The emphasis on the national value-oriented retailer rather than the traditional department store; from the enclosed regional mall to the power centre and the lifestyle centre; and, most importantly, the emphasis that the American consumers now place on managing their limited time by doing one-stop shopping versus shopping as an entertainment experience have combined to transform the US retail market.
The need of the two income family to manage time to fit in child rearing, household chores, necessity shopping and entertainment has changed the shopping pattern in the United States. The ‘stay at home' parent is in the minority so the household must find ways to accomplish tasks in limited time periods, which can constrain the shopping experience. The response of the retail developer and the retailers has spawned significant change in the store type and shopping centre type.
This article provides an analysis of the recent trends in retail development as well as a look at the retailer's response to market conditions.
The pace of regional mall development in the US has slowed to a virtual halt. Twenty-five years ago, over 100 malls a year were opened. At present, only a handful are completed and tenanted in the US each year. This trend illustrates that, for the present, the bellwether of the retail development company has gone into retreat. There are several significant factors that have caused this. The consolidation of the traditional department store industry has played an extremely important role in the shrinking construction of the traditional mall. Since the mid-1990s, the major department store chains have either disintegrated or merged. Some have changed their identity to try to capture lost market share. In the mass-merchandiser category, Sears remains as the survivor, with its principal competition coming from Target, Kohl's and other value retailers. The traditional anchor tenant of the enclosed mall has diminished in number and impact.
The conventional end of the department store spectrum was almost completely consolidated when Federated Department Stores acquired the May Company and changed the corporate name to Macy's, the Federated flagship. This left many regional centres with one or two department store vacancies, but no effective candidate to fill those locations.
JC Penney has revitalised itself by promoting a fashion image and has moved out of the mass-merchandise category. Of course, a few regional retailers can fill some of the gap.
The luxury stores such as Nordstrom, Neiman Marcus and Saks still provide anchor opportunities. However, their demographic requirements - high income level and population size - mean these stores are candidates only for a small minority of available in-fill opportunities.
Mall development is also inhibited by the growing inability of developers to work their way through the governmental approval process. Opposition to major traffic-producing developments has increased manyfold over the years. The length of the approval process has inflated cost and often yields approvals that are not sufficient to provide the economic return relative to the risk inherent in undertaking regional malls. While this factor also exists for other types of retail development, the intensity of the opportunity and the time factor make it easier for the developer to select another type of smaller-scale retail opportunity more likely to be approved.
The regional mall, in the meantime, has had to find alternatives to fill the void created by the empty department store. Increasingly, developers have looked to several sources. Foremost is the value retailer such as Target, Kohl's, Wal-Mart or other similar full service value-oriented retailers. Additionally, these retailers have transform the service image of department store retailing. Traditionally, customers did not expect to shop at the regional mall at an ‘off the rack' retailer. The value retailer also provides competition with the in-line mall merchants at levels that were not typically anticipated when leases were signed with conventional department stores as the anchors. Indeed, the replacements are not limited to the value retailers. Other ‘category killers' such as book stores or sporting goods stores have filled the empty spaces.
Developers will also fill empty department stores with major restaurants, typically chains, and home furnishing and kitchen retailers. The early success of these ventures, to some degree, led to the lifestyle shopping centre (see below) that is much in vogue today.
Entertainment is a key fill-in for the vacuum left by the exit of the department stores. At one time, malls contained cinemas. However, mall developers determined that the parking requirements of cinemas conflicted with the needs of its other tenants. Recently, this line of thinking has been reconsidered and cinemas have become important to the tenant mix. Other entertainment concepts have also filled the gap. From mini-amusement parks to ice skating rinks, creative developers have filled empty spaces, frequently at an income reduction to the developer.
The decline of the regional centre was hastened by the popularity of the power centre. The power centre started as a collection of value retailers in major categories such as apparel, books, bed and bath, sporting goods, electronics, movie theatres and home improvement coupled with a section of small conventional retailers occupying smaller or less significant spaces. Soon the needs of the major power centre retailers to fuel their growth by expanding the number of stores led to the power centre becoming a collection of the ‘category killers' - retailers with large square footage and inventory that use buying power to sell at prices not usually achievable by the small tenant in the same category. As a result, small tenant space was not developed.
As adjuncts to the large free-standing retailers grouped together or near one another, power centre developers reserved pad sites for smaller users such as restaurants, banks and small-space users that were no less dominant in their retailing category. The stores were typically one-stop destinations. While it was conceivable to walk from one store to another, site plans and parking requirements often made this impractical and dangerous. The consumer enters the power centre for a single purpose or, if multiple shopping destinations are the goal, will drive from one to another. On the other hand, the regional mall thrives on multiple-destination shopping and measures its success by average sale, average number of destinations and average time spent in the mall (the longer, the better). In a power centre, the consumer enters with a purpose, consummates the retail transaction and leaves to do other things unrelated to shopping.
The power centre thrives on in-fill locations. The property type does not require as large an assemblage as the mall and, thus, can occupy locations ‘left over' from other developments. These are frequently near major highway transportation access, which is deemed necessary by the dominant retailers.
One of the by-products of the power centre has been the shift from landlord dominance in negotiation position to that of tenant superiority. As the power centre concept has aged, the demands of the major retailers have increased with respect to such things as open-date compliance with rent reductions if not made, requirements as to co-tenancy or co-occupancy, reduction in the eligibility of certain expense recoveries by landlords and the virtual elimination of percentage rent as a profit opportunity for the landlord. This trend has carried over to the other property types, including the regional mall developer in its negotiation with major national in-line tenants.
Because of the narrowing of the landlord's profit margin, today's power centres are being built once again with small space tenants. These tenants occupy the space for shorter terms, frequently pay percentage rent and are slightly more compliant when negotiating the lease terms.
A natural outgrowth of the evolution of the multi-tenanted retail property is the lifestyle centre. Its major components are the higher- end fashion-apparel mall tenants, restaurants and other food purveyors and the home-furnishing tenants such as Crate and Barrel and Williams-Sonoma. These centres are not enclosed because the consumer has expressed a desire to move from the enclosed milieu to an open-air format. The property type frequently resembles a streetscape, giving the concept an alternative name - Main Street.
Recent formulations of the lifestyle concept have added the major-value retailers from the power centre line-up. These retailers act as the ‘anchor tenant', much like department stores in the traditional retail mall. This property type, as the mall, relies on multiple destinations from a single shopping trip, which includes a stop at a restaurant. The restaurant is the surrogate for the shopping centre food court, which remains extremely viable at the regional mall today.
The lifestyle centre, as the power centre, is an in-fill development opportunity. Proximity to an existing mall may well be a plus to the lifestyle developer. It remains to be seen whether the profusion of these centres will mean they cannibalise one another or whether the lifestyle opportunity will have a serious effect on the existing regional mall opportunity.
The supermarket-anchored neighborhood or community centre retains its vitality and is developed and replicated throughout the United States. Supermarket concepts, however, have evolved over the years from food purveying at low mark-up to multi-department retail stores that contain pharmacies, florists, housewares, cafés and prepared foods of every ethnic style, all to better serve the time-burdened customer. Profitable departments are typically housed at the edges of the store and are fascinating to the consumer. In its own way, the supermarket has become an entertainment venue.
As a result, the store size of the average supermarket has doubled, trebled or even quadrupled over the years. The old 30,000 square-foot store is now 75,000 to 120,000 square feet. This has led many supermarket chains to abandon the old store and look for new development opportunities in fresh locations. Thus, the developer of the small centre is left with an empty store that yields rent but impacts severely on traffic in the centre and also spawns competition, causing further rent rolls and property value decline.
Because of size requirement, supermarkets have also become candidates for the power centre and the lifestyle centre, further affecting the small centre owner and operator. Adding to the mix, some of the value retailers, particularly Wal-Mart, have gone into the supermarket business and become more than capable competitors to the supermarket chains. One has only to view the recent consolidation in the supermarket industry to measure the impact of this competition.
Certain of the major retail developers have recognised that, as a result of the surge of the renaissance of urban dwelling in the last several years, development of free standing locations for specific retailers is providing a new growth opportunity. Retailers must both increase sales per store and number of locations to continue to fuel the earnings growth required by the capital markets to sustain the retailer's value.
The urban marketplace of revitalised downtowns and, in some cities, gentrified neighborhoods, is the perfect opportunity. The retailer requires an experienced developer rather than the casual owner of a store front. Developers are buying opportunities at reasonable prices and converting them for retail use.
Outside of cities such as New York, Chicago and San Francisco, this concept is relatively new, so it is too early to determine the scope of this trend.
The advances of technology have taken their toll on retailers and retail developers. For example, music downloading from home computer systems rather than through physical presence in a store has made the music store, an old stand-by, virtually obsolete. Value retailers have also diminished certain categories of retailing because of the dominant buying power and pricing power over certain commodities that used to be manifested by multiple store competitors.
All of this decreases the opportunity to fill retail space in all of the retail property types. It is clear that this is a trend that will persist for a long time and will tax the ingenuity of the retail developer.
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Following the advent of the regional mall, retail development remained a stable environment. Neighbourhood, community and regional shopping centres were built, with the evolution coming within the constraints of the property type. Examples are the development of the food court and the proliferation of entertainment opportunities. However, within the last 15 years, retail development has undergone a revolution because of the rapid change to the retail climate engendered by the value retailer, the ‘category killers' and the rapid change in shopping patterns in the US. It does not appear likely that there will be a return to the old concepts. Rather, the advent of the lifestyle centre and urban revitalisation point to continued change (or flux) in the future.