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Shopping Centers Today -> June 2002
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DEPARTMENT STORE BLUES
Owners seek alternative anchors
By Debra Hazel
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Anchor used to be another name for department store, but no longer. When General Growth Properties renovated Milwaukee’s Mayfair Mall recently, it decided against adding department stores, opting instead to bring in restaurants and specialty retail to join an anchor lineup that included Barnes & Noble, Boston Store, General Cinema and Marshall Field’s.
The fact is, developers are losing their taste for five-department-store malls, worried that a predicted round of retail consolidation will leave them with cavernous dark anchor spaces. Consolidation in the pool of anchors, a process that has been going on for more than a decade, is expected to accelerate.
“What you’re going to see [at a mall] is one or two department stores, not four or five,” said Robert Michaels, president of Chicago-based General Growth. “You’re starting to see that mind-set.”
Parkway Place, Huntsville, Ala., a 600,000-square-foot center under development by CBL & Associates Properties, has just two anchors. Another CBL project, The Lakes (700,000 square feet), debuted last year in Muskegon, Mich., with three department stores and a Bed Bath & Beyond for anchors. General Growth’s Jordan Creek Town Center, opening in West Des Moines, Iowa, in a couple of years, has two anchors (Famous-Barr and Dillard’s) and a streetscape planned.
Industry insiders have made some dramatic predictions about the future shape of department store retailing. A March 2001 report by New York City investment bank Bear, Stearns & Co. predicted that the department store business would ultimately revolve around Kohl’s, Federated Department Stores and May Department Stores Co., with the latter two likely to grow by acquisition. The department store sector has lost market share over the last decade to both discount and specialty stores, the report noted. “Moreover, the economics of operating a department store are becoming less favorable,” it said.
Recent events have heightened merger speculation. Federated and May reportedly held merger talks this spring. And though nothing came of them (most observers see the move as unlikely, given the overlap of stores in many markets) many say that a number of smaller regional chains will be acquired in whole or in part, in the face of declining market share and growing competition from other retail formats.
It’s bad enough that chains are competing against each other, but other formats are doing them a great deal of damage, too. Department stores’ share of general merchandise sales has dropped about 20 percentage points in the last decade, according to the Bank of Tokyo-Mitsubishi figures (see chart). Ten years ago few department stores would have considered Gap, Kohl’s, Target or Wal-Mart a threat, but these competitors’ superior efficiencies and lower prices have made them viable alternatives for today’s time- and cash-pressed consumers. Even when customers do shop at department stores, they wait for sales, trained to do so by the promotional events that proliferated during the downturn of the early 1990s, when Federated, among others, operated under Chapter 11 bankruptcy protection. That hurts cash flow and profitability.
“This is a sea change, and it’s been coming for a long time,” said Walter Levy, managing director at New York City-based consulting firm Kurt Salmon Associates. “Sales started to weaken in 1999, when the economy was still doing well, and now [department stores] have competitors.”
Other events could also hasten mergers and acquisitions; the death in early February of Dillard’s founder William Dillard prompted immediate speculation that the chain would be sold. Though the company denied this, not everyone is convinced.
“The regionals are still the ones most likely to be acquired, including Dillard’s,” said Dana Telsey, senior managing director at Bear Stearns. “Saks also is of interest, given its recent issues [in January Moody’s downgraded its debt rating to junk status], and some of the locations of their divisions may be attractive to different suitors.”
Other, smaller chains such as Elder-Beerman, the privately held Belk Stores and Marshall Field’s, the department store division of Target Corp., are among the names bandied about as potential acquisition candidates in whole or in part.
That leaves landlords wondering what’s going to happen with some valuable real estate and worrying about having multiple units of a chain within one center and, ultimately, shuttered anchors.
Developers are not giving up on department stores entirely, however. Recently opened centers include the six-department-store Polaris Fashion Place, Columbus, Ohio (J.C. Penney, Kaufmann’s, Lazarus, Lord & Taylor, Saks, Sears); the five-department-store Streets at Southpoint, Durham, N.C., (Hecht’s, Hudson Belk, J.C. Penney, Nordstrom, Sears); and five-anchor Triangle Town Center, Raleigh, N.C. (Belk, Dillard’s, Hecht’s, Saks, Sears).
Even regionals are still finding locations at new or expanding malls.
“We’re comfortable with May, Federated and Saks Inc., as well as with a Von Maur [a Midwest regional player], which has great financials and a good niche,” said Stephen D. Lebovitz, president of CBL & Associates, Chattanooga, Tenn.
In addition to still-substantial sales, the chains provide a valuable recognition factor and spend a considerable amount in advertising that brings customers to the malls.
“The history of nonanchored malls is not encouraging,” Bear Stearns’ Telsey said. “We believe that anchors are one of the main draws in attracting traffic to the centers. In addition, high-end specialty retailers want tenants who sell similar-priced goods to attract comparable-income customers. The mix of discounters and mid-high-end specialty retailers is not a combination that has been shown to work.”
The degree of further department store consolidation depends on the economy, opined Lebovitz, speaking in early April.
“If the economy continues to improve, retail sales will improve, and there will be less pressure to consolidate,” he said. “But there will certainly be horse-trading among department stores to rationalize markets.”
Kurt Salmon’s Levy maintains that substantial consolidation will not occur, largely because there are few viable targets left.
“The issue is not so much getting bigger,” he said. “It’s getting better.”
Whatever the case, developers should be cautious, advised Telsey.
“Real estate developers need to be very cognizant of the changing financial outlook for many of these players,” she said. “The financial strength of a retailer is essential to their investment in new properties and [to] remodeling and updating their existing stores.”
You don’t need to tell CBL.
“It’s a big factor in acquisitions,” said Lebovitz, whose company last year acquired much of the Richard E. Jacobs Group’s portfolio and continues to eye purchases. “We don’t want to buy a mall and have an anchor go dark.”
When anchors do go dark, replacing them with other department stores can become still more challenging because the remaining anchors can veto other chains, except in some major markets, he noted. All of which has encouraged CBL to replace some department stores with large specialty users such as Galyan’s and Dicks Sporting Goods. At General Growth-managed Ridgedale, Minneapolis, a former Dayton’s department store was converted to a home furnishings unit, to great success.
“It works well for the retailer,” Michaels reported. “I think you’ll see more emphasis in that area.”
Meanwhile, retail’s Darwinian cycle continues. Ten years ago such names as Jordan Marsh, Maison Blanche and Prange’s dotted the retail landscape. Many of those same physical stores continue to exist, operated under other names by stronger companies. This “survival of the fittest” trend shows no sign of abating and will likely force developers to adapt to a new landscape, as they did in the early 1990s.
“It’s the same cycle,” said Todd Slater, a retail analyst at New York City-based Lazard. “The cycle of low-cost, more-efficient operators taking more market share will continue to be a trend in retail.”
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