This article appeared in the 1997 Spring edition of The Strategic Solution, the newsletter of The Strategic Edge.
NEW RETAIL CONCEPTS
INTRODUCTION
For the past several years the shopping center industry has been facing a myriad of troublesome issues: near stagnant retail sales, high vacancy rates, and intense competition. While their are many causes for the problems facing shopping centers, shopping center owners and developers still need ways to address the nagging issues and improve performance. There are many shopping centers that have responded well to adversity and are thriving, and there are many others in a state of decline, still others in severe distress. What many of the successful center developers have done is to reinvent their centers, by such means as extensive repositioning/redevelopment strategies. For developers seeking growth strategies in this competitive market, there has been the creation of new formats. This issue of The Strategic Solution takes an in-depth look at regional shopping centers and how they have adapted to an ever-changing retail environment. Reviving the Center takes a look at how declining centers can be reinvigorated through renovations and retenanting, or if necessary, total reconfigurations. Reinventing the Center takes a look at the recent growth of a new format, the value regional center, and how it has been developed as a response to consumer preferences and adapts some of the best characteristics of existing formats.
REVIVING THE CENTER
The increase in overall retail square footage, the emergence of the power center format, and changing consumer habits have all contributed to some difficult times for shopping centers. The aforementioned problems have been exacerbated by the aging of many centers. Throughout the United States today, there are many shopping centers that not only have declining consumer patronization and increasing vacancy rates, but also look physically worn. As a response to these problems, many shopping center owners and developers have implemented repositioning/redevelopment strategies to reverse the decline of their centers. Many of these strategies begin by gaining a better understanding of the consumer and market, and finish with significant physical alterations to the center with the goal of improving its attraction and ultimately its performance.
Shopping centers have faced numerous changes in consumer patterns, particularly a decline in patronization and shifts in demographic characteristics. To best understand these changes, numerous shopping centers have undertaken research studies to detail exactly what trends are occurring within a center’s trade area and market. Information about the consumer, via traffic surveys and/or consumer research, has been critical in providing information about who shops at the center, where they come from, and how much they spend. A thorough understanding of the consumer has provided the framework upon which shopping center owners and developers base decisions about how a center should be altered to better meet the needs of current and potential patrons.
Along with a thorough knowledge of consumers, shopping centers in a repositioning mode have also focused attention on the competitive framework in the marketplace. Assessing competition provides information regarding such factors as which shopping centers have the greatest impact on the center in question, what type of retail opportunity exists, and how a center can differentiate itself from existing centers in the market. Competitive information is often acquired through field work. In addition, consumer surveys can provide insight into how consumers perceive various shopping opportunities in a market. Combined with the consumer data, competitive information is a powerful tool in making decisions about the future of a shopping center.
In recent years, shopping center owners and developers have been turning their market information into aggressive repositioning activities in hopes of strengthening weak centers and completely revitalizing distressed centers. The majority of large scale repositioning strategies have been focused around three areas: renovation, retenanting, and reconfiguring. More often than not, the strategy typically used involves a combination renovating and retenanting. In some cases, complete reconfigurations, along with renovating and retenanting, takes place. These strategies have been implemented to reenergize centers by creating a "new" and exciting shopping environment, with the ultimate goal of improved productivity.
Renovations of shopping centers provide physical upgrades to facilities that have a worn and dated look. Physical problems present in older centers include a lack of vibrant lighting, extensive use of drab colors, absence of food courts, and dilapidated restrooms. The visual impact of a center upon shoppers’ perceptions has been well documented, particularly when the impact is negative. Correcting physical problems has been effective in communicating an image that a center is a clean, safe, and fun place to shop. Reviving a center visually, and often at the same time functionally, has been an important move for many centers to provide a "modern" feel and match newer centers on an aesthetic level. Renovations are often combined with an expansion of retail space, providing an even greater opportunity to add new and exciting tenants, as well as increase the overall attraction of a center.
Renovating, while providing a pleasant shopping experience by improving aesthetics and eliminating negatives, does not ensure a mall’s success. When a renovation is combined with a significant retenanting plan, however, significant benefits have been realized. New retailers provide renewed interest in a center and often stimulate improved customer traffic. Shoppers who may have grown tired of "the same old stores," find a renovated and retenanted center to be a new experience. The likelihood of increased sales from consumers also rises. The combination of new tenants and new aesthetics provides a new vitality to stimulate customer excitement.
The renovation and retenanting strategy has worked best with regional centers that were once dominant, have faltered slightly, but not drastically. Just a few examples of the many projects where malls have renovated to improve their performance and better meet their consumers’ demands include: Northgate Mall, Cincinnati, Ohio; Riverside Square, Hackensack, New Jersey; and the Mall at Short Hills, Millburn, New Jersey. As part of the renovation strategy, many malls are also expanding. For example, the Mall at Short Hills added thirty-five new stores, including three new anchors. These malls have been able to renovate largely because they have retained their competitive positions in the market. In addition, these centers are located in markets with large numbers of affluent shoppers. While the initial costs of renovation and expansion may be expensive, good locations and strong markets can provide the financial pay-back.
While some malls are fortunate enough to be positioned in upscale areas with limited competition, some centers face more difficult market conditions. Many regional shopping centers have been dramatically impacted by the construction of newer, often larger, shopping centers. Typically, these centers simply cannot compete with the newer centers in a traditional format. Under this scenario, center developers and owners have begun to pursue significant reconfiguration strategies, in addition to renovating and retenanting. A costly, but potentially effective solution is demalling. Demalling involves conversion from an enclosed regional mall to a power center format via elimination of ancillary tenant space and replacement by power retailers. Demalling replaces an out-dated retail format with a more current and viable format. While the logistics and costs are significant, demalling is often a necessary option for centers unable to succeed as a traditional mall.
A good example of a demalled center is Kenwood Mall in Cincinnati. Located in a prime location, Kenwood Mall was no longer able to compete with the newer Kenwood Towne Center across the street. As a response, Kenwood Mall replaced its anchors and small shops with big-box tenants such as Barnes & Noble, Computer City, and Old Navy. Reopened as Sycamore Plaza at Kenwood, the center successfully filled an available market niche.
Depending on the center, market demographics, competition, and logistics, many distressed retail centers have adopted aggressive repositioning strategies. Many of these strategies have been successful in increasing consumer traffic and ultimately the sales of the center. As markets continue to be saturated, and centers continue to age, the opportunities for center repositioning and redevelopment will continue to grow. It is up to the shopping center owners, developers, and mangers to recognize these changes and adapt accordingly.
REINVENTING THE CENTER
One of the more well-publicized shopping trends in recent times has been consumers’ preoccupation with "value." While value has many divergent definitions, it can be generalized as the perception of receiving a quality product at a good price. A good price would typically be defined as a cost lower than full price, whether achieved through a sale, markdown, or via an outlet. Much to the dismay of many traditional retailers, many shoppers will no longer buy merchandise unless it is "on sale." While this discount strategy has increased sales for many retailers, it has also taught consumers to expect constant markdowns. Few retailers have escaped the impact of the discount philosophy, even past stalwarts of margin protection -- traditional department stores -- have resorted to significant sale events to promote the value aspect of their products.
To satisfy consumers demand for "value" retail, some developers have ventured into the outlet mall arena. Between 1988 and 1996, square footage in outlet centers grew from approximately 14 million square feet to over 50 million square feet. While outlets represent a small percentage of total retail square feet, the growth rate indicates a clear response on the part of developers to changing consumer demands. However, outlets are also facing some problematic issues, primarily the maturing of the industry and ever changing consumer preferences. Consumers who are increasingly short on time may find an outlet center too distant, or simply lacking in the conveniences offered by many regional centers, particularly food and entertainment. As a response to consumers’ ever changing needs, and the shortcomings of outlet centers and other retail formats, a new concept has emerged, the value regional mall.
What exactly is a value regional center? The value mall is not so much a new concept as it is a fusion of several existing retail formats. The value mall combines concepts and ideas from outlet centers, traditional regional malls, power centers, and entertainment complexes. By combining previously unassociated concepts, developers have created a unique blend of retail choices and entertainment opportunities. The value mall concept has been driven not only by consumers’ demand for "value," but also an exciting shopping environment with entertainment possibilities. Value regional centers differ from outlet and traditional centers in terms of composition, consumer base, and locational strategies.
Value regional malls are enclosed shopping centers that mix discount, outlet, and off-price retailers, as well as significant food and entertainment offerings. Traditional department stores are usually absent. Even with the absence of traditionals, the number of anchors is high, often between 10 to 15. The large number of anchors contributes to the centers’ large sizes, usually a minimum of 1 million square feet of gross leasable space; typically though, sizes range from 1.5 to 2.0 million square feet. Retail offerings are supplemented with a large food and entertainment component, reaching upwards of 25% of total space. The food and entertainment offerings supplement the retail mix to provide shoppers with a complete experience. The value center provides the "value" through outlet and big-box stores, while at the same time providing the enclosed setting of a traditional center as well as significant food and entertainment options.
The unique composition of a value regional is supported by a consumer base that is often larger and more diverse than a power center or traditional mall. Value regionals attract a wide scope of consumers, ranging from value-oriented to upscale. The differentiation of the value center from other formats in a market enables the center to draw from an entire metro area and compete effectively with established centers. It is not uncommon for a value mall to draw consumers from a forty-mile radius. Shoppers may not be as willing to travel to the other side of a market for a store that they can patronize at a closer mall, but they may be willing to do so for a value mall that offers a unique blend of value retailers. Tourists provide an additional boost to the wide consumer base within a metro market. It has been reported that tourists account for up to 25% of all shoppers at value centers. In fact, most value malls implement significant tourist marketing campaigns and have special programs (e.g. charter buses) for both domestic and foreign travelers.
Further enhancing a value center’s unique composition and strong consumer base has been the location strategy of these centers. Value centers have optimally positioned themselves by obtaining excellent locations within large markets. Most value centers have located in metro markets with at least three million people, often four to five million. The locations within the market itself are often similar to a traditional center, along a high volume interstate within a metro area. Due to the fact that the differences between outlet and "full-price" retailers have blurred, value centers have not been as constrained as outlet centers in terms of locating closer to major metro markets.
The development of the value mall concept has been pioneered by the Mills Corporation. The Mills Corporation has opened several "Mills’ projects," and is planning on opening several additional centers. Ontario Mills, recently opened in the Los Angeles market, is a good example of a value regional center as it exists today. Ontario Mills is a 1.7 million square feet value mall with approximately fifteen anchors and two-hundred ancillary tenants. A few of the anchor tenants at Ontario Mills include: Burlington Coat Factory, JC Penney Outlet Store, Marshalls, Saks Fifth Avenue Outlet, The Sports Authority, and TJ Maxx. In addition to the retail offerings, Ontario Mills has approximately 250,000 square feet dedicated to entertainment, including a thirty-screen AMC Theatre. Ontario Mills succeeds by blurring the lines between once separate retail categories and combining them under one roof, providing a new and practical shopping experience.
The development of the value regional mall, now being implemented by other developers in addition to and in conjunction with the Mills Corporation, is clearly the result of the ever present axiom: change. Premier developers of quality super regional centers, such as The Taubman Company, are among those entering the value regional mall field. Value centers have developed not only in response to consumers preoccupation with "value," but also as a competitive response to the shortcomings of traditional, power, and outlet centers. The value mall is not so much a "new" concept as it is a fresh application and combination of many of the "best" aspects of existing formats. History has shown us that success in retail, from individual stores to entire shopping centers, often requires an ability to adapt, even if adapting means reinventing.
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