SAN FRANCISCO, Oct 24 (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.
    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
    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.
    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."

    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.
    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
    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 tmsnrt.rs/2yAt3nu
    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
    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."

 (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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