Big boxes building up as squeeze for space hits sector.

BIG box retailers ore throwing their formulas out the window when they build stores in the Los Angeles region.

Challenged by having to find lots big Enough--and affordable enough--for a 100,000 square foot store, plus a sea of parking, Target Corp., Best Buy Co., Circuit City Stores Inc. and Wal-Mart Stores Inc., ore among those looking at alternatives.

In Los Angeles, some retailers have begun building multi-level stores with underground parking, while Kroger Co.'s Ralphs supermarkets and Home Depot Inc. have begun putting parking on the roofs of their stores.

"When you start getting into areas with a lot more urbanization and dense locations you don't have the luxury of a lot of land," said Francisco Behr, president of Behr Browers Architects Inc., which has designed several stores for retailers and developers. "They ore already having to use smaller boxes and having to deal with parking in ways they aren't used to."

Overcoming the obstacles of building new stores in Los Angeles is key to many national retailers. With most suburban areas saturated, retailers are increasingly looking to locate new stores in urban areas, which are considered underserved.

Most recently, Best Buy has proposed building a new 56,000-squore foot structure near the intersection of Van Nuys Boulevard and Millibank Avenue in Sherman Oaks.

To fit into the roughly one-acre lot, more than half the store's retail space would be located below ground. A two-story parking structure with another level of subterranean parking would be connected to the store.

Ben Moore, director of real estate for Best Buy, said it was against company policy to discuss stores that haven't been approved, but he said that in general the company has had to be creative when building stores in urban areas.

"I need four to four-and-a-half acres of land to build a new store, and that's not going to happen in L.A.," Moore said. Most potential sites for stores are redevelopments, he said.

As an example, Moore pointed to a store Best Buy will open at the end of this month at the West Hollywood Gateway center on the corner of Santa Monica Boulevard and La Brea Avenue. The two-level store is in a complex that is co-anchored by a Target store and has three levels of subterranean parking.

"West Hollywood is the market where we first encountered such an anomaly," Moore said. "Ten years ago we could have probably found a site like the one in West Hollywood but we wouldn't have known how to run it."

Higher hurdles

Changing the formula and adapting to the Restraints--both physical and regulatory--of building in the Los Angeles area also greatly increases construction costs and delays the amount of time it takes for a store to achieve revenue levels of a normal set-up.

While Moore wouldn't discuss building costs, a knowledgeable source said Best Buy was planning on spending $200 a square foot to develop the Sherman Oaks store. On average, the company spends $50 a square foot nationwide.

"Land is getting more expensive and they are having to come up with new ways of laying things out," Behr said. "It's not innovation; it's all done because of a lack of choice."

Adapting the interiors of the stores has proven difficult, too. With escalators and elevators connecting multiple levels, retailers have had to improve store layouts so customers can get shopping carts between floors and easily wheel their purchases out to their cars in the parking structure.

Circuit City spokeswoman Amanda Tate said the company now uses adaptable displays in most of its stores to keep pace with changing technology and for converting existing buildings, like the store that opened in Santa Monica last month.

"We have learned how to compensate for going into unique spaces," Tate said, "while still making the shopping experience convenient for our customers."

Best Buy and Circuit City have been scouting for new Los Angeles locations for the past 12 years, and only recently have they begun to experiment with new designs.

"It's always been one step at a time to convince these guys," Behr said. "They have strong research material that backs up what they say works and they are resistant to changing any of that."

So far, customers have been slow to warm up to the changed formats. Sales at Best Buy stores with multiple levels take anywhere from 12 to 18 months before reaching the volume of business at a normal store, Moore said.

"But it really spikes after that," he said. "At the end of the day, the rewards (in urban areas) are great because there is pent-up demand."

Retrofitting, remodeling 

Behr said big box retailers have also begun looking at retrofitting existing buildings for use as new stores.

"Another strategy has been to look at reusing older multilevel buildings that have a large enough foot print," he said. "A lot of stores have attempted to locate in areas that didn't have the type of land they were looking for and had to settle."

Most recently, Circuit City abandoned traditional big box stores it occupied in favor of retrofitting existing stores in urban settings.

The company closed a store in Westwood Village and another store in West L.A. in favor of the former Wells Fargo building at the northeast corner of 4th and Arizona streets in downtown Santa Monica.

The site is smaller than the former stores and it relies on nearby public parking decks, but Tate said that Circuit City was trying to reach an untapped electronics market.

"Sometimes going into a space that is already existing instead of building our own space is much easier," Tate said. "We don't have to make major changes to our plans because we're able to adapt to the existing buildings."

Last week, Best Buy said it will $50 million to transformas many as 110 stores with new signs and product displays, such as a home-theater system set up in a mock living room.

The move is part of a "customer centricity" initiative targeting groups of customers, such as suburban mothers, who have been found to generate the most profit for the retailer.

Over the next three years, the changes will likely be brought to all 608 Best Buy stores, Chief Executive Brad Anderson told analysts and investors while in Los Angeles.

During the past year, Best Buy tested displays, signage, staffing and merchandise for five customer segments at 32 of its stores. Same-store sales at those outlets were 7 percentage points higher than at the company's other stores during the fourth quarter.

Efforts by national chains to tailor stores to types of customers in surrounding areas are nothing new. Lowe's Cos., the world's No. 2 home-improvement chain, is opening a store for urban dwellers in Brooklyn, while Bed Bath & Beyond Inc. lets managers organize stores to suit local shopping preferences.

Best Buy said most of the improved sales at the test stores come from added staff and training.

At the company's 58,000-square-foot store in Westminster, employees meet each morning to review store performance, discussing labor hours. gross margin and other measures. Best Buy executives said motivated employees spur sales.

"The secret sauce is the people," said Gil Dennis, the store's general manager.

Higher Hurdles

Big box retailers must adapt to find enough space for stores in Los Angeles.

Downsized: The chains have to use smaller footprints for their stores. Average size of a big box store nationally is 90,000 square feet, but Best Buy's latest project in Sherman Oaks is only 56,000 square feet.

Supersized: Best Buy's average cost to develop a big box store is $50 a square foot, but its Sherman Oaks project is running $200 a square foot.

Parking: Typical big box stores have large surface parking lots, but newer stores in Los Angeles use parking decks, subterranean parking and some put parking on the roofs of the store.

--Bloomberg News contributed to this story.