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E-tail: How threat transformed into an opportunity

by Edmund Mander

Though predictions that Internet retailing would be the death of shopping centers—remember Time magazine's "Kiss Your Mall Goodbye" cover?—turned out to be greatly exaggerated, landlords are not letting their guard down just yet.

The outlook concerning the Internet's impact on shopping centers these days is much more cheerful from the owners' point of view. But it also is more complex. As retailers sell simultaneously over the counter, through the Internet and by catalog, landlords are scrambling to make sure that multichannel retailing doesn't take a bite out of their profits.

Time magazine, July 20, 1998

"No one really knows how it's all going to pan out," said Keith Stone, retail director at Lend Lease's Bluewater in London, Europe's largest mall. "We're just trying to find a fair path."

Once it all seemed so straightforward: There was the Internet for those who opted to shop from home, and stores for shoppers who wanted the retail experience; the two worlds seemed completely separate, and landlords were happy to keep it that way.

"There were mall owners who banned dotcom advertising in their malls," said William A. Hicks, a partner in the E-commerce Integration Development Center at Arthur Andersen LLP, although he noted that such bans proved difficult to enforce.

Retailers, for a time, also seemed happy to keep their Web dabbling separate from their store operations, especially when they began to appreciate the complexity of running Internet operations. Barnes & Noble.com is only about 40% owned by Barnes & Noble Inc. the bookstore, and Kmart's online entity has a completely different name—Bluelight.com.

But now a new word has mall owners' ears pricking up: "integration." Retailers now are using their catalogs to promote their Web sites, the Web sites to spotlight their stores, their stores to sell on the Internet and all three to process returns. And Amazon.com is even putting out a catalog now.

For retailers, integration was a hard-learned lesson of survival. Initially, many thought e-tailing would be a relatively simple matter of processing a lot of e-mail messages requesting goods using a system that bypassed the expensive, complicated business of locating markets, renting store space and training and paying customer-service personnel.

The reality, as many of their customers learned during the chaotic holiday season of 1999, was very different. Suddenly retailers found themselves receiving 10,000 orders a day that required shipping to 10,000 destinations, noted Rohit Agarwal, vice president of marketing at Natick, Mass.-based CommercialWare, a company that specializes in helping retailers set up and integrate Web retailing operations. As retailers discovered "to deliver on a multichannel level requires more than just a multichannel presence," he said.

With no links to a common database, those selling over the Web were oblivious to the activities of their counterparts in the stores, with catastrophic consequences for inventory control. Warehouse meltdowns prompted Toysrus.com to mail $100 coupons in lieu of the toys it couldn't deliver in time for Christmas 1999.

There were as many problems on the Web sites themselves—referred to in the business as the "front end"—as there were in the warehouses—the so-called "back end." The relatively new Web site for the esteemed London food store, Fortnum & Mason, suffered from a nervous breakdown of sorts before that same Christmas and crashed, recovering its composure in time to announce the deadline for Christmas deliveries had passed.

Until recently, call center staff at many retailers were helpless to assist customers calling up to change orders they had placed over the Internet, and stores often were refusing to accept the return of products placed over the Internet.

"Fundamentally, people didn't understand multichannel retailing," observed Agarwal.

But a year is a very long time in the Internet world, and many retailers have taken the lesson of integration to heart. Call centers now have instant access to e-tailing computers. A recent shopper on L.L. Bean's Web site, who suddenly discovered he had forgotten to use some of his coupons for the purchase, called up and had an employee access the order on her computer screen, and had his coupons credited.

Most, if not all retailers, now allow customers to return Internet-purchased merchandise to their stores. And it works the other way, too: Customers unable to find what they want in a J. Jill store are referred to a concierge who places their order at an in-store Internet kiosk and arranges to have the goods delivered by the next day, said Agarwal. CommercialWare helped J. Jill and other leading U.S. retailers—including Staples, Target, Disney, Saks Fifth Avenue, Brooks Bros. and Patagonia—integrate their online and store operations.

Kiosks, of course, offer much, much more than a simple backup for out-of-stock items: They are ideal for customers who don't want to schlep their purchases home and who are eager to avoid lines at the counter. Retailers love kiosks too, because they can sell merchandise without having to restock a store's inventory.

All of which is great for the stores and wonderful for their customers. But where does this leave the landlord? If a customer buys a product from a store's kiosk, should that count toward a landlord's percentage rent? What if an Internet-purchased item is returned to a mall store—is that to be subtracted from the rent? Is it even fair for stores to be advertising their Web sites at their mall stores? All this is beginning to be included in landlord-tenant lease agree ment language. It's still very early yet, "but there seems to be a general understanding between retailers and landlords about how it will work," Bluewater's Stone said, adding that new leases at his mall, regarded by many as the finest in Europe, spell out a tenant's obligations.

"As far as I'm concerned, any transaction that's initiated in the store...we should get the benefit of that," he said. If, however, a customer is simply picking up an item purchased on the Internet, the store owes the mall nothing, Stone added. "At least I've got the benefit of their visit to the shopping center." But if a customer returns an Internet-purchased item to the store, "that must not impact my turnover [percentage] rent," he said. Some landlords are endeavoring to engage the Internet on their own terms. Plymouth Meeting, Pa.-based Kramont Realty Trust has signed a deal with MyShoppingCenter.com, an e-business provider, to supply common broadband Web access to all of Kramont's 2,000 tenants in 90 community centers.

MyShoppingCenter.com allows Kramont to communicate with customers, vendors and its own headquarters. It also offers consumers coupons and sales information, and enables retailers to band together to obtain cheaper credit card processing. MyShoppingCenter.com also has brought shopping centers online in Miami; Tampa; Orlando; Jacksonville; Atlanta; Richmond; Baltimore; Washington, D.C.; and the tristate area of New York, New Jersey and Connecticut.

"This is the shopping center's Web site as well as the retailer's Web site," said Gary Mansfield, president and CEO of MyShoppingCenter.com, explaining that the service meets the common interests of both landlord and tenant. But when it comes to Internet retailing, Kramont is making sure that the rules are spelled out clearly by amending its lease agreements.

"If merchandise is bought over the national Web site and it's returned to that store, we want to make sure we don't get debited for it," noted Norman M. Kranzdorf, chairman of the board at Kramont. Given that 25% of apparel bought over the Internet is returned, according to Agarwal, malls could see a steady stream of customers bringing in clothes. To monitor such transactions, "we have teams of auditors like all the other shopping center owners do," Kranzdorf said.

But for all that, multichannel retailing promises to be an ally of landlords and, properly regulated, will actually drive up store sales, and therefore percentage rent, according to a recent survey.

Nearly 60% of Internet shoppers visiting retailers' Web sites went on to purchase items from their stores, according to the survey of retailers, shoppers and retail executives conducted jointly by the Washington-based National Retail Federation, J.C. Williams Group, a retail research company based in Chicago and Toronto, and BizRate.com., which collects retail data from online transactions. More than two-thirds of catalog shoppers also bought from the catalogs' brick-and-mortar stores, the survey found. Furthermore, multichannel shoppers purchase more frequently and spend more per transaction than their single-channel counterparts, according to the survey.

"What's interesting to see is how you work all three as a promotion," said Arthur Andersen's Hicks. Consequently, landlords who not long ago viewed the Internet as a threat now regard it with a far more kindly eye.

"We hope that we're going to be able, through MyShoppingCenter.com, to drive business back into the center," Kranzdorf said.

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