Observations & Conversations
The
retail arena continues to defy logic.
Mixed-use, mixed-use, mixed-use, it feels like every project I hear pitched lately has a mixed-use component. Some of these projects sound great and some look like amateur hour with the town's ideal dream laid out to a tee on the project's leasing plan. One mixed-use project that I heard about is the former Lazarus building in Pittsburgh, PA. The site has been vacant since 2004 and the new developer bought the property for $8.5 million and another $2 million to pay off an outstanding loan to the city. The four-story property was originally built about 10 years ago for $36 million. The new owner has earmarked $49 million to redevelop the site into 28 condos, 19 townhouses, 180,000 sq.ft. of office and 50,000 sq.ft. of retail with a grocery anchor. It'll be interesting to watch since it's an urban site that was designed as landmark retail now being retrofitted with retail as the the smallest component.
Another interesting deal I heard about was with Bass Pro Shops doing a 130,000 sq.ft. store in Portage, IN. The city, it seems, plans to cough up $17.5 million in bonds, with $15 million tagged for construction costs, a 10% set aside and the balance towards fees to issue to bonds. The owner of the 15.5-acre site reportedly expects to spend $30 million building the project. The town expects Bass Pro to draw 2.5 to 4 million visitors annually. I’ve read that the town of Broken Arrow, OK spent $24 million and Garland, TX laid out $24 million too for a Bass Pro Shop, while Council Bluffs, IA offered $20 million. In WV, about $40 million in public funds is going towards developing a Cabela’s with a total of $13 million for an interstate ramp and $35 million as an economic development grant. I understand towns’ desperation to put themselves “on the map” and generate revenues and improve their residents quality of life, but I’m not so sure spending millions on a super sports store is the answer. More on the ongoing battle of public powers with eminent domain, I heard about a large national lender making a corporate resolution not to lend on projects that were seized using the Supreme Court’s new ruling giving leeway to developers using public muscle for private gain. I like their code of ethics. A town in FL is trying to relocate about 5,000 blue-collar residents to make way for a $1.4 billion waterfront 400-acre mixed-use project. The developer had hoped to buy out the residents at 130% of the accessed value, but reports are that he’s paying closer to three times the accessed value in order not to pursue acquiring the property using eminent domain. I’m sure that project will run over budget.
I came across a new retailer, well actually they're seasoned online, but the company, Daedalus Books and Music, just opened a 10,000 sq.ft. store in Baltimore, MD at Belvedere Square, a 100,000 sq.ft. redevelopment project anchored by Tuesday Morning. The bookstore carries 20,000 books, most of which are hardcover, and 2,000 CDs at discounts of up to 90% off regular retail prices. The company specializes in "remainder books," excess inventory from publishing houses. Its online base has bolstered the company to $27 million in annual sales. Its online customer count is about 600,000 book buyers, while it also sells to about 3,000 bookstores worldwide. Its average price point for a book is $6, however some rare books can list for as much as $1,000. We'll see if this is the beginning of a burgeoning chain.
I had drinks (actually, lots of drinks) with a national developer that has quite a few Gap stores in his portfolio. We got to talking about how dismal their sales have been and that it was pathetic that they had a 20% drop in sales for the period ending October 2005 and same store sales plunging 7% before the Christmas season even officially started and they never recovered even at the height of Christmas shopping season. We talked about why they were having such trouble, since in most cases the real estate can't be blamed as the culprit. Retail analysts have been talking for months about how off target Gap has been with its merchandising and that they've lost touch with their customer. I agree and I have empirical evidence in my own closet. I've been trying to organize my walk-in and it becomes pretty obvious how my shopping habits have changed in the past few years. As I was cleaning out the clutter and actually putting stuff where it belongs, I counted 17 Gap favorite tees all of which are at least three years old, along with about a dozen t-shirts from American Eagle that I've bought in the past two years. And I'm down to two pairs of jeans from the Gap, both of which are older than five years and so worn I wouldn't wear them past my driveway. I was an avid Gap customer until they decided to discontinue fly-button jeans and zippers longer than three inches (if you don't know what I'm talking about with three-inch zippers ask any woman over the age of 40 what I'm referring to and I assure you if you're willing to listen she can give you a 40-minute rant).The company is playing musical chairs at the management level to try and fix it, but they've been trying to fix it for five years. Remember back a few years ago they had more leather and suede than you could find at Wilson's Leather and it bombed. Since 2001 they've been making headlines on how they can't identify with their customer. They've tried the celebrity factor with Madonna, Missy Elliot, Sarah Jessica Parker and Joss Stone, but that didn't work. I looked at their monthly sales for Gap, Old Navy and Banana Republic from January 2000 through December 2005 and if history writes the story, it won't be a happy ending. A friend of mine, who in a former career was in retail, visited their newest concept Forth & Towne in Nyack, NY and she said the merchandise and presentation were great, so maybe they're on the right track. I’ve also been hearing a buzz on Brazilian jeans coming to the US market and I came across a one-store concept called Pittsburgh Jeans Company, located in a historical building in Pittsburgh, PA. The company was founded in 1924 as Pittsburgh Waist Overall and Mercantile Company catering to the work wear needs of local steelworkers and coal miners. The founder's son changed the store's name in 1966 to Pittsburgh Jeans Company. In 2001, the founder's grandson was named president and has since established Pittsburgh Jeans Company as a premium jeans store. The store has an extremely inviting look as well as strong merchandising with its women's premium jeans, contemporary sportswear collections and luxury bath and beauty items. I wouldn't usually discuss a one-store concept, but the look of this store is really great. Another company focused on denim is True Religion, check out this month’s feature on their expansion plans. I think we'll be seeing a few more retailers rolling out premium jeans stores in the next few years, where spending $100 on jeans is commonplace, but where you can also find jeans from Japan retailing at $600 and up.
Lately, there's been lots of capital flying around for retailers to grow. Some of the big plays in the past few weeks include Burlington Coat Factory's buy out from a hedge fund for $2.06 billion. Then, Wet Seal is buying 450 G+G\Rave stores out of bankruptcy for about $15 million along with $10 million in DIP financing. Burlington is expected to take on aggressive growth, while Wet Seal has reserved the right to close additional G+G stores under bankruptcy protection.
In the past few weeks, I had dinner with a lineup of retail industry experts (no, I didn't crash the party!) and the topic of strong and weak geographic markets came up. The consensus at the table was that the Midwest was feeling some angst in the retail arena and that California is going strong and expected to continue to pick up momentum. I read a report issued from the U.S. Conference of Mayors and their findings show problems in Chicago, Cleveland, Detroit and Pittsburgh and attribute the downturn in the softening of manufacturing in the region. Wal*Mart recently opened a store in the Chicago market and had 325 positions. They got 25,000 applications for jobs that average $10.99 an hour for non-management full-time positions. We'll see how the auto industry and other manufacturing plays out in the next few years for the Midwest, but it could be a bumpy road. Canada seems to becoming a hot market. Steve & Barry's recently announced they're looking for sites in the north forty and Cabela's plans to open its first store outside the U.S. in Montreal, Quebec late fall of 2007 or spring of 2008 at Lac Mirabel, a 14 million sq.ft. mixed-use project.
I read an interesting article on the outlet industry. Seems as though a few retailers are jumping into the factory outlet store business. Coach, the handbag manufacturer, plans to open at least three outlet stores and expand another five, while Lane Bryant expects to open 75 outlets this year, and Childrens Place is expanding both its childrens’ apparel division and its Disney stores in outlet projects. Maybe the outlet business isn’t as much of a dead horse as the industry contends. Once again, the retail arena continues to defy logic.
Until next month,
Ann O’Neal, Publisher