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Buying and Selling

The Retail REIT Index was designed for Shopping Centers Today. The stock price movements were calculated starting at a base of 100 on Dec. 31, 1995. For the month ending Oct. 29, the regional mall index is at 105.17, down 3.0%; the strip center index (including power, neighborhood and community centers) is at 101.55, down 4.0%; and the factory outlet index is at 70.60, up .05%. The index is updated monthly.

Paine Webber: Soft goods remain ‘robust’

Consolidation in the department store sector has led to a number of issues, including the growth of off-price apparel chains, such as Ross Stores and The TJX Cos. A fall report by Paine Webber analyzed soft-goods trends, particularly the symbiotic relationships of the apparel manufacturer, department store and off-price retailer. Excerpts follow.

In the last 30 years, the retail environment has undergone dramatic changes. The department store industry has consolidated from 70 regional department store chains to four national operators. The result has been a rationalization of the department store business to an oligopoly or monopoly in most markets. Managers of these businesses have focused on the operations and execution of the department store business seeking to rebuild profitability. The department stores benefited from the reduced competitive pressure and realized significant economies of scale as well. With leaner inventory levels, a reduced promotional calendar and the resultant decline in markdowns, the recent success of the department stores has been impressive.

However, we believe that retailing is comprised of two key components: merchandising vision and operational execution. By our estimation, the department store operators in the 1990s have focused primarily on operational excellence and turned to the national fashion brands for merchandising vision. This has been an effective strategy, as consumer demand for these brands fueled strong sales at the department stores while permitting the department stores to operate with a leaner consolidated national merchandising team. Partnerships developed between the national brands and the department stores, in which the department would dedicate floor space to brand-driven “shops” within the stores.

However, this situation has necessitated that the brands assume more responsibility for inventory, particularly as the department stores operate with leaner inventories. The brand managers were faced with an increased risk: responsibility for both the wholesale and retail sales of the products and exposure for their markdowns, and therefore, have become more conservative.

The key issue is that consumers do not “need” new clothes. They have plenty of apparel in their closets to stay warm for many years. And yet they keep buying new apparel, motivated by a host of psychological and emotional issues.

Outlook good for off-price

The chief beneficiaries of this scenario are the off-price retailers and the specialty-store retailers.

The national brands have assumed greater responsibility for their products at both wholesale and retail levels as a result of the partnership with department stores. These manufacturers now find the off-price retailers not only attractive but essential to the timely liquidation of excess inventory. In short, we believe that there will always be sufficient product for the off-price retailers.

What could change this robust and highly favorable retail environment?

Finding physical expansion and new store opportunities limited, department store managers would then seek to stimulate comparable-store sales growth. These highly leveraged sales can contribute to significant profit improvement. However, once inventory buildup begins, it could provide difficult to resist the temptation of more significant inventory buildup. While we believe this could drive sales and increase profits initially, the likelihood of additional markdowns necessary to clear excess inventory would be high and with it the erosion of profitability as well as credibility for the regular-price market.

Specialty stores have benefited from these fundamental changes in the retail environment. With a clearly focused merchandise vision, well-executed with vertical integration and a specialty-store format consistent with that vision, specialty stores have outperformed by offering a unique merchandising assortment that strikes a chord with consumers and inspires them to buy.

Transactions

General Growth sets sights on four regional centers
General Growth Properties has acquired the 1 million-square-foot Baybrook Mall in Houston for $133 million from RREEF-USA, and issued a $30 million second mortgage to First Union Real Estate with an option to acquire the 765,000-square-foot Crossroads Center in St. Cloud, Minn. Chicago-based General Growth also purchased the 868,000-square-foot Oak View Mall, Omaha, Neb., and the 1.4 million-square-foot Eastridge Mall, San Jose, Calif., in a joint venture with Canada’s Ivanhoe for $160 million. •

May Department Stores Co. buys 14-unit ZCMI chain
The May Department Stores Co. said it would purchase 14-unit Salt Lake City department store chain ZCMI for $52 million. St. Louis-based May said it will gradually change the 14-unit chain to its Meier & Frank banner. (For more, see The Uncommon Area, page 7.) •

Simon Brand Ventures, Enron ink $1.5 billion deal
Simon Property Group’s Simon Brand Ventures division and Houston-based electricity and gas giant Enron Energy Services announced a 10-year, $1.5 billion alliance in which Enron will supply or manage all of the electricity, gas and heating/ventilation at Simon malls. The deal makes Indianapolis-based Simon the first REIT to outsource energy management. •

Jitney-Jungle likely to close stores in wake of bankruptcy
Jackson, Miss.-based grocery chain Jitney-Jungle in September filed for Chapter 11 bankruptcy protection and said it is considering closing 30 to 40 stores. Jitney, overrun with debt following a 1996 leveraged buyout, operates 196 stores in five states, including the Delchamps chain. Jitney has hired a turnaround specialist from Jay Alix & Associates and secured $260 million in debtor-in-possession financing.

Inland buys 10 centers from Ryan for $120 million
Inland Real Estate Corp., a private REIT based in Chicago, agreed to purchase a 1 million-square-foot portfolio of 10 community shopping centers from Ryan Cos. Inland will pay $120 million for the properties, which include nine centers in the Minneapolis metro area and one under construction in Illinois. •

Edens & Avant purchases five grocery-anchored centers
Columbia, S.C.-based developer Edens & Avant acquired five centers totaling 800,000 square feet in: Fort Myers, Fla. (University Crossing); Marietta, Ga. (Sandy Plains Centre); Gastonia, N.C. (Franklin Square); Nashville, Tenn. (Jackson Downs); and Frederick, Md. (Riverview Plaza). •

Prime Retail to launch $15 million Internet site
Factory outlet developer Prime Retail said it would launch an Internet commerce Website designed to become the global leader in online value shopping. Primeoutlets.com, a $15 million venture set for a spring 2000 launch, will rent virtual space to manufacturer/tenants in a similar fashion to Prime’s 51 physical locations.

Deal of the Month

Urban Shopping Centers, which earlier this year purchased Los Angeles’ well-regarded Century City Shopping Center, said it would buy one of Houston’s best-known upscale retail malls. Chicago-based Urban purchased the retail component of the Houston Galleria from Hines Interests for $376.1 million in a 66-34 joint venture with Walton Street Capital. Urban said it plans a $100 million expansion of the 1.6 million-square-foot center, which averages sales of around $500 per square foot. The deal was set to close in November.