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begins to show signs of life

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HK’s CRE to slow expansion
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Ikea’s largest Asian store
opens in Shanghai

Taipei 101 Mall set to open later
this year

Malls in S’pore fight back SARS
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OG to leave Great World City in
S’pore when its lease expires

More outlets outside Bangkok:
SF Cinema

Thailand’s Seacon Square earmarks Bt107 million for upgrades

 

By Seth Sulkin

International retailers like Costco have set up shop in Japan, but their impact on Japanese retailers and developers hasn’t been all that significant

Retail sales are constantly falling, most economic indicators point to further weakness and bankruptcies continue at a steady pace, yet retail development in Japan shows a number of encouraging signs. In particular, the discipline of the capital markets is beginning to have an impact on the decision-making process of Japanese retailers and developers.

For the last 3-4 years, a change in the law affecting retail development in Japan caused a flood of overdevelopment. Fears that the “Large Scale Retail Store Location Law” would slow down or stop development in many parts of the country led to a flurry of new projects not justified by demand or rents. (Editor’s note: Introduced in June 2000, “Large Scale Retail Store Location Law” gives municipalities the right to turn down an application for planning permission if the store is judged to have an adverse effect on the local environment. For example, an application could be rejected on the ground that the store opening would lead to traffic congestion.)

Will recently opened mixed use properties in Tokyo like Marunouchi Building (above) and Roppongi Hills perform well as retail centers?

Now that those fears have proven to be largely groundless, Japan’s retail environment has returned, more or less, to normal, and oversupply is no longer a major problem. For Japan, “normal” means the predominance of single-anchored suburban shopping centers developed on a build-to-suit basis for the anchor tenants. Still, there are more and more exceptions, both in terms of the concept and tenant mix, as well as the financing structure for new projects.

With land prices still falling in most parts of Japan, rents and tenant deposits have also been under pressure. Even though they are sitting on mountains of cash available to lend, Japanese banks have become much stricter about making new loans, so developers have been forced to be more disciplined, using ground leases, fixed-term tenant leases, lower construction prices and a variety of other methods to improve project returns and mitigate risks.

The overall impact is that Japan’s retail landscape is changing quite rapidly, making it much harder to generalize. Here are some of the key issues faced by Japanese retailers and developers today:
Location: Over the last few years, Japanese retail development has diversified in terms of location, reducing the concentration of people flows and threatening the business of many existing projects.

For consumers, however, this has been generally good news, as the number and variety of choices to go for shopping and entertainment have risen considerably. For retailers and developers, the price of failure has gone up with the level of competition. Major shopping districts in central Tokyo such as Shinjuku and Ginza continue to be strong, while a number of less-convenient urban and suburban areas have suffered from drops in customers and a loss of tenants.

A hollowing’-out of Japans industrial base has opened up waterfronts and industrial parks throughout Japan to retail and residential development, further spreading the flow of people. Japanese zoning, which was never considered to be a model of urban planning, has become even less relevant as factories, homes and retail try to co-exist at close quarters. Aeon (Jusco) and Ito-Yokado, Japan’s two leading general merchandise store (GMS) operators, have taken particular advantage of lower land prices and increased availability of industrial areas to speed their pace of new store development.

Concept: Specialized, independent retail developers are rare in Japan, so traditionally, shopping centers have been built to serve the needs of the anchor tenant, not the consumer. As a result, multi-anchor shopping centers that draw people from a wide area are almost non-existent in Japan.
Still, there has been an increasing variety of new development concepts tried recently, albeit with mixed results. In central Tokyo, many large-scale developments are either unanchored or multi-use. Given the high cost of land in central Tokyo, there is typically no alternative to mixed-use projects with office, residential, arts and often government facilities thrown into the mix.

Mixed-use projects have a poor track record in Japan, partially because of extraordinary development costs, but also because the retail portions are too small, hard to access and less visible than competing retail-only properties. Triton Square in Tokyo, Riverain in Fukuoka, Landmark Plaza and Queen’s Square in Yokohama have all been opened several years and their retail portions have had decidedly mixed success. Recently-opened mixed-use properties in Tokyo such as Roppongi Hills, Marunouchi Building and Caretta have attracted an extraordinary amount of attention, but their performance as retail centers is yet to be determined.

In the suburbs, most centers are single-anchored, typically by a GMS, but the number of power centers, with two or more big box anchors, has been gradually increasing. The construction of cinema complexes, which were all the rage in Japan in the late ’90s, has slowed. Stricter parking requirements under the “Large Scale Retail Store Location Law” that took effect in 2000 and a lack of steady hit movies have made cinemas less attractive to developers. The number of outlet malls, another booming concept of the late 1990s, continues to grow, but many existing centers are struggling.

Anchor Tenants: For retail developers affiliated with major retailers such as Diamond City (Jusco) and Aeon Malls (Jusco), finding anchor tenants is not an issue. For every other developer, however, finding attractive, financially healthy anchors is extremely challenging in the current environment.
For large-scale regional shopping centers, department stores would be most developers’ first choice as anchor, but few are expanding at the moment. Many department stores have been closing poorly performing stores in recent years, notably Sogo and Seibu.

Other department store operators such as Mitsukoshi and Isetan have taken over some of the choicer locations, but few companies are seeking to build expensive, new stores, particularly in the suburbs. Takashimaya, Japan’s largest department store operator in terms of sales, recently announced the cancellation of a plan to open a large new store in the Tokyo suburbs.

Marui, a fashion-focused department store targeting young people, has announced that it will expand from the Tokyo area west to Osaka, but most other companies are trying to protect their existing turf. In Sapporo on the northern island of Hokkaido, Daimaru opened a 45,000 sqm store in March, its first large-scale store in 20 years. To keep down operating costs, though, Daimaru cut the number of full-time staff by half, to 250, compared with its existing stores of similar size.

Ahead of Daimaru’s opening, existing department stores in Sapporo, such as Marui Imai, Tokyu and Seibu, invested heavily in renovation to try and keep customers and tenant brands. For developers seeking a GMS as anchor tenant, the choices are also few. Following the spectacular bankruptcy of Mycal, Japan is left with five major GMS chains-Jusco, Ito Yokado, Daiei, Uny and Seiyu.

Jusco and Ito Yokado are both expanding rapidly, although typically through developments in affiliated companies or through master building leases. Daiei, which for years was Japan’s largest retailer, has been on the edge of bankruptcy for some time, and has been closing stores and cutting costs. Uny, the smallest of the four, has not been keeping up with the rapid pace of Jusco and Ito Yokado. Seiyu, whose largest shareholder is now Wal-Mart, hasn’t yet announced how its development plans will be going forward.

There is one type of anchor tenant that has been rapidly expanding recently, but mainly in strip centers. Japanese home centers, a hybrid of Home Depot and Wal-Mart, have been opening new stores at a rapid pace, while at the same time growing larger and larger. A few years ago, many home centers were in the 3,000-5,000 sqm size range, but 10,000 sqm is now considered average, and new stores are now often 15,000-20,000 sqm or more. 

With their low sales productivity, thin gross margins, the need for high ceilings and plenty of open air parking, it is rare for home centers to locate in shopping centers. Instead, they seek to lease huge parcels of land in outlying areas. Typically, to lower their overhead costs and attract more customers on weekdays, larger home centers sub-lease portions of their floor area to supermarkets, fast food and other tenants.
International Retailers in Japan: The arrival of major international retailers such as Costco Wholesale and Carrefour has fueled endless speculation in the Japanese media and much worrying among Japanese retailers, but with only four stores each for Costco and Carrefour, the impact on Japanese retailers and developers hasn’t been all that significant.

Metro, the German food wholesaler, has only opened a single store, although it has announced plans for another. Wal-Mart entered the Japanese market through a major investment in Seiyu. Currently, it is in the process of introducing its world-renowned IT system. At the store level, the most visible impact of Wal-Mart’s investment so far is “everyday low pricing” and “rollback” signs. Ikea is now laying plans to open its first Japan store by late 2005, while a number of other European hypermarkets and specialty stores are currently considering coming to Japan.

Despite ongoing weakness in personal consumption, the quality of Japanese retail and development has vastly improved. Lower land and construction prices have allowed retailers and developers to continue expanding and to invest more in design, long ignored in Japan. Demand from institutional investors to acquire shopping centers has spurred interest in merchant development, which has been virtually non-existent to date.

The increased sophistication of Japan’s capital markets has created new financing alternatives for both retailers and developers. Although nobody is predicting a quick turnaround in the Japanese economy, stronger companies see the current environment as an opportunity to increase market share. Thus, new store development and renovation are expected to continue at a rapid pace.

Seth Sulkin is President and CEO of Pacifica Corporation, a retail developer in Tokyo
www.pacificausa.com