MANUFACTURERS, WHOLESALERS FUEL SPECIALTY RETAIL GROWTH

BY DEBRA HAZEL

Specialty leasing’s rapid growth and increasing sophistication have rendered its mom-and-pop pedigree virtually invisible.

Today it is a $10 billion-plus industry, according to trade quarterly Specialty Retail Report, dominated by chains that operate scores, if not hundreds, of carts and kiosks.

In particular, the specialty retailing business has caught the eye of wholesalers and manufacturers, who view carts and kiosks as a feasible way to get into the business of retailing their own products.

Perhaps it’s not surprising that in these times of political and economic uncertainty shoppers should look for a little comfort and pampering. Specialty tenants offering such services and products as skin care, massage chairs and even board games were particularly hot this past holiday season, say industry players.

“Sales were good and traffic was up,” said Deborah Georgetti-Piro, vice president of Main Street retail at The Mills Corp.

Chamilia

It would seem to be a pretty big leap to go from Wall Street and Tommy Hilfiger to beaded-jewelry importing. But Chamilia co-founders Jeff Julkowski and Killian Rieder say supplying jewelry wholesale to specialty leasing carts has proved to be a profitable career move.

The two are a husband-and-wife team. Julkowski, formerly a securities analyst, and Rieder, once an executive with Tommy Hilfiger and Polo, started out in the temporary-tenant business as owner-operators of the Aquamassagers found in malls around the country (SCT, February 2003).

Rieder and Julkowski bought their first Aquamassage unit in April 2001 and started running the business while they were still working their full-time jobs, though both quit when the specialty retailing took off.

Then another opportunity beckoned: Italian modular jewelry charms. While continuing in the Aquamassage business, they began wholesaling the charms to carts. Eventually, the company was supplying about 25 to 30 carts, including several in New Jersey.

There was yet again another change on the way.

“We learned a bit about that, then found out about beaded jewelry,” Julkowski said.

Chamilia now supplies carts with sterling silver and 14-karat gold beads that are slipped on to chains and leather cords for bracelets or necklaces. The beads, which vary in size, retail for about $13 to $18 each. They sport individual letters of the alphabet, patterns and stones, allowing the customer to create an individualized look.

“Personalization is definitely where it is right now, from remodeling homes even to cars,” Julkowski said.

Unlike some temporary tenant wares, beaded jewelry is not seasonal, Julkowski says, though sales obviously spike at Valentine’s Day, Mother’s Day and other gift-giving holidays.

Today Chamilia has over 100 accounts.

The privately held company won’t reveal specific sales figures, but Julkowski did say he was hoping for at least $10 million. Chamilia is now selling its Aquamassagers to focus on the jewelry business.

Shiatsu massage chairs

One of the newest specialty leasing tenants isn’t even dependent on the mall’s being open to make money. Shiatsu massage chairs, now being installed in centers around the country by Redlands, Calif.-based Lyon Distributing, provide respites for mall walkers in the morning and for maintenance staff after hours.

“Even when the mall is closed, we’re still generating income,” says Lori Lyon, vice president of Lyon Distributing.

The company opened its first massage chair unit last June and has since expanded that to 61 locations.

Chairs are arranged in clusters, usually four to six units, and require no more electricity than a typical cart. Massages start at three minutes for $1; the customer places his money in the unit as he would a vending machine. “People are into pampering,” Lyon said, “and for a dollar, they can sit down and relax.” Digital meters monitor sales, which vary by location. Some malls see $500 weekly, others post as much as $4,000 a week. The chairs appeal to all demographics, but men in particular, says Lyon.

Go! The Game Store

In an increasingly competitive toy market, Go! The Game Store is finding success through a wide assortment in a very small niche: board games.

Go!, a division of Calendar Club, doesn’t sell computer games. It doesn’t even sell traditional board games — a shopper won’t find the classic Monopoly there, for instance. But if she’s looking for University of Texas Monopoly, she’s found the right place, because Go! sells specialty versions of old favorites, in both kiosks and in-line spaces.

“It’s a smaller business than overall recreation,” said Marc Winkelman, president of Austin, Texas-based Calendar Club, referring to computer games and the like. “But in recent years, they’ve created some great new ones, including Friends Trivia and Simpsons Monopoly.”

Go!, like Calendar Club, operates seasonally, from about Nov. 1 through early January. Calendar Club sells calendars (and, as Christmas Corner, holiday items). The units are evenly divided between the in-line stores and the kiosks. Winkelman looks for seasonal sales of $100,000 to $150,000 per unit.

One might think that in this age of Nintendo, board games would be passé. Not so, says Winkelman. “Particularly since Sept. 11, a lot has been written about families cocooning, and they are drawn to games,” he said.

People are simply not going out as much, and they need entertainment, says Kendyle A. Baldwin, manager of national accounts at The Rouse Co.

“It’s getting back to that 1950s lifestyle,” Baldwin said.

Go! went from 150 units in 2002 to 240 last year, including some shared with Calendar Club. Winkelman sees having up to 500 units in malls around the United States.

American Kiosk Management

Some might see a simple logic to American Kiosk Management’s strategy to sell Proactiv Solution acne treatments on specialty leasing carts: Acne especially likes teens, and teens especially like malls.

The reality, of course, is even more lucrative: People of all ages are both afflicted by acne and attracted to malls.

“You can’t get it in any other retail outlet,” said Max James, CEO of Las Vegas-based American Kiosk, which operates the Proactiv carts. A former executive and board member at the Days Inn Worldwide economy hotel chain, James founded American Kiosk in 1997 to sell Metabolife diet pills. But as the supplements became increasingly available through discounters and other full-time retailers, James began looking for a new product.

In 1999 James pitched Bill Guthy and Greg Renker, the co-founders of a television infomercial retailing company, about placing on carts a skin care line that they sold over the air. (It was Guthy and Renker who had allowed him to sell the Metabolife products.)

Guthy and Renker agreed, but had a different product in mind: acne treatments. These products (cleansers, creams and makeup) had been an infomercial staple for years. The line’s celebrity spokeswomen included actresses Judith Light and Vanessa Williams.

“I said, ‘You can’t sell zit cream in the malls,’” James said. But when he found out that the line sold more than $125 million through television, he said, “it took me a nanosecond to raise my hand.”

In 1999 James opened five Proactiv carts (four in Tennessee — and one in Las Vegas), and the business has continued to expand. The company had 85 units in the United States and Canada at year-end 2003 and expects to have 200 units by the end of this year.

Such rapid expansion left James looking for investors to fund the growth. However, Guthy-Renker offered to buy half the company and finance as much growth as he could handle. The deal closed last year, and James says he can now expand Proactiv to 300 carts or more.

All the units are in carts to avoid the expense of kiosks. The company is still privately held, so James wouldn’t reveal yearly sales. But established carts can do $35,000 to $40,000 in sales monthly, he says, adding he hopes to post a total of $50 million this year.

“They’re doing gangbuster business,” said Nancy Goodman, manager of national accounts at The Rouse Co., which had 20 Proactiv units last year. “Max James has a knack for finding trends.”

After all, troubled skin is eternal.

NYS Collection

Marc Behar used to mock the cart operators he saw in malls.

“Now I’m one of them,” he said. Behar is a partner of Brooklyn, N.Y.-based NYS Collection, which sells affordable high-fashion sunglasses from its own carts and also wholesales to others around the country.

Behar came to the business through a friend and fellow Brooklyn native, Sal Babbino. The two had taken divergent career paths — Babbino became a specialty retailer, selling embroidery, while Behar went to Wall Street.

“I hated it,” Behar recalls.

So when Babbino called in 1996 offering his old pal a partnership in the NYS Collection cart enterprise, Behar jumped at the chance to sell sunglasses.

“It’s an item that’s never tired,” Behar said. “There are always new styles.”

But there is also a disadvantage, notes Babbino: “It is seasonal. It’s mostly in the summer and fall.”

The partners opened their first cart later that year in the retail concourse of the World Trade Center and kept it until the complex was destroyed in the Sept. 11 attacks. (The cart operator escaped unharmed).

The next year the men opened five units and today they operate 37. About 90 percent of the units are carts, the rest kiosks.

A typical cart holds roughly 100 to 120 styles, with new styles coming in every month. At between $12 and $15 a pair, most shoppers can easily afford to choose a number of styles.

The styles are inspired by costlier designer glasses, “but we make them into our own, using different colors and textures,” said Babbino.

The two men visit Europe regularly to search for new styles; then they have the glasses manufactured according to their own specifications in Asia.

Charlie’s Angels and other films have been a boost for business, the partners say, as customers come seeking affordable versions of what they’ve seen on the silver screen.

NYS looks for its carts to post sales of $10,000 to $12,000 monthly. The more than 500 styles in the company’s inventory allow cart operators to choose the hundred or so that best suit their customer base.

“The World Trade Center was more of a tourist location,” Babbino said. “But we did as well there as at Roosevelt Field,” he explained, referring to the upscale suburban mall in Garden City, New York.

The company supplies 600 other owner-operators, and in fact it is the wholesale business that will be significantly expanded in the future, Babbino and Behar say.

“If a retail opportunity comes up,” Behar said, “we’ll pass it on to a good operator.”

Santa’s Pen

Who would believe that a Christmas ornament could save a marriage? Micheal Brother swears it’s true.

“A man came up to us and said his wife liked a particular ornament, but when he came back to the cart, it was gone,” said Brother, the consultant to Santa’s Pen, a Honolulu-based personalized Christmas ornament retailer. “He asked us to FedEx one,” explaining that ‘My wife was going to leave me if this didn’t work.’” The company did just that.

Brother says that this type of devotion and personalization is the reason Santa’s Pen has grown to a chain of more than 160 specialty units across the United States.

It all started when Karen Sotomura began designing and selling Hawaii-themed holiday ornaments (hula girls, Santas in grass skirts) to local hotels and resort gift shops across the islands. In 1985 she and her husband founded Joseph K. & Co., also based in Honolulu, to manufacture the ornaments.

“They were colorful and whimsical, and they took off immediately,” recalls Sotomura, president of Joseph K. & Co., noting that at the time, she did everything herself. “But as we expanded the line, we saturated the market.”

She expanded not only the line but also her geographical reach — to ski areas in the Colorado cities of Aspen and Vail and other places. In the early 1990s the company added personalization services, writing names and dates on the ornaments to order. At about the same time, Sotomura began selling to year-round Christmas stores. By 1994 she was ready to expand again, when a specialty retailer at Columbia (Md.) Mall expressed interest in the ornaments.

“I ended up having her set up a personalized Christmas ornament kiosk, and it was very successful,” Sotomura said. Sotomura started supplying other temp tenants. She joined ICSC and attended the specialty leasing conference; by 1995 she was supplying 30 tenants. It was the success of these that prompted the company to take things a step further and operate its own kiosks. Joseph K. & Co. launched Santa’s Pen last year and is shooting to have 200 open this year.

Prices range from $2.25 to $20. Over a typical two-month selling season, cart sales can range from $40,000 to $200,000, she says.