Filling the Empty Boxes
Conversations with Target, Costco, Sports Authority, Forever 21 and Bob Michaels
Written by, Tommy Miller – President, Trademark Property Company
One of the greatest challenges facing the regional mall business is the remerchandising of vacant or
underutilized Anchor spaces. This is not a new issue in the industry. The consolidation of the department store
business in the 80s and 90s left vacant boxes scattered across the country with many still empty today. The
situation is arguably more acute now given the impact of internet shopping (now accounting for 8% of total
retail sales) and changing consumer patterns, the proliferation of lifestyle and now outlet centers in once safe
trade areas and a challenging operating environment for Sears and other Department Store chains.
Where will the new anchors come from?
Sears’ recent struggles and its heightened focus on a real estate strategy may be indicative of a major
inflection point in the industry. Recently, the company announced the closing of 100-120 stores to raise cash,
the sale of a package of stores to GGP and the hiring of a President of Real Estate Development. These are
signs of things to come. Note these comments from Sears Holdings Chairman and legendary investor Eddie
Lampert, “A lot of retail businesses will have profitless prosperity and we’ve got to adapt and companies like
Amazon and Ebay have turned this into a big opportunity and we have to compete with them not just Wal-Mart
and Target. Retailers like JC Penney, Sears and Best Buy find themselves in need of re-invention. That means
you are going to have to try new things and if you are not willing to fail and learn you don’t have a shot. Walmart is trying smaller stores, Tesco in the UK is using closed stores as fulfillment centers for internet
orders. There will be winners and losers. What is happening in retail is great for the consumer but it may not be
great for business.”
It is no surprise that many investors today are cautious about investing
in Sears anchored malls. This is a huge issue as Sears operates 644
stores within the 1,240 super regional and regional centers listed in the
Directory of Major Malls (52%). This is the equivalent of perhaps 80-90
Million square feet.
Beyond Sears, other Department Store chains continue to reduce their store count, albeit at a less rapid rate,
closing unproductive and out of date units. Also many of these companies, due to consolidation, have been left
in the untenable position of inefficiently operating 2 stores in the same mall under the same brand – for
example: a women’s store at one end of the mall with a home furnishings or men’s store on the other side.
Consolidation of these situations is inevitable. The “Blockbustering” of the book business, which is rapidly
going digital, will also continue to be a thorn in the side of retail landlords across the US including regional
malls. We are only now seeing the light at the end of the tunnel in the aftermath of the Mervyn’s bankruptcy.
While many boxes have been indeed been successfully rereleased or sold, others remain vacant.
The need to transform properties and fill empty anchor spaces is complicated by the strong control provisions
that Department Stores typically enjoy. Any major remerchandising or redeployment will likely require some
form of anchor approval, which can be an exceedingly difficult process. This is a particularly complicated issue
for the Mall REITs who are not able to negotiate with anchors on a property-by-property basis given the large
size of their portfolios. A simple request for a change to the common areas in a single mall, no matter how
sensible, can trigger a perilous portfolio discussion.
Insights from Top Executives
Recently, we reached out to a select group of executives who have deep experience in the Mall business and a
point of view on this topic. Our goal was to seek multiple perspectives including retailers and landlords. What
are the risks and opportunities? What has worked, what hasn’t and what are the challenges going forward? In
the interest of stimulating a discussion, here is what we learned.
Costco is becoming a significant player in the mall transformation business, according to Mike Dobrota of
Northwest Atlantic, their representative in multiple Western US markets. Adding a Costco can be a seductive
proposition for a mall owner given the enormous potential sales volumes and an affluent demographic profile,
similar to Nordstrom. A Costco can generate $120-130 Million in annual sales, which can be 2-6 times what
many department stores can produce. Costco looks for locations with a large, affluent customer base and
prefers non-mall locations, though they will consider malls if it is the best option in the market. The company
operates in 6 malls in the US today with a few more in the pipeline. So far, Costco is reportedly performing well
in all of its mall locations. The question is: Are the malls benefitting from Costco? The answer is not clear to
us at this point.
Typically Costco cannot afford
high rents or purchase prices
due to its cap on gross sales
margins (13%) and the high
opportunity cost compared to
sites in cities willing to offer
lucrative economic incentives
and even free land. Cities are
attracted to Costco because of the sales tax revenue and high “living wage” jobs with benefits. According to
Dobrota, Costco mixes well into a mall environment. It offers only 3,500 SKUs (versus 130,000 at Wal-Mart)
and is therefore not a “category killer” that threatens other retailers. For example, Costco’s limited but high
quality jewelry offerings give shoppers a reason to search for alternatives in the mall, enriching the overall
shopping experience. From time to time they offer a limited selection of Craftsman tools, which may cause
shoppers to explore the larger offerings in a Sears next door. Costco’s food court, however, can negatively
impact food service in the mall given free beverage refills and the overall value it delivers to customers.
The jury is out on how successfully Costco can integrate into a vibrant mall environment. One interesting
example is Spotsylvania Town Center in Fredericksburg, Virginia. An open-air vestibule at the store entrance
opens into the mall, which stimulates some cross shopping, but also creates climate control and cart
management issues. Costco’s strong preference is to have one outside entrance as far away as possible from
mall entrances. For the landlord, this can result in blank walls, dead end corridors, poorly merchandised low
energy zones, and traffic/parking management challenges. Costco’s preferred design scheme is illustrated at
Macerich’s Paradise Valley Mall in the Phoenix area, however this mall does not seem to have benefited
materially.
Target has a long history operating successfully in malls. According to Scott Nelson, SVP – Real Estate,
Target operates stores in 110 regional malls in the US (out of 1,763) in addition to multiple locations in Canada
where it recently acquired the Zoellers department store chain. Target performs well in malls and embraces
interior mall entrances. If a mall is positioned correctly within a trade area, Target will go there. Mall stores do
have different labor models due to interior mall entrances and 2nd levels and, as such, are more expensive to
operate thus requiring higher sales volumes. While not at the Costco level, Target can generate mall sales
volumes of $50 Million plus, that rival or oftentimes exceed those of traditional Department Stores.
Perhaps the most interesting insight from Nelson was a recent study
conducted with Simon Property Co. indicating that a Target interior mall
entrance generated 2+ times more shopper traffic than the Department
Stores. There are numerous examples of successful Target anchored
malls, with Westfield’s Topanga and GGP’s Glendale Galleria being
notable examples. Both these malls offer customers what some believe
to be the optimal mom-friendly merchandising mix in today’s economy.
Target is paired with Nordstrom and Macy’s at Glendale and Neiman
Marcus at Topanga. After touring several Target-anchored malls and
operating/leasing one, however, it became apparent that most landlords have not found the magic
merchandising formula that takes full advantage of Target’s tenancy, traffic, volume and demographic profile.
Evidence suggests that a conventional mall leasing approach (ie. specialty and fashion retailers) for the Target
“wing” doesn’t optimize value. A more promotional or value-oriented merchandising plan would seem to work
better than, for example, full price fashion retailers. Nelson believes that the US could learn something from
Canada where many enclosed malls are multi dimensional, community centric properties in the middle of the
trade area where all the action is. This format could be the solution for many well located malls in the U.S. that
have lost their relevance as regional fashion destinations.
Large format sporting goods stores such as Dick’s and Sports Authority are also replacing traditional
anchors in regional malls. Dick’s has become the more established mall sports anchor with a typical store size
ranging from 50,000-90,000 square feet, sometimes on two levels. By contrast, Sports Authority, which has
also been active in the regional mall space, typically occupies 40,000 square feet. Sporting goods, according
to Lon Novatt, who runs real estate at Sports Authority, is a category that mall owners want. Without sporting
goods, the merchandising mix at most malls seems incomplete. Out of 460 stores, 25 Sports Authority units
are located in regional malls. Malls have become an increasing focus for both Sports Authority and Dick’s.
Sports Authority generally prefers outdoor, promotional centers but now must consider regional malls given the
dearth of new development. Both Dick’s and Sports Authority mall prototypes have exterior and interior mall
entrances. While a solid addition to the merchandise mix, sporting goods stores like Dick’s and Sports
Authority only generate sales in the $150-200 per square foot range. Depending on size, the expected range
of sales performance is $6-8 Million for a Sports Authority and $8-20 Million for a larger Dick’s. Interestingly,
these two retailers have different merchandising strategies and are carving out their own niche. Dick’s offers a
full range of product offerings including the male-dominant “blood” sports (hunting, fishing). Sports Authority
focuses more on apparel that appeals to women and their families. Both have strong footwear components
which do compete with mall tenants.
Of interest is Sports Authority’s new “Elite” concept (6 open, 4 in
the pipeline), which occupies approximately 8,000-12,000 square
feet in high volume malls. This concept goes in-line and hopes to
achieve $300-350 per square foot in sales, targeting the higher
income professional customer. Dick’s and Sports Authority have one thing in common, they offer “softer”
environments and product offerings that are more female and family friendly than the typical in line athletic
shoe stores such as Foot Locker, Champs and Finish Line which appeal more to male and teen customers.
Perhaps the hottest mall anchor replacement in recent years has been Forever 21 who has had success
taking 50,000-80,000 square feet in both one and two level configurations. It is no surprise that Forever 21 is
favored over other anchor replacement alternatives. Forever 21 sales volumes are generally higher than
sporting goods stores and other alternative uses. These stores deliver high energy, fashion and frequent
inventory turnover - the key ingredients for mall owners trying to keep their properties fresh and destinationworthy. Forever 21, according to Luis Barrientos, has been happy overall with the performance of it’s +/-40
large format US stores. This large store strategy contrasts with the company’s bread and butter in line mall
business (average store size: 12,000 square feet). Forever 21 has been successful taking old Mervyns and
other Department Store boxes such as Gottchalks as well as select vacated 20,000-25,000 square foot
Borders locations. One negative we have heard is that junior focused retailers can be cannibalized by a large
format Forever 21 store.
However, Barrientos acknowledges that these large stores work best in
locations such as California, Texas and Florida and underperform in
smaller markets and more conservative regions such as New England.
The large stores require lots of capital and it has been challenging to
maintain desired energy levels in certain locations. The sweet spot
for larger format Forever 21 stores going forward will likely be closer to 25,000 square feet according to
Barrientos. Coincidentally, this is approximately the same size as a vacated Borders, which may be a sign of
things to come. It is unclear what impact the large Forever 21 stores may have on the junior segment of the
specialty store mix.
While replacing vacant anchor spaces with large format retailers is preferable, this is not the only solution. In
the interest of transforming malls into leisure destinations, many empty boxes are being demolished or
converted to create lifestyle retailer appendages and/or entertainment, theater and dining clusters. This
strategy has not worked in every situation - for example smaller malls with only 2 or 3 anchors. Visibility,
placemaking and integration with the interior mall entrances are key factors. Such multi-tenant solutions will
not likely work in the backs of malls with limited exposure to major roadways, and many anchor spaces are
situated in these less desirable locations. The best merchandising solution for these locations is promotional
retailers such as TJ Maxx or Burlington Coat Factory or in some cases non-retail uses such as health clubs.
The highest and best use for many of these undesirable boxes may ultimately be fulfillment centers or nonretail uses. Incorporating these lower price point or non-retail uses can often seal the fate of a once vibrant
property.
If there is one mall executive who has seen in all, it is Bob Michaels, former President, COO and Head of
Leasing for General Growth Properties, Inc. and currently Director of Cadillac Fairview. Bob’s opinion is that
landlords who own productive malls (+/- $400 per square foot in sales) should do what they need to do to
acquire or otherwise secure control of the Sears space. The decision with less productive malls on the edge of
sustainability is more complicated due to co-tenancy concerns. With respect to remerchandising anchor
spaces, Michaels believes sales volume should be the highest priority.
Michaels was very bullish on Target as an anchor though acknowledged that not all landlords have
successfully merchandised the adjacent space. He cited the success of the Glendale Galleria where Macy’s
($80 Million), Nordstrom ($70 Million) and a 3-level Target ($80 Million) all successfully anchor the mall.
Another success story is Christiana Mall in Delaware, which boasts Nordstrom, Macy’s, JC Penney and Target
as anchors. Sporting goods stores are a “nice use” according to Michaels but can’t generate the volumes that
some other anchors can produce. One very productive alternative is stacking two retailers, for example a
Forever 21 over a Sporting Goods anchor in a 2 level box. Of course this is easier said than done and the
best examples involve grading scenarios that allow each anchor to have interior mall and exterior entrances.
Conclusions
The confluence of factors described above, exacerbated by a ground up development pipeline that is
essentially shut down, is putting retailers’ focus back on regional malls. For the foreseeable future, this is
where the lion’s share of available space for retailer expansion will come from and hybrid, unconventional
merchandising solutions will become the norm not the exception. The definition of an “anchor” is also changing.
If sales productivity, as Bob Michaels notes, is truly the right measuring stick, why can’t a
restaurant/entertainment cluster or an Apple store generating $35 million or more in sales (stores average
$5,600/sq. ft.) qualify? Are there viable non-fashion anchor alternatives that can replace the role of a traditional
department store? We may indeed be on the precipice of a major paradigm shift in the relationship between
anchors, in line retailers and mall owners. These stakeholders will need to work closely together to forge
creative win-win solutions that drive energy, sales and most importantly bring communities together. Not all
strategies will work, of course, and the ultimate impact on property values is unclear. So we are in uncharted
territory in many respects. Further, many of these solutions will be capital intensive thus potentially changing
the economic model of a regional mall forever. We welcome your feedback on this very important topic.
Trademark Property Company | 817.870.1122 | tmiller@trademarkproperty.com