Observations & Conversations
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FunExpo was definitely a good experience, with 4,000 attendees and two high traffic days out of three (one of which was a Saturday). The real kicker is that there were close to 3,000 operators of family entertainment centers, from ice and roller rinks, game rooms (arcades), golf and soccer venues, restaurants, resorts, plus... I saw traditional retailers on the floor, too. One of them was Al Lubetkin, CEO of Oshman’s (713-928-3171), a 50-unit chain of sporting good stores. I asked him why he was there and he said he was looking for ideas to bring entertainment (fun) into his stores. |
His response didn’t surprise me. I know from first-hand experience. My son, Josh,
begs his grandmother to take him on a 30-minute drive to the nearest Oshman’s so he
can play basketball inside the store and, of course, grandma usually buys him something
that he really needs. Also, Carnival Shoe (812-867-4034) was there. Here’s another
traditional retailer that puts zing into shopping and lives up to its name, running a
carnival-like atmosphere with continuous contests and such on the floors of its 128
stores. (Carnival must be doing something right -- net sales for the second quarter were
up by 22 percent.)
At the show, we had a sign saying, “Looking for locations or to sell your family
entertainment center? Talk to us.” A model handed out ESP to the passersby and by my
count, more than 2,000 took the issue and a lot dropped off their business cards so they
could take a look at this month’s issue. I spoke to exactly 164 family entertainment
operators that are looking to open locations, sell their company or want to acquire other
operators. Not bad for a few days at a trade show. Guess how many real estate companies
were there? Less than a dozen. Companies offering financing for real estate, equipment,
expansion, venture capitalists and traditional lenders were also few and far between.
Many of the operators I talked with are looking for sites and capitalization. They have a
good history, but are ignored by the real estate and lending communities. I can’t say
for sure why, but my gut feeling is that too many kitschy buildings went by the wayside,
and cash businesses are thought to be ‘fly by night’ and landlords never see
percentage rent. For the most part, these businesses operate in established communities,
whether it be Orlando or Sioux City. Usually the real estate is viable and well located.
Most importantly, smaller operators aren’t doing heavily themed and dramatic
architectural structures like many of the “big boys” that are in trouble right
now, so the argument of readapting the building becomes a moot point. As far as cash
businesses go, a long-ago experience always makes me question the validity of the argument
that the little guy is the one that never gives a good count when it comes to calculating
percentage rent. The story: I’m visiting stores with the president and director of
real estate of a 200-unit regional chain. Their scam was to monitor the cash before
closing out; they scheduled their store visits (projections for sales were pretty accurate
so they knew what the take would probably be) so the cash would be removed and the sales
volume would always be just below or just above the percentage rent break point. The
president didn’t believe in percentage rent, but he had to sign the lease. He saw
this as just another way to skin a cat. This company is no longer around, which just goes
to show you that ‘what goes around comes around’ and that some of the big boys
cheat too.
While I was in Vegas, I stopped by Michael Getlan’s Theaters of Sensation and enjoyed
a good thrill. His attraction is in The Venetian and it was the first time I saw the hotel
and retail shops in operation. Getlan’s Theaters of Sensation was a fun encounter
with a scientist taking you on a fantasy ride using 3D effects. I can’t explain the
techno aspect, but I will tell you about the audience reaction. The guy next to me kept on
yelling, “Isn’t this fun, isn’t this fun?” Michael (914-576-7800)
operates a full circle of entertainment centers and he is available for consulting (this
is a public service announcement.) The retail shops at The Venetian were busy, although a
number of stores have yet to open. I stopped by the Cafe Deluxe, The Cheesecake
Factory’s answer to a radius restriction clause, and to my surprise the decor was
underwhelming, especially for Vegas. After visiting the tables for awhile, it was a short
stint at home and then on to the International Council of Shopping Centers Western States
Dealmaking in Palm Desert, California.
The ICSC’s Palm Desert show had record attendance, and our booth was active all the
way up to closing time. I was introduced to some interesting entertainment retail centers
being developed and about a dozen projects recently renamed entertainment centers or at
least entertainment centers in the making. Many of the newly renamed projects are being
marketed as entertainment venues because everything else failed and the owner is desperate
to do anything to fill space and create cash flow. Don’t get me wrong -- a few of
these repositioned projects will make it, but most of them won’t because, for just
about any type of use, their best days are gone. There were three or four entertainment
tenants represented by brokers at the show too. Every time I attend this ICSC event, I
stay in Palm Springs, a quaint town about 15 minutes from the huge hotel and resort
complexes in Palm Desert. Palm Springs has a downtown hub and within walking distance are
a casino and interesting shops. Check out the Mall Makeover column in the issue to read
about Excel Legacy’s plans for its Desert Walk project in downtown Palm Springs.
A few more really interesting articles in this month’s ESP are on adult
entertainment. On a recent trip to Los Angeles, I had a chance to see Hustler Hollywood.
It was tasteful; I wouldn’t have a qualm about taking my mother, who is a southern
belle through and through, onto the main floor. When I hear people grumbling objections, I
can honestly say there was nothing any more provocative in Hustler’s windows than
what we see in a Calvin Klein ad or just about any perfume commercial televised. In our
search for adult entertainment tenants, Judi Biederman, ESP’s managing editor, came
across an association of cabaret owners. Association members are aggressively pursuing
avenues to grow their chains, just like any entertainment operation, but are often hitting
brick walls with city officials and potential landlords. Many adult entertainment
operators are circumventing towns and landlords by purchasing real estate. Yet, the
industry is changing from the 42nd Street of yesteryear to more mainstream with toned-down
signage, less risque advertisements, and more white-collar appeal. Usually when a shopping
center owner leases to a “go-go bar,” the other tenants vacate. However, some of
these new-generation cabaret operators have little resemblance to dives on side streets.
There are chains spending big bucks on tenant improvements for an upscale environment,
marketing to locals and tourists and they can afford above-market rents for secondary
space. These chains can also afford to purchase traditional retail settings. As far as
tenant mix, that’s still an untold story. But I can see tobacco, barber, florist and
shoe shops, or electronic, specialty hardware, motorcyles and aftermarket auto part stores
as co-tenants. Talk about highly niched retail and entertainment centers... the pylon
could read “Indulgence Plaza where real men shop and play.”
Discussing another major industry change is an article about cataloguers using e-retailing
in conjunction with traditional storefronts. ESP began researching this phenomenon several
months ago and the volume of information is colossal to say the least. The proverbial
“writing on the wall” is that e-retailing will shake up the retail industry as
much as or more so than the advent of the car and the mall. Projections are that 52
percent of the U.S. population will buy on-line this Christmas season. If this 52 percent
purchases 10 percent of their holiday gifts via e-commerce, that means that retailers in
your center will see a decrease in sales, up to an unknown saturation level, for many
years to come, which evolves into fewer storefront retailers and retailers needing smaller
stores.
I looked at a list of potential uses on our database of 5,000 traditional retailers
(Tenant Search -- call us at 1-800-732-5856 and ask for a demo or download the demo
version from our Web site, www.property.com; for specialty and entertainment tenants, ask
for REACT or go to www.specialtyrealestate.com to download a demo). Out of 65 traditional
retail uses, the only ones I could come up with that really would be difficult or
impossible to use the Web for actual sales were accessories, child care, convenience
stores, dry cleaners, fitness centers, entertainment, gas stations, hair/nail salons,
optical, printers, restaurants, and shipping services. The first thing that came to mind
in our discussions was that fresh food to make at home would always be a staple storefront
tenant. However, these items can be easily purchased on the Web, since the likes of Omaha
Steaks and fruit baskets are shipped every day.
The most common complaints about shopping on-line are speed of access once you get to the
Web site (this will be resolved in the near future), shipping costs and return policies.
Eventually the obstacle of shipping costs will be resolved, once e-retailers are convinced
it hinders their sales and that the expense is the same as “occupancy costs.”
They may eat the cost or opt to open pick-up centers. Finding carriers for shipping is
another problem for both the customer and e-retailer. Remember the UPS strike that
waylayed retailers a few years ago? Returns are another unresolved issue for on-line
sales, as a number of e-retailers charge restocking fees of up to 15 percent. The learning
curve is still steep, with traditional retailers mimicking e-retailers and vice versa.
Many traditional retailers are making heavy promotional strides to encourage their
storefront customers to buy on-line. For example, in the New York Times, Staples is
advertising a 10 percent discount to its e-retail customers, and Virgin records is giving
a free cd to its on-line shoppers. Obviously, the profit margin for on-line sales is
greater than that from selling merchandise off the floor and the customer convenience
can’t be beat.
In the age of e-retailing, everyone is set up to win, except for the landlords of retail
space. So how do shopping center and storefront landlords deal with the inevitable? The
most sound direction is to tenant your site with unique operators that can’t be found
at every street corner. Create a reason that will warrant the time commitment required to
come to the store. Go after tenants offering merchandise and a shopping experience that
doesn’t lend itself to e-retail, or solicit retailers that sell based on price alone.
However, retailers that set themselves apart from the competion with extremely tight
margins can be easily trampled by new competion, both in storefronts and on-line. The
following is an excerpt from a column in our sister publication The Dealmakers, in which
my partner, Ted Kraus, accurately sums up the scenario of selling based on price:
I was recently reading a trade publication called Industry Standard (415-733-5400), which
had an article by Mark Borsuk (415-922-4740) on how the retail real estate industry will
be coming to an end in the near future. Borsuk said that with the explosion of on-line
shopping, retailers won’t open as many stores; they’ll downsize most existing
stores and vacate many. The Internet, while in no way destroying retail sales, will siphon
off enough (15% to 20% of sales) to make many locations unprofitable. In addition, because
of the Net, the regional price differences on commodity type merchandise will disappear
and cause many currently profitable retailers to get into trouble. What he means is, take
an area like California that has high land and labor costs. It has to charge more for a
Mr. Coffee maker than a location in Columbus, OH. However, because the consumer can now
shop worldwide from their home, the cheapest retailer wins, therefore the value of real
estate in California will have to drop, as will labor costs if they want to stay
competitive and in business. Now, not all “Mr. Coffee” machines sold in
California will be sold on the Net, but when most people start to say that the
“right” price for Mr. Coffee is $19.95, not $23.95, Wal*Mart, Target and all the
rest will have to match that price. If they do, they lose margins. If they don’t,
they lose customers. The same is true for the small town retailer that charges retail plus
because he’s the only game in town. Now he won’t be. Therefore, he’s in
trouble. Wal*Mart is no longer his threat. It’s the Net. I e-mailed him my opinion,
basically saying he was wrong. I got a phone call from him the next day ready to debate
the subject and he was using some of my past “My Ways” as his defense (he’s
a sub, which I didn’t know; god bless his soul). We talked for half an hour and many
of his points I ended up agreeing with. Commodity retailing is here. Ten minutes on the
Net and not only do I find the cheapest price, but I don’t have to devote an hour of
my life to shopping. Mass merchants have problems. We’ll always have “real”
retailers, but the size of their stores will diminish as will their need to be at every
street corner. Mark’s main point is there are going to be lots of vacancies
nationwide in less than five years.
A few days later, Ted and I had a chance to break bread with Mark, an attorney and real
estate developer in San Fransisco. The dinner table discussion was stimulating, but the
factor not taken into consideration is that a certain percentage of the population will
most likely never have means or proclivity to be on-line and a good deal of Americans do
not have credit cards or lines of credit to make large purchases from e-retailers. So,
could the future of storefront retailing be exclusively marketed to economically and
technologically challenged groups? Well, some interesting new concepts are being bandied
about that would make these factors go away. For instance, one company is devising a
payment system for teenagers without credit cards to buy on-line using the same ideology
of a phone card. Our government is installing computers with Internet access in public
housing projects and HUD-funded ventures.
With the playing field becoming more competitive, making your real estate a true
destination will be the key to ensuring its long-term value.