Observations & Conversations
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E-Retailing: The New CompetitionAre Mall Developers
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Researching this month’s issue of ESP was particularly interesting. We looked at mall concept after concept with a focus on small specialty shops and we heard about mall developers’ interplay with or aversion to e-commerce. Whew! It’s a volatile topic (though not quite as controversial as our coverage on adult entertainment). Mall tenants bitched and brayed about high occupancy costs amplified by decreasing customer counts. Developers ranted about retailer Internet operations robbing them of future percentage rent and cited e-commerce as the reason why mall visits are on the decline.
Probably the main reason why both parties are so edgy is because it’s expensive to operate a mall and to operate a mall-based store. For the past few years, mall developers and retailers have encountered problems maintaining high volumes. Some industry spokespeople have gone so far as to say the mall business is dead and the Internet is a prime culprit in its demise. Nonsense, as time has proven this kind of take on competition from alternate retail avenues is utterly ridiculous. For example, home shopping networks are not making the impact naysayers prophesied, video stores and movie theaters are coexisting nicely even though most of us have a choice from hundreds of channels in addition to pay-per-view options, grocery stores offering prepared foods are faring well up against restaurant chains, etc., etc. Another stupid idealogy is that malls are dead. The fact is that they are just in trouble.
Why are they in trouble? There are four main reasons.
One, there is too much duplication of uses found in both the local mall and the nearby strip centers. Solution: Make it your mission to procure interesting and unique tenants offering merchandise not found at the local strip and power centers – tenants with an alluring presentation and the best of service. Tall order, yes, but definitely doable.
Two, mall operating costs are astronomical. Solution: Really watch the pennies. Due to our sister company TKO Real Estate Advisory Group’s involvement in managing shopping centers, I see the common area charges on hundreds of centers scattered coast to coast. Most of the time, when we take on a third-party management account we drop costs dramatically. An example is a project where the prior management company charged the center’s owner $30,000 for an administrator and $50,000 for a marketing person, yet these two people worked on five projects, four of which were not owned by our newfound client. I’m sure the administrator wasn’t grossing $150,000 and the marketing person never saw a W2 reporting a $250,000 income in his wildest dreams. Words of advice: not only should tenants audit the management company, owners should too.
Three, malls are attracting a younger customer base than do strip center tenants and a large portion of this teenaged group visits the mall without a parent in tow. Thus, security issues arise and adults are deterred from visiting because of a lack of stores catering to their needs (I don’t know many 40-year-old women buying for themselves at Steve Madden or The Limited) and the overwhelming feeling that they’re out of place in a mall teeming with adolescent hormones. Solution: create lifestyle districts within the mall. Yes, it requires existing malls to retenant, relocate tenants and redesign architectural elements, but you automatically increase your potential to attract the entire family, which equates to higher sales volumes, more percentage rent and increased customer visits. Several examples of projects designed from the onset to cater to customer lifestyles include the recently-opened Easton Town Center in Columbus, Ohio and the long-established Bridgewater Commons in Somerville, New Jersey. Easton Town Center and its phase two offer a tenant mix catering to the entire family and tenants are grouped together based on the type of customer they draw. Bridgewater Commons clusters tenants catering to various lifestyles on each level of the project. Regarding security, the best way to keep teenagers out of trouble is to keep them occupied, thus the emergence of new concepts such as Pyro Skate featured in this issue, as well as Van’s Skate Parks, etc.
Four, mall developers have been milking projects for years with little to no money spent on keeping up with the times. For years, mall developers saw huge returns on their investments and today their NOIs are becoming slimmer. So decisions need to be made on whether you want to sit back and let your project become obsolete or do you want to infuse capital and pray that you see the return. Solution: reinvest in the milk cow before it dries up and dies.
As to the Internet being an issue in the future of malls, it will undoubtedly make an impact but to what extent is the great unknown. This issue of ESP offers some hindsight advice from Hycel after its naive prohibition of e-commerce promotion in their mall turned into a public relations debacle and made headline news worldwide. Censorship has proven through the years to be the grossest of errors. Modern day mainstream folks don’t have much tolerance for dictators, especially when it comes to limiting where they spend their money or how they make it, as long as it’s in a lawful manner.
Two developers that are trying to embrace and interweave e-retailing into their projects are Simon Property Group and General Growth Properties. Simon operates a subsidiary, Clixnmortar.com, with the purpose of finding the best medium to make the shopping experience friendly. The outcomes of the research are fastfrog.com and yoursherpa.com. Fastfrog.com caters to teens and younger customers, allowing them the opportunity to buy either online or at malls owned by Simon. The site also lets young customers set up a gift registry using a scanning device called a zapstick in the store. Yoursherpa.com, catering to audlts, also lets customers shop online or at the store by using a scanning gadget linked to a credit card to place orders at various stores while they walk the mall. At the end of the shopping trip, a mall employee collects purchases that can be picked up at a later time or delivered to the home (alas, no more schlepping packages). Furthermore, Simon made an alliance with MicroSoft to bring Internet services to its malls with web-linked kiosks for its tenants.
General Growth launched mallibu.com as an informational Web site, rather than a point of sale, and it expects to expand the site’s capabilities to offer store coupons for frequent shoppers. I found Simon’s two Web sites to be places that I would shop online and I definitely would try the scanner, however General Growth’s mallibu.com needs some tuning to be of much use.
The Internet is also spawning storefront concepts that originated on the Web, such as Chef.com, a new retailer in Washington that started online and opened a storefront to test market products before marketing them on the Net. (This was reported in our November 12, 1999 weekly fax bulletin; if you are not receiving the ESP News By Fax bulletin, call us at 800-732-5856 and ask Laurie Hedden to add your fax number to the list or send an e-mail to ann@dealmakers.net). Neiman Marcus also operates Chefs Catalog, a concept offering kitchen and personal care items, in mail order and online versions (chefscatalog.com). It wouldn’t surprise me if retailers such as Neiman Marcus opened storefronts for their catalogs. Which brings me to a conversation with a marketing director of a large East Coast leasing company. One of her assignments is to identify catalog companies that would be receptive to opening bricks-and-mortar stores so that new and interesting tenants can be brought to the company’s projects. I’m sure other researchers are being employed by shopping center developers to surf the net looking for e-retailers to solicit to open stores. These days, canvassing for tenants entails more than the traditional walk and talk, but it also means there are more potential tenants to lease your space.
The last decade was accurately dubbed the information age. I think the next ten years will be the convergence age, where storefront, virtual, and mail order retailing will blend together and complement each other. Anxiety will continue to run high. Fearful developers and retailers that stick their heads in the ground will quickly be forgotten. Face it, the best way to combat the Internet is to exploit it.
Ann O’Neal, publisher