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THAT WAS THEN, THIS IS NOW

WE’VE UPDATED SOME OF OUR MOST COMPELLING STORIES FROM PAST ISSUES

By Kerri Linden

The retail real estate industry does not stand still, and neither does its news. Some stories change almost as soon as the ink is dry, others play out over several years, snowballing into trends. And still others are made irrelevant by mergers, acquisitions, economic turmoil and changing consumer tastes. That is why we are looking back at several stories from issues past to reexamine and update them. For example, are banks threatening to steal business from developers? Have tighter U.S. borders hurt retail sales in tourist spots? And how are all those new concept that bowed in recent years holding up? As 2007 draws to a close, we revisit the past few years’ most fascinating topics with the benefit of hindsight. After all, we hate to leave our readers hanging.

The REIT world turns

The worldwide REIT whirlwind did not blow quite as expected. In December 2006 SCT published a story heralding the start of an era of consolidation and transparency in European real estate as Britain and Germany prepared to create REITs, joining its neighbors Belgium, France, Greece and the Netherlands. At the time, Britain and Germany were still taking steps to finalize REIT legislation, and investor anticipation was high for the new vehicles.

In March Germany’s REIT Act finally passed the Bundestag and was made retroactive to January 1. German REITs, called G-REITs, are stricter than their U.S. counterparts, limiting investors to 10 percent of the company and excluding residential property.

The U.K. enacted REITs through the Finance Act of 2006, legalizing them in January 2007. Upon enactment of the law, nine U.K. property companies converted to REIT status, including British Land, Brixton, Great Portland Estates, Hammerson, Land Securities, Liberty International, Primary Health, Slough Estates (now known as SEGRO) and Workspace. Eight more joined thereafter, bringing the total to 17 companies listed as REITs in the U.K. Investors rushed into the sector, driving prices into the stratosphere.

In July Italy joined the REIT movement too, and though the country has 14 publically listed property companies, none have converted thus far to REIT status. Germany also has not seen the expected surge in property company conversions to REITs, most likely owing to the residential property exclusion, which may have disappointed many, observers say. One German company, Alstria, became the first REIT, though it concentrates on office space.

Herbert Quelle, head of economic affairs for the German Embassy in London, told CNBC that the future could still be bright for German REITs. “Yes, the current rules are set in stone, but we can be assured of continuous revision, and if people can be persuaded, the system may change,” Quelle said. “The current government coalition is in place until 2009, but for REITs this is just the start. They may not meet the maximum demands and expectations now, but in five years the situation may be different.”

The enthusiasm for U.K. REITs also appears to have been relatively short-lived. As fears of a real estate downturn mounted midyear, U.K. REIT stock prices began falling as investors put their funds into other sectors. As of September, research firm FTSE Group flagged real estate as the second-worst-performing sector of the year so far. At press time major U.K. REITs were still trading at discounts to their global peers. Proponents of U.K. REITs attributed the drop in prices mainly to the exodus of speculative investors, and they predict that in time, REITs will become a popular vehicle for long-term investors seeking stable dividends.

Lord & Taylor’s last laugh

An old retailer can learn new tricks, as evidenced by the turnaround at Lord & Taylor, the oldest U.S. department store chain. SCT published an article in April about NRDC Equity Partners’ $1.08 billion purchase of Lord & Taylor the previous October. The brand had lost much of its luster under The May Co., which expanded the chain far beyond its Northeast home. Thirty-two stores were shuttered in 2003, and 48 stores were struggling when Federated Department Stores bought May Co. in August 2005.

NRDC promised to revive the brand, but critics questioned its talent in the retail sector, given that the purchase of Linens ’n Things in February 2006 was its first venture in retail. Since then, Lord & Taylor has given up its Chicago store, at Water Tower Place. Landlord General Growth Properties replaced that with specialty retail. NRDC said it would also look into closing or reducing the Fifth Avenue flagship in New York City. Richard A. Baker, NRDC’s president, told Crain’s New York Business, “It’s nice having a Manhattan store, but I wouldn’t call it key.”

As 2007 ends, is any portion of the $150 million NRDC set aside for capital improvements to Lord & Taylor stores bringing visible change? Faith Hope Consolo, chairman of the retail leasing and sales division at Prudential Douglas Elliman, says the company has made considerable progress. “NRDC has done an amazing job,” she said. “They’ve hired designers, done new promotions, and they’re out to eat Macy’s lunch.” Consolo also says NRDC is not giving up the Fifth Avenue location now “for love or money.” NRDC could not be reached for comment on its other real estate plans.

Candace Corlett, principal of WSL Strategic Retail, a New York City-based consulting firm, told SCT in April that the chain should move in new directions. “Even classic, preppy women have days when they feel edgy, and they need to bring in more of that,” she said. Consolo says the company has done just that. “In some of the stores, they have replaced more than 75 percent of the merchandise, all to upgrade,” she said. “That’s a pretty large expense, so they’re spending money on this.”

Consultant David Lipman, who has worked for other high-end chains, was hired to breathe new life into the retailer’s ad campaigns. The company’s Web site now features an introduction for its Christmas collection geared to the luxury market, with messages of “sophistication” and “elegance.” The site now looks remarkably similar to those of Saks Fifth Avenue and Neiman Marcus, an intimation of who the retailer is trying to draw back into its stores. The firm has also signed exclusive deals with such high-end designers as Bryan Bradley and Cynthia Steffe to create proprietary merchandise to help Lord & Taylor stand out.

The retailer also brought in Randall Ridless, an interior designer who has worked for Bergdorf Goodman and Burberry, among others. “From a design point of view, they’re reaching out to the customer to better familiarize themselves with clearly marked areas for each designer in the store, like the upscale stores,” Consolo said. “They’re going head-to-head with Macy’s and Bloomingdales. It’s a new day for Lord & Taylor.”

Border patrol

In February 2006 SCT published a story about the Western Hemisphere Travel Initiative, a new law requiring travelers to show identification before entering the U.S. from Canada, Mexico, Central and South America, the Caribbean and Bermuda, and which would take effect as of Dec. 31 of that year. Sources discussed the possible damage the law could do to retail and tourism.

As of January 23, all citizens of the U.S., Canada, Mexico and Bermuda have indeed been required to present a passport when leaving or entering the U.S. at any airport. Children of any age and Mexican citizens are also required to show identification. U.S. citizens traveling outside the country do have to obtain a passport; currently only 25 percent of U.S. citizens have one, according to the U.S. State Department. As of January 2008 all land, sea and air border crossings into the U.S. will require a passport. The Canadian Tourism Commission predicts that U.S. businesses will lose about $670 million over three years as trips to the U.S. from Canada decrease by 3.5 million.

Some advocates are still pushing for an alternative to the passport as a means of identification that would be cost-efficient and easy to get, to make commerce flow freely. But landlord Macerich, with 47 of its 75 centers in Arizona, California and Texas, insists the passport laws, current or future, will have no negative impact on its malls’ sales. The company sees an upside to the new law, in fact. “If anything, with the Canadian market, there’s been an influx of tourists at the U.S. malls,” said Kate Cavaliere, senior manager of tourism for Macerich. “It’s such a great opportunity to shop with the exchange rate currently that passports are not even an issue.” Macerich also has a partnership with the Travel Industry Association of America, which has promoted awareness of the law so travelers can be prepared. “Tour operators and travel agents are really helping to communicate the message to clients to be prepared, and we think visitors will continue to shop, as they are aware of the laws.”

Missing Marshall Field’s

Marshall Field’s is proving to be the brand that would not die. After being passed from The May Department Store Co. to Target, the chain landed in the hands of Federated Department Stores in February 2005. Federated moved to create a national platform, but the Marshall Field’s name became counterproductive to that strategy, so the retailer decided to convert all the Marshall Field’s stores to the Macy’s banner. The change was a blow to the citizens of Chicago, for whom the Marshall Field’s store on State Street was an institution. In June 2006 SCT wrote an article about the change.

As a concession to angry Marshall Field’s fans, Federated decided to put valet parking and other amenities in place at the State Street store and to honor the Marshall Field’s heritage by installing a doorman and a private elevator, and by reinstating holiday traditions such as the Great Tree in the store’s Walnut Room. But the changes, including Macy’s decision to begin a four-year process of cleaning and renovating, had the locals grumbling. “There’s been a visceral reaction at a grassroots level,” Bruce Kaplan, president of Chicago-based Northern Realty Group, told SCT in June 2006. “Marshall Field’s is more than just a brand — it’s been woven into the city’s psyche. It would be like someone buying the Yankees and then changing their name to the Vikings and expecting New Yorkers not to get upset.”

The change was completed in September 2006. But even a year later, Marshall Field’s loyalists were still protesting; some 200 of them gathered on Sept. 9, 2007, outside the store, hoping to bring back the name and some of their local pride. Despite Macy’s efforts to combine old and new, Chicago still misses its old landmark. Macy’s executives have said they are disappointed with sales so far at the former Marshall Field’s stores and the State Street flagship, according to press reports. Lord & Taylor CEO Jane Elfers told the Associated Press that her chain’s sales rose 12 percentage points since the switch.

Macy’s is now trying to get Chicagoans to move on. On Oct. 24 the company launched an ad campaign that puts its own stamp on the store to attract customers. Using the slogan “Take Me to State Street,” the ads promote exclusive products and brands at the old Marshall Field’s, including FAO Schwarz and beauty shop Carol’s Daughter. Macy’s installed a wine bar in the famed Walnut Room and Wi-Fi access at the store’s eating areas and has made plans to bring in high-end designers. “You have to, at some point, stop and say, ‘I apologize. I’m sorry you feel that way’ and move on,” Frank Guzzetta, the former president of Marshall Field’s and now chairman and CEO of Macy’s North, told the AP. “We wanted so hard to not disappoint the old Marshall Field’s customer that we put an excess amount of energy on that and not enough on making sure the store was what everyone wanted.”

Mall ads gain ground

Malls continue to be the new billboards for brands seeking to reach captive audiences. In August 2006 SCT discussed the turning of mall owners to third-party market researchers and consultants to position their properties as advertising vehicles. “What we’re now trying to do as developers is to make sure we have the right delivery vehicles and, from there, the right combination of advertising and content,” said James W. Brewster, SCMD, senior vice president of marketing communications at General Growth Properties. “Digital is probably the most critical component of it, because, across the country and now internationally, you do have billions of consumers going to these properties.”

To take advantage of the vast numbers of shoppers, Simon Property Group teamed up with France’s Publicis Groupe to create the OnSpot Digital Network and planned to install 2,000 high-definition screens at 50 Simon malls. An Arbitron study conducted after a pilot test showed that 90 percent of shoppers watched the screens and 91 percent said the programming was very noticeable. General Growth, Macerich and Westfield, through New York City-based Adspace Networks, put 65-inch screens in malls to announce sales and other quick messages, a departure from Simon’s longer, TV-like commercials. Westfield put Adspace screens in 23 malls and planned to put in even more.

Judging by the numbers, the program is performing well. William Ketcham, executive vice president and chief marketing officer of Adspace, says the firm now has about 15 screens in each of 102 malls in 39 major markets. General Growth now has 32 centers with the screens, Westfield has 30, CBL has 19 and Glimcher has seven. “The key to our success is really our content,” Ketcham said. “We have the Today’s Top 10 spots, which showcase the 10 best deals in the malls each week. With Simon’s program, it’s primarily fashion highlights. We tested that out, but we found that what people want to see most is what’s on sale.” Adspace now has 300 advertisers whose messages flash in between the ‘Top 10’ mall sales messages on the screen. A Nielsen study for Adspace found that 47 percent of shoppers were looking at the screens, proof to Ketcham that the program works. “With all the advertisers we now have, we’re finally beginning to get some traction,” he said. “And with our expanded footprint, it’s shown the progress we’ve made.”

Home fires keep burning

In March 2007 SCT reviewed the performance of home decor retailers and saw that many were struggling. Sources noted that many such chains would have to adapt to changing baby boomer tastes or perish. The likes of Bombay Company, Cost Plus and Pier 1 Imports, all of which focus on Eastern styles, experienced particularly hard times in 2006. A slowing housing market and rising gas prices affected the three, as consumers spent less on decor. Pier 1 saw sales for the first nine months of 2006 fall 9.5 percent from the comparable period the previous year, while same-store sales fell 11.6 percent. Bombay suffered a year-on-year sales decline of 7.9 percent for the first nine months of 2006, while same-store sales sank 6.5 percent. Cost Plus fared better, posting a 6.7 percent revenue increase for that time period year on year, though same-store sales slid 2.9 percent. These chains also faced competitive pressure form a growing home decor business at Wal-Mart and Target, all the while attempting to find the consumer’s sweet spot. “A part of the problem is that there hasn’t been a look that’s caught on recently,” said C. Britt Beemer, chairman and founder of America’s Research Group, a Charleston, S.C.-based consumer behavior consultant firm. “It’s hard to define, but there has to be a look that excites buyers. Retailers are trying, but they’ve been missing it.”

All three chains attempted a turnaround plan, including store closures, management changes and financial strategies over the past year, but some could not manage. In September Bombay filed for Chapter 11, reporting $239.4 million in assets and $173.4 million in debt. The company said its U.S. stores would remain open only through the 2007 holiday season. Pier 1 decided in August to close 100 of its 1,000 U.S. stores, including its clearance stores and 36 Pier 1 Kids units. It also abandoned its e-commerce and catalog operations. Pier 1’s sales for the second quarter (ended Sept. 20) showed slow improvement. Same-store sales for the quarter dropped 3.6 percent from the previous year’s second quarter, and the company posted a loss of $43.4 million, versus a loss of $73.1 million a year ago. Cost Plus added food to its offerings. The chain posted a net loss of $18 million for the second quarter of 2007, versus a loss of $18 million the year before. Same-store sales fell 7.6 percent, compared with a drop of 3.2 percent for the year-ago quarter. The company opened four new stores during the second quarter and closed none. It now operates 296 stores across 34 states. The company said it expects to see a same-store sales decrease for the third quarter of 2007 and to open just one store, noting that it still faces economic challenges.

Hot new concepts cool off

Retailers’ new concepts are rolled out sometimes with fanfare, and sometimes with a dull thud. SCT has written about many of the new concept stores that have come onto the market, and now we are following up to find out how they have fared. In December 2006 American Eagle launched its Aerie lingerie chain and an apparel concept targeted to Generation X and called Martin + Osa. In May we reported that consumers were responding well to the Aerie concept. “If the new stores continue to perform like the test stores, we believe Aerie could be a 350-plus store concept,” said American Eagle CEO Jim O’Donnell on a year-end earnings call in May. Aerie’s first year was better than expected, bringing in $100 million in sales. American Eagle plans to have 100 Aerie stores open by the end of next year. The company pledged to revamp the less successful Martin + Osa brand in October, after critics said merchandise was too expensive and not feminine enough for the age 25-to-40 shoppers being targeted. Martin + Osa now has 13 stores across the U.S., and American Eagle said it remains committed to its original intentions of providing casual clothing for customers who have outgrown teen fashions. It also plans to test Martin + Osa units in second-tier markets with cheaper rents instead of only top U.S. markets and class-A malls, as initially planned.

In August 2006 SCT featured One Thousand Steps, a new concept by Pacific Sunwear. The store, aimed at 18-to-24-year-olds, had higher-priced items to target older, more-affluent customers. It focused more on footwear but retained its casual merchandise theme. “In this case, it’s about looking for a way to hold onto people you know,” said Wendy Liebmann, president of WSL Strategic Retail, a New York City-based consulting firm, in August. “They feel their core brand is strong enough for them to leverage a new concept. They’re saying, ‘We know our customers, and we know what they want.’ ” In October, however, the retailer decided to abandon the concept, now operating nine stores. The company also says it will abandon its Demo chain, with 54 stores geared to hip-hop styles. In July Neiman Marcus launched a concept called Cusp, a youth-oriented chain selling only luxury apparel, jewelry and accessories. Last year Cusp stores opened in Chicago, Los Angeles and Washington as well as Virginia. Neiman Marcus announced plans to have Cusp stores in about 75 locations. But by October the retailer was less enthusiastic. Neiman Marcus will be reviewing the concept in January to determine whether it has the legs for a broader rollout, said CEO Burton Tansky on an earnings call. “We are not going to open additional units, but rather evaluate what works and what doesn’t from every aspect — size of store, merchandise assortment, fixturing, and so forth.”

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