 |
 |
 |
 |
 |
 |
 |
 |
Shopping Centers Today -> July 2003
 PRINT THIS STORY: |
  CHANGE TEXT SIZE: |
|
COSTCO TAKING ANCHOR SPOTS
BY DEBRA HAZEL
 |
| Costco’s spot in Spotsylvania Mall, Fredericksburg, Va. |
In a major strategy change for both Costco and the shopping center industry, the warehouse club operator has begun anchoring regional malls.
Costco has moved into two centers so far, and it says it’s in talks to enter more, in a move that will provide it prime locations. At the same time, malls stand to get a fresh anchor tenant, something they very much need in an era of flagging department store sales.
The company is “in discussions with all the major mall owners, including some unique malls — high-end, well located,” said Jeff Brotman, Costco’s chairman. “Over the next several years, we will see a number of transactions with mall owners.”
Costco opened its first mall unit at Chris-Town Mall, Phoenix, in 2001, and put the second in Spotsylvania Mall, Fredericksburg, Va., last July.
“This is a terrific location, in an area we wanted to be in,” said Brotman, of the Spotsylvania store. “The reason that the malls are attractive to us is that they’re extremely well located.”
When Montgomery Ward went out of business, it left Spotsylvania Mall’s owner-manager, The Cafaro Co., with a dilemma familiar to other developers: the difficulty of replacing an anchor in a time of retail consolidation. Conventional wisdom would have dictated finding another department store, but the mall already had Belk, Dick’s Sporting Goods, Hecht’s, J.C. Penney and Sears as anchors.
“It would have been a duplication,” said John J. Cafaro, executive vice president of Cafaro Co.
So the firm approached Costco, the affluent person’s membership warehouse club, which until recently has owned stand-alone buildings on its own real estate.
Spotsylvania, located at the intersection of Interstate 95 and state Route 3, about halfway between Washington, D.C., and Richmond, Va., is in the center of a rapidly growing, increasingly well-to-do part of the state. Spotsylvania Mall’s proximity to the nation’s capital and Virginia’s state capital gives the mall a solid economic base. Household income in the trade area of more than 400,000 people averages $65,450, according to Cafaro Co. Major military facilities Hill Air Force Base and Quantico Marine Base are nearby.
The fit was good for the mall too, Brotman says. He refers to his chain as a hypermarket rather than a warehouse club, noting that hypermarkets have a much broader appeal than department stores.
“I don’t care what you say — if you have four mid-category department stores [as anchors], how much merchandise is different?” he said.
Costco’s demographics were also a major factor. The median age of Costco’s members is 51.8, and they have a median income of $85,000. That’s well above the U.S. medians of 35.6 and $41,000. More than 42 percent of Costco members earn upwards of $100,000 yearly, versus just 12.2 percent nationwide.
As a result, the merchandise is compatible with a regional mall. After all, this is not a typical warehouse club — Costco’s customers are looking for designer-label apparel, fine wines and good jewelry at great prices, not 50-pound barrels of no-name ketchup.
“They have an upscale customer, and their draw is from a much larger circle than the mall itself,” Cafaro said. “I don’t think any department store would equal that draw.”
Nor is the idea of adding a food merchant to a regional mall incongruous. Nearly everywhere else in the world, grocers or hypermarkets coexist happily with fashion anchors in regional malls.
Even so, there were complications, Cafaro says. Indemnities from the Montgomery Ward bankruptcy had to be resolved and the old building needed to be torn down. In addition, warehouse clubs have very different physical needs from department stores. Clubs use shopping carts, for example, which are not used elsewhere in the mall. Food and wine must be delivered, then properly stored, frequently and promptly. And the warehouse club had to adapt to parking decks.
“We were blending two completely different philosophies,” Cafaro said. “They are accustomed to being freestanding, owning their own parcel and doing whatever they want. We’re used to control.”
Overcoming these hurdles, the two sides signed a ground lease — both Costco and privately held Cafaro Co. declined to give specific lease terms — and the 138,000-square-foot Spotsylvania unit opened.
To provide a logical transition between the mall and the warehouse club, Costco created a triangular entry that allows shoppers to turn right into the Costco or left into the mall proper. The covered entrance provides an area to store Costco’s shopping carts without cluttering the door to the rest of the mall.
The Costco was an instant success, all report, and other mall tenants are benefiting as well.
“Customers are coming from 70 miles away,” said Harry “Duke” Conners, a Cafaro Co. leasing agent. “They make it a day and shop at the mall.”
Jewelry sales at the rest of the center are up 71 percent, he said, with Cafaro Co. reporting a doubling of sales for some mall jewelers. So far the Hecht’s store has seen sales grow 7 percent from a year ago, and the other anchors also report sales increases since the opening, according to Norman Peters, a Cafaro Co. senior vice president. “It’s been an overwhelming success,” he said.
Speaking less than a year after the Spotsylvania opening, Brotman said Costco had yet to formally study the differences between its mall shoppers and those at other locations, but a survey will be done near the end of this year.
“We probably have a bit more upscale customer at the mall,” Brotman said. “Our jewelry sales are off the charts.”
The deal has been a learning experience for both companies, Cafaro said.
“Changing our tenant mix and putting in Costco helps our mall to compete with the big boxes across the street,” Cafaro said. “With the big boxes and the Internet, to keep traffic up you have to change the philosophy of the regional mall.”
Costco, too, is learning lessons it will apply in the future.
“We have become more flexible, learned more about operating in this environment and with deck parking,” Brotman said. “As we look for more urban locations, the malls will help that.”
 | Current Issue March 2010 |