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HOSPITAL RETAIL: A NEW FRONTIER?

By Dave Bodamer

Swedish Medical Center, Seattle.

In recent years landlords have turned an assortment of venues into centers for shopping, including airports, railroad stations and office buildings. Are hospitals next?

It is already happening at a handful of large health centers in the United States and Canada, which are turning to retailers to boost their income and better serve their customers.

In so doing, the hospitals have closely followed the shopping center model, charging retailers base rents and a percentage rent on sales that exceed a certain threshold.

University Health Network in Toronto has been one of the most aggressive developers in pursuing the retail option to date. The provider operates three hospitals in the city and is in the process of integrating a total of more than 50,000 square feet of shopping into them.

“We’re the largest campus in Canada,” said Susan Conner, vice president of real estate solutions for the Network, “and with 8,000 employees altogether and the hundreds of thousands of patient visits a week, you’re talking about quite a large community.”

In October, the Network opened its first retail venture at the Toronto Western campus, which now includes a 6,000-square-foot Shoppers Drug Mart and a 350-seat food court.

“Our staff was crying out for this,” Conner said. “This is the kind of thing they want us to do.”

Other retailers the Network has courted for its hospitals include gift shops, coffee vendors and video stores, so that overnight patients can rent movies. The Network’s hospitals also play host to health goods retailers. Most hospitals have small pharmacies, but the benefit of bringing in a national chain is that it provides a “front shop” (an industry term for the nonpharmacy section of the store) carrying nonprescription drugs and convenience-store-like inventories.

Other retailers are eager to come.

“We actually have a waiting list of tenants to get in,” Conner said.

Another Toronto health care provider, Sunnybrook and Women’s College Health Sciences Centre, which also has three campuses within the city, has been similarly aggressive in bringing retail into its hospitals, primarily food and coffee vendors.

But officials at the Centre stress that while they have worked to realize the retail potential of their campuses, they have also been concerned to preserve their image with patients as primarily health care providers, not retail landlords.

“The hospital does benefit from a revenue cut, but the retailers don’t get to do a lot of marketing of their services here,” said Sandra Cruickshanks, the Centre’s chief of public affairs. Retailers cannot, for example, use the branded storefront signage they use elsewhere. “We didn’t want people to think that our hospitals are becoming malls.”

The most ambitious marriage of health care and retail is now in the developmental pipeline. UC Physicians, a group affiliated with the University of Cincinnati; and Dayton, Ohio-based developer Miller-Valentine Group are building the $100 million, 500,000-square-foot University Pointe in West Chester, Ohio. The complex will include a new hospital operated by the physician group and 75,000 square feet of retail and restaurants, the latter serving healthy fare. Health care-related tenants will include a day spa. The first retail components, which are being built on outparcels of the property, will open late this year or in early 2003.

“We’re not like a traditional shopping center or retail center,” said John Gillespie, a spokesman for UC Physicians. “We really have a site plan that will direct our growth, but the primary function at the end of day is to support health-related services.”

But putting retail into hospitals has met with mixed success so far, according to some officials, who say that such development can work only at facilities with large work forces and enough residents nearby to support the retail.

Even then it can be a struggle. The Swedish Medical Center in Seattle has 30,000 square feet of retail space along one of its facades. The Center sits on the major east-west arterial in the city, giving the retailers access to patients, workers and passing pedestrians. The stores, however, have had a hard time, according to Don Audleman, senior vice president at Dallas-based Trammell Crow Co.’s health care services unit, which runs the hospital’s retail. Food chains such as Starbucks, Quizno’s and World Wraps have done well, but some small businesses, including a dry cleaner, have had to close, he said.

“The retailers have been fairly successful, but I wouldn’t say that any are setting volume records for their chains,” Audleman said.

The Swedish Medical Center in Seattle features 30,000 square feet of retail space along one of its facades.

The problem, he said, is that the hospital, despite being the largest in the Northwest, does not generate enough traffic to support the retailers. All of this has led Audleman to conclude that integrating retail into health centers will probably not catch on as a widespread phenomenon.

“I’d be particularly cautious if you had a campus that was isolated from the community or a distance from the community,” he said. “We have the fortune of being a major urban hospital [covering 13 city blocks] integrated very closely to the downtown core of Seattle. We’re a part of the urban fabric.”

But were the retail on the other side of the campus, away from the main road, it would not survive, Audleman opined.

“It’s that sensitive,” he said. “You have to have a critical mass of people to use those retailers.”

Conner of The University Health Network agreed with Audleman’s assessment. “At small hospitals this won’t work, but when you’ve got the size of hospitals we have, that’s an opportunity,” she said.

Health providers in Canada and the United States have turned to retail for different reasons, officials say. Canadian health centers have less funding and endowments than their U.S. counterparts, so retail income is, for some, a key asset. In the United States, hospitals have turned to retail as a way of adding services that employees and patients ask for, but they don’t see it as an income-earning imperative.

But for all that, retail continues to make inroads at U.S. hospitals. Northwestern Memorial Hospital, Chicago, has 14,000 square feet of retail that includes a Starbucks and a Barbara’s Bestsellers bookstore. And there’s money to be made in such locations, according to some retailers. Mayuba Bookstores Inc., the parent company for Barbara’s, says the store generates between $700 and $800 per square foot annually.

In Britain, WH Smith Group has earned even more at the small bookstores it operates in over a dozen hospitals. Its stores are similar in format to the ones the chain operates at train stations and airports both in the United Kingdom and the United States. Those stores, and other bookstore chains in travel destinations, generate more than $1,000 per square foot annually, according to the company.

Pitching the hospital environment to retailers has not been difficult, said Conner. “We’ve really just had to say, ‘Here’s the community, here’s the size, here’s the sales potential.’”

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