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The reinvention of retailing.

Shopping center owners and developers are finding the 1990s every bit as competitive as the 1980s, despite the expected decrease in the amount of new retail space being built. The public sector's willingness to subsidize centers it believes will contribute to government revenues continues to spur on retail development.

The ongoing expansion of "big-box" retailers will also add to this space overhang. At the same time, demographic forces and shifting buyer attitudes will slow the growth in demand for retail goods and services.

To survive this combination of oversupply and underdemand in the '90s, shopping center owners and managers will need to strive for market dominance as never before. Finding ways to stand out from the competition and to eliminate sameness will become principal marketing goals. Major retenanting programs will also be necessary to respond proactively to changing shopping patterns and the possible loss of one or more anchor tenants.

It has never been more important for retail asset managers to understand the make-up and preferences of the consumers attracted to their properties. Managers must also know who their current tenants are serving and how well these tenants are meeting the demands of the property's customers.

The first part of this article will explain why, even with fewer centers being built, there will continue to be too much retailing space chasing too few dollars. Next, it will address the underlying shifts in the sources of consumer demand. Finally, the article will explore anticipated changes in retailing and how they will influence the strategic options of shopping center managers and developers.

Continued growth of supply

The supply overhang we face today is the outgrowth of steady overbuilding in the 1980s. For example, in 1980, the nine-county San Francisco Bay area contained somewhat over 3,700 apparel stores. By 1990, that number had increased by 54 percent to approximately 5,700 stores. The result was a 19-percent decrease in average sales per store (in 1989 dollars).

A recent Price Waterhouse study concluded that to regain the sales-per-square-foot productivity of the 1970s, the square footage of the nation's 35,000 shopping centers and 1,800 regional malls would have to shrink by 10 percent.

Yet, despite an oversupply of space and a lack of available financing, city subsidization of tax-generating retailers continues to fuel often unneeded expansion. Local governments are becoming increasingly mercantilistic as they look to retail sales taxes for much needed revenues.

As communities vie to attract large, revenue-generating retailers and centers, some municipalities resort to a variety of tax subsidies. Sales tax generators such as auto centers and big-box retailers are particularly likely to be subsidized.

The overbuilding of auto malls in southern California, which has already resulted in at least one well-publicized failure, has largely been driven by local subsidies. We can expect to see similar overbuilding of power and discount centers for the same reason.

What governments fail to calculate is that sales tax gains in one area are often offset by losses from those existing retailers who are less able to compete. Even an established 50,000-square-foot supermarket finds it difficult to compete with a Wal-Mart or a Target.

The proliferation of big-box retailers, such as The Price Club, COSTCO, Wal-Mart, and Target has been tremendous in the last decade. As recently as 1983, there were only 25 club-type stores (Price Club and COSTCO), generating less than $1 billion in annual sales. In 1991, revenues had reached $28 billion, generated by 430 warehouse operations. By the end of 1992, projections anticipate an additional 150 outlets and revenues as high as $35 billion.

Despite this success, big-box retailers may be in the process of overbuilding. It is possible that continued competition will finally cut gross margins below the point at which the economic returns are viable. For retailers who rely on turning merchandise before supplier payments are due, a reduced number of annual turns may be disastrous. Many of us can remember the 1960s, during which discounters came and went as a result of overexpansion and murderous competition.

The '90s will also see a continued blurring among manufacturer, wholesaler, and retailer, hastened by dramatic changes in technology and information transmission and manipulation.

New improvements in distribution, such as Just-in-Time inventory systems, which allow overnight availability of merchandise, will cause some retailers to rethink their storage space needs. Smaller storage areas will lower the overall square footage leased by even prosperous stores. Space for administrative activities will also be reduced, further contributing to retail oversupply.

Declining demand

If retail construction is still growing, the same cannot be said of retail demand. Demographic factors in the 1990s are working both to slow the growth of demand and to change the preferences and attitudes of retail customers.

Incomes, particularly those of the middle class, have not risen substantially since the 1970s, if discounted for inflation. Between 1978 and 1988, the media family income (in 1988 dollars) had grown by less than $200.

Even this small gain would not have been achieved without the increased participation by women in the labor force. Median income for males actually decreased by almost $1,300 between 1973 and 1988, when discounted for inflation.

The result of this falling buying power has been a shrinkage of the middle class over the past 20 years. A recent Census Bureau study found that the number of people in middle-income groups fell from 71.2 percent in 1969 to 63.3 percent in 1989. Over the same period, people in the highest income groups increased from 10.9 percent to 14.7 percent, while the poorest groups increased from 17.9 percent to 22.1 percent. (Poor households are defined as having incomes of less than half of the median; wealthy households have incomes at least twice the median.)

This situation has been exacerbated by the ongoing recession, which resulted in an actual income decline in 1991. But even after the recession is over, most economists concur that real income through the '90s is unlikely to gain more than 1 percent annually.

Even ignoring the recession, there is strong evidence that consumers are spending less of their disposable income on retail goods and services than they did prior to the mid-1980s. Between 1970 and 1980, there was a 1.12 percent increase in taxable sales generated for every 1 percent increase in personal income. However, between 1985 and 1989, that increase was only 0.85 percent in taxable sales for every 1 percent increase in income.

This trend is particularly strong in regions such as California, where higher costs for housing, health care, and transportation have lowered real disposable income.

Shifting buying patterns

Two other demographic factors certain to influence retail sales in the 1990s are the aging of American society and the changing shopping patterns of the American consumer.

America is an aging society. In 1980, the median age was 30 years; by 2000, the median age will approach 40 years. In addition, the number of 18-to-34-year-olds will decrease by 2000, going from 28 percent of the population in 1990 to only 23 percent in 2000.

At the same time, the 55-to-64-year-olds will increase their share of the population from 18 percent in 1990 to 23 percent in 2000. Historically those over 55 spend less on retail goods than those under 34.

Older shoppers are far less likely to buy impulsively and to view shopping as recreation. Middle-aged buyers are also far more inclined to emphasize home-oriented purchases than those under 34, who tend to favor clothing and personal items.

At the same time that overall buying may be decreasing, shopping centers and malls are facing increased competition for the dwindling consumer dollar. In 1991, 53 percent of all Americans shopped by mail at least once. Total catalog sales for the year exceeded $25 billion, according to the Shop-at-Home Information Center of the Direct Marketing Association. The proliferation of shopping networks on cable TV is another potential source of competition.

Increasing cultural diversity in American society will also influence shopping patterns in the 1990s. Approximately 40 percent of all U.S. population growth in the next two decades is forecast to originate from Hispanic immigration and births. Eighty-five percent of this population will be concentrated in six locations: California, Texas, Arizona, Miami, New York, and Chicago.

While the Hispanic population is far from homogenous in terms of taste and income, it is united by a common language. Today, 86 percent of American Hispanic households speak Spanish as a primary language, and 88 percent feel that retaining language is the most important aspect of their culture to preserve. Retailers and developers who want to reach this expanding market segment will need to do so via Spanish.

The excess materialism of the 1980s is also creating a backlash against consumption. This is not the first time in American history that materialism has been followed by a period of relative austerity. To many Americans, Barbara Bush's faux pearls seemed a welcome relief from the Reagan era.

In a 1991 survey published by the Wall Street Journal, 70 percent of Americans who were questioned indicated that they own everything they need at present. Retailing is in serious trouble when the majority of the population believes they already have all the products they want or need.

Retailing's response

Yet, instead of husbanding their resources to meet the challenges of shrinking demand, many department store anchors spent the 1980s in overleveraged buy-outs and expansions. As a result, some of the major department store players are not likely to be in business in 2000.

Those that do survive will have to adopt a strategy based on providing the best in one of three categories--merchandise, price, or service. Moreover, managers of regionals and larger community centers need to consider now what they will do to replace one or more lost anchors.

Several alternatives are emerging as replacements for the traditional department store anchor. Of course, each center's choices must be based on the characteristics of its own current and possible customer base.

Nontraditional anchors that relate to "home and hearth" present one sound strategy for those trying to tap the growing demand for home-related products. For example, the Home Limited, Inc., prototype at the Garden Gate Center in Lombard, Illinois, leases 12,000 square feet to sell ready-to-assemble home furnishings and accessories at 10 to 40 percent below retail price. The role model for this store is the IKEA chain in New Jersey, Long Island, and California.

A similar concept is Rooms to Go, a 14-store chain based in Tampa. The company's strategy is to sell a room or an apartment full of furniture and related accessories at one time. Items are priced individually, but customers pay less the more they buy. Such a concept would work well for locations with large numbers of first- or second-time homebuyers.

Another growing category related to home and hearth is sewing. Sixty percent of all U.S. households have sewing machines, as opposed to 51 percent with VCRs. Today's sewer is college-educated, between 25 and 45 years old, often with a child at home. Much of the new boom is recreational, as career women seek some quiet and creative time for themselves.

Another possible replacement for department store anchors is a specialty tenant, such as The Gap or Crate & Barrel, which is able to create its own regional draw. Because these tenants have the option to locate at free-standing locations, they are in the position to ask for and get some of the benefits of traditional anchors.

Owners and managers must recognize these stores' increased bargaining power and negotiate accordingly, particularly if one or more of these specialty stores can be encouraged to increase their size to provide a greater presence. For example, The Stanford Shopping Center in Palo Alto, California, is planning a two-level, 19,000-square-foot Gap store for pre-Christmas '92 opening.

Although these mini-anchors will help to draw consumers into malls and centers, managers and owners must also explore other sources of traffic. Many retailers have already added game rooms to encourage the teenage and young-adult market.

In markets with a large enough base of visitors and/or young adults, computerized movie systems such as I-MAX and high-tech systems such as Virtual Reality are making inroads. Less esoteric and more family oriented are tenants such as The Discovery Zone, a play center with slides, ball bins, and chutes for the younger child.

Nonretail tenants will also play a more important role in attracting consumers to some centers. Medical centers, libraries, child-care centers, museums, and even government services may all relocate to the mall. In Everett, Washington, for example, a city hall branch in a local mall is open evenings and weekends for residents who need a dog license or want to pay parking fines. As new concern about the safety of downtowns surfaces, the mall may once again replace the city as the center of life.

A new retail philosophy

In addition to changing the tenant mixes of their centers, shopping center developers, owners, and managers must also reassess conventional wisdom on what consumers want and how they shop.

The retailing community needs to understand that it is dealing with an increasingly sophisticated and resistant shopper. In the 1990s, inexpensive will not be enough; retailers must stress quality as never before. In the minds of consumers, status is becoming associated with being both informed and cost-conscious. Television ads for products such as the Subaru already demonstrate this approach.

Retailers also must rethink the traditional strategy of forcing the consumer to walk past as much merchandise as possible. Simple store layouts and merchandise placement will appeal to the time-pressed shopper of the 1990s. For many, especially two-career households, shopping is no longer a pastime. Escalator systems which separate up and down stairways in order to force the shopper to circle the store will find themselves at a competitive disadvantage to centers with direct access.

Owners' and managers' strategies are largely dependent upon identifying who a center's customers are and selecting appropriate tenants and space configurations. At the same time, they must strive to be unique, to eliminate the sameness that fails to differentiate them from their competitors.

As '90s consumers are increasingly confronted with retailers as "wholesalers," wholesalers as "retailers," television channels as a point of purchase, and the catalogs in the evening mail as extensions of the specialty shopping center, success in the 1990s will be much harder to achieve than in the preceding decade. The old formulas of three anchors to match the profile--high-end or low-end--will no longer be enough.

Nina J. Gruen is executive vice president and principal sociologist of Gruen Gruen + Associates. She serves on the State of California's Department of Transportation Airspace Advisory Committee and on the Urban Land Institute's Board of Trustees. Ms. Gruen has published widely, including these recent articles: "What Is Special About Specialty Shopping Centers?", "Public/Private Partnerships: A Better Way for Downtowns," and "Retail Battleground: Solutions for Today's Shifting Marketplace."

Gruen Gruen + Associates, headquartered in San Francisco, considers demographic and consumer preference analysis to be an important part of the work they do conducting real estate due diligence assignments and helping managers design and implement value-enhancing asset management strategies.
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Author:Gruen, Nina J.
Publication:Journal of Property Management
Date:Jan 1, 1993
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