Store-Within-A-Store Becomes Expansion Model Dujour
Elaine Misonzhnik, Senior Associate Editor October 16, 2012
The list of retailers opting to expand through storeswithin-stores agreements has grown quite long lately,
from all the boutiques scheduled to open within JC
Penney locations, to Finish Line planning to open
450 stores inside Macy’s, even to Apple pursuing
the strategy, albeit for now, overseas. Opening
stores-within-stores certainly helps retailers save on
construction costs, compared to stand-alone stores.
But the true value such agreements offer is flexibility,
market insiders say.
As of now, there appears to be no set model for how
rent for stores-within-stores is calculated. In most
cases, the agreements likely involve some form of
profit sharing rather than traditional base rent, notes
Eileen Mitchell, executive vice president with RCS
Real Estate Advisors, a New York City-based retail
real estate consulting firm. That doesn’t necessarily
mean that monthly rent charges for such locations
are lower than for stand-alone stores, adds Lew
Kornberg, managing director in the corporate retail
solutions group of real estate services firm Jones Lang
LaSalle. But given the fact that the retailer who takes
up residence inside an established department store
gets access to built-in foot traffic and is not bound by
the standard 10-year leases with multiple clauses, the
strategy still makes a lot of sense.
“One of the trends we are seeing more of is a desire
on the part of retailers to have as much flexibility
as they can,” Kornberg says. “This allows them to
[have] that, and allows them to test the waters. The
opportunity and flexibility may be overwhelmingly a
more economically attractive proposition than having
to pay a landlord and have contractual obligations. It
may be worth a premium” in rent.
And this is an opportune time for department stores
that are willing to engage in such agreements because
many of the retailers that drastically cut their portfolios
during the recession are now looking to expand, but
want to do so with minimal risk, notes Matt Winn, U.S.
retail services leader with brokerage firm Cushman
& Wakefield. The stores-within-stores allow them to
reduce expansion costs through lower construction
expenditures and perhaps the use of shared labor with
the department store chains. Meanwhile, the retailers
can still open a fairly large number of new units and
generate additional revenue.
“They are trying to find a way to capture consumer
spending without the commitment of a full-line store,”
Winn says.
The landlord community may not be particularly happy
about this development, but given current market
dynamics, they may have little recourse against it.
To begin with, many department stores own their pads,
and are free to do whatever they want inside their
stores, says Winn. In better times, large landlords may
have been able to convince anchor tenants to forgo
store-within-store agreements by offering to sign them
to new projects, adds Kornberg. But given how little
new construction the retail real estate industry has
seen in recent years, that is no longer an effective
negotiating strategy.
“I definitely think that [stores-within-stores] is a trend
that we will continue to see,” he says. RT