The Time Is Ripe For Many Retailers To Test New Concepts. What Impact Do These New Approaches Have For Leasing, Development And Expansion?

This Strolling the Agora column is from the March 22, 2010 Issue of Shopping Center Digest

Those retailers who have weathered the economic recession and are now “flush with bucks” are looking at ways to take advantage of changing demographics and conditions within the industry to find new ways to grow. And one pathway could be to spin off or creation of new concepts that exploit what they see as an under-served niche.

It has worked extremely well for some operators in the past; a prime example, of course, is Target, which was originally a spinoff by a leading mainstream department store, Dayton-Hudson.

Conditions now are ripe for testing. Due to high vacancy rates in shopping centers of all sizes and focus, landlords are more amenable to granting inexpensive, short-term leases to test these concepts--- and the ease of data capture and analyzingf results can be relatively inexpensive; result, many more “pop up” stores becoming a common fixture in these projects, and even in CBDs of major metropolitan markets, especially those involving home repair and furnishings. And you have established operations widening their focus, perhaps a pizza chain acquiring restaurants specializing in Mexican or Indian foods.

Whether there are a record number of new concepts being tested is hard to measure; I don’t know if this type of information was ever gathered before. However, anecdotal evidence shows that it is a more visible and common trend today than previously reported. The greater number of these concepts being developed are in associated areas related to the main focus of the parent company; you’re unlikely, for example, find a shoe chain “popping up” with a store selling hardware, for example.

Selecting Niches

So you have chains specializing in women’s wear trying on units to cater to men; you have teen-oriented retailers establishing brands focusing on pre-teens or—since they have an aging, loyal customer—testing completely separate concepts to serve the needs of those in their 20s and 30s. We are not speaking of a discount operator, for example, opening an in-store department providing optical service, or a grocery chain inserting a coffee shop within its supermarket, or wines and liquors.

This shopping center-retail chain industry has always been innovative—as we’ve cited numerous times in the past, some successful new directions, and some not-so-successful directions. Would you believe, at one time, anchors, such as a department store, thought it would better merchandising to not have another department store in the same center because “Who needed the extra competition in your own backyard?”

The boom in information and technology has made it a relatively simple matter to gather data of all sorts, massage these numbers, and pinpoint areas that are just waiting for someone to exploit. “Whereas,” said one senior dealmaker, “we’ve had the surge to big-box stores and category-killers, now we’re getting into a more refined area where we can zero-in on specific segments: seniors, hikers and campers and sportsmen, those who want to build their own one-of-a-kind toys. You can call this trend one of segmenting; select this niche and then direct it at a market where there are an overbundance of these people.”

The Impact On Dealmaking

So, what does this increasing number of specialized brands mean for the leasing, expansion and development of shopping centers? What, overall, will be the impact from these new concepts.

There is a wide range of opinion from seasoned dealmakers. They go from those who are far from excited:

“My opinion [is that the] net effect will be zero. I wonder if it isn’t being driven as much by three things: Landlords will to do ‘any’ retail chain deal in their shopping centers; rock bottom pricing in some ‘A’ location and whether or not retailers are simply carving out ‘high profit margin items’ for a quick hit to their bottom line/quarterly earning announcements?”

On the other hand, there are those who look at it as the best thing since sliced bread.

“It gives me as a landlord another tenant to add to my merchandise mix, one that a competing mall may not have, and, if successful can be quickly added to almost every center in my portfolio. If it really takes off, it gives me a strong selling point to attract other retailers, such as when Victoria’s Secret became a magnet, or Nordstrom, for other retailers.”

Another owner-developer said he would be less likely to test a concept in a top mall at favorable terms if it were being proposed by a ‘Mom and Pop.’ “If it’s a great idea and extremely successful, they wouldn’t have the required investment capital to do much with it, except open another store or two.”

To the retailer, a new concept can ride on the coattails or loyalty of established customers and transfer this loyalty to another brand, providing another income stream to the parent.

To the landlord, in an industry that has been contracting due to closings and bankruptcies, a new concept may mean another tenant available to fill continuing vacancies.

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