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The retail sector: how the industry fares in Utah.


How the Industry Fares in Utah

Retail sales pack an undeniable wallop when considered as part of Utah's overall economic health. Every time a cash register rings up a sale, the tax collected goes to support a fund which trails only federal grants and individual income taxes as a source of state operating revenue and contributes to a monetary pool four times larger than that provided by net corporate taxes.

The retail industry in Utah racked up some $8.58 billion in sales last year, up 6.2 percent from 1989 and capping a three-year roll of annual sales increases of more than 6 percent. And despite slowdowns during the first half of 1991, due largely to the Gulf War, Utah State Tax Commission analysts are predicting the year will end on a favorable note with an 8 percent gain in the final quarter.

Retail Migration

Since the late 1980s, Utah has seen an influx of national retailers unparalleled in its history. Major players like Wal-Mart, Shop-Ko, Payless Drug, and Phar-Mor, which will soon make its debut here, are competing head to head with retailers who have long maintained a presence in the state. Add to the picture chains like Toys |R' Us, Autozone, and Bizmart that feature a vast selection of merchandise in one category and national restaurant groups, such as Olive Garden and Red Lobster, which have targeted Utah for expansion, and the result is increasingly heated competition for the same consumer dollar.

What typifies the Utah consumer? Demographic studies reveal the average household contains three people, with a median age of 24. Household income averages $28,256, and almost half of Utah consumers (48.9 percent) are white collar workers who have completed a median of 12.75 years of school. Furthermore, over 44 percent of Utah adults have completed at least one year of college.

Although national retailers are flocking to Utah in greater numbers than ever before, it's unlikely the state's vibrant economy is the chief factor in their decision-making process. Retail specialist Tai Biesinger of Pentad Properties says much of the growth may be simply because Utah is one of the last markets in which they don't have stores.

Biesinger, whose company handled site selection for both ShopKo and Toys |R' Us in Utah, said Utah took a "bad rap" for many years from national chains who viewed the state as regressive and provincial. As a general rule, he observed, our buying power is lower than many other communities, as is the median income. And our relatively conservative population is slower to accept trendy retail concepts, making the Wasatch Front often one of the last major metro areas selected to "infill."

"Our young population and large families have a lot to do with retailers coming to Utah, and once they're here they often find the state is a lot more sophisticated than they originally thought. Also, retailing has changed on a national basis. The focus isn't exclusively on enclosed malls anymore because space in malls is becoming increasingly scarce and expensive. These big retailers need room to expand preferably across the street from the malls," Biesinger explained.

The Small and the Mall

Indeed, vacancy in Utah's regional malls is lower than that of any other type of shopping environment. According to information provided by Consolidated Realty Group, which conducts a comprehensive retail market survey of Salt Lake County each year, mall vacancy rates as of January 1991 stood at 6.55 percent.

While the CRG survey pegged the overall vacancy rate at 12.97 percent, figures show that the smaller the size of the shopping center, the lower the rate of occupancy. Neighborhood centers, defined as 50,000 to 99,999 square feet in size (generally anchored by a grocery store), have a 20.73 percent vacancy factor, and the rate for strip centers (49,999 square feet or less) was even higher at 22.19 percent.

Two primary factors have underwritten the declining numbers of retail tenants at these smaller shopping centers. They have no "anchor" or large-size tenant to draw large numbers of consumers who, in a trickle-down effect, also patronize the small shops; and there are simply fewer small retail businesses in today's market. Many "mom and pop shops" have been casualties of competition with large chains whose buying power results in lower prices, and who have whopping advertising budgets.

Salt Lake-based Tate Brubaker Real Estate has found a niche in leasing and managing such small centers. Through an aggressive marketing plan built around experience, expertise, and close attention to the needs of small retailers, the company has bucked vacancy trends in a portfolio of 45 properties ranging in size from 5,000 to 150,000 square feet.

"Small shops aren't doomed, but the tenant mix is definitely changing," says Barlow Nielsen and Associates retail specialist Chris Monson. "There are fewer tenants like small video and computer stores, but there's still a big market for service or specialty shops. You might not find any more 4,000-square-foot sporting goods stores, but you will find stores that specialize in one aspect of sports, like soccer or bicycles, that are very successful," he said, noting approximately 50 percent of small tenants in today's market are service-oriented.

Regional malls enjoy continued popularity in Utah and other parts of the country because they appeal to a broad cross section of shoppers, according to Steve Bogden of Salt Lake-based Price Development. The company is ranked as the largest retail developer in the Intermountain West and is owner of the Cottonwood Mall, the first regional mall built in Utah.

Bogden indicated that the selection provided by more than 100 stores under one roof encourages "cross-shopping" and contributes to the overall success of all of a mall's tenants. Malls also contain more top-of-the-line fashion stores, a segment of the retail market which Bogden said is increasingly popular with Utah consumers.

Some high-end retailers, however, have been reluctant to enter the Utah market despite the fact that chains like Nordstrom, The Gap, and Banana Republic have prospered here, Bogden said. "Many major retailers fear that because members of the dominant religion set aside 10 percent of their earnings for tithing, there's less money to be spent on things like expensive cars or high-end jewelry. It's a fact that many retailers believe that it is germane to the retail industry in Utah, and in Idaho as well," he asserted.

The Bargain Boom

Conversely, the bargain-conscious reputation of Utah shoppers has proved to be a draw for large discount retailers. ShopKo led the pack of discount chains which have recently expanded here with multiple outlets. The company's plans were originally based on the rationale that there was an opening in the market here, with only K Mart and Fred Meyer as direct competition, Bogden said.

"Now comes Wal-Mart, with its tremendous buying power, low prices, customer loyalty, and advertising, and the whole situation will change," he predicts. Wal-Mart, one of the largest mass-merchandise chains in the country, has gained a national reputation for its aggressive, competitive practices and an ability to quickly gain dominance over new markets. The company currently has nine stores either open or under construction in Utah and plans for more on the drawing board.

Phar-Mor, a Youngstown, Ohio-based discount retailer whose stores average 65,000 square feet in size, has also announced plans to enter Utah this year with at least six locations along the Wasatch Front. Payless Drug, which acquired Osco Drug's Utah operations earlier this year, has reported plans for extensive expansion with additional stores, increasing competition even further.

With so many new players competing for Utah's consumer dollar, some casualties are bound to occur. "I personally feel there will be a fallout," Bogden said, predicting the "fatalities," or those that will go out of business, will be older stores that don't remodel, renovate, or generally "clean up their act."

Major discount retailers are also a driving force behind new retail development in the state. Nationally, the trend is towards "power centers," or shopping centers 600,000 to 700,000 square feet in size which feature a cluster of large retailers and a limited amount of small shop space. While new centers in Utah are not as large, those built recently or in the planning stages follow the same pattern, and industry experts agree space and financing limitations make it unlikely a new regional mall will be built here within the next decade.

Retail Hot Spots

Several retail "hot spots" have emerged outside the Wasatch Front region of late. Southern Utah is a high-growth area, buoyed by the success of Price Development's Red Cliffs Mall which opened in St. George last year. And with the new 200,000-square-foot Factory Outlet Stores under construction at Kimball Junction, Park City is becoming increasingly attractive to retailers.

That fact has some Park City and Summit County residents up in arms. Both K Mart and Wal-Mart are in the process of applying for approval to build approximately 90,000 square foot stores at Kimball Junction, and while neither issue was decided before Utah Business went to press, each proposal has politically vocal adversaries and proponents.

Summit County planning director Jim Peterson received a standing ovation when he opposed the projects at a public meeting held with the planning commission. "These developments would be out of character with Park City," Peterson says. "They are highly commercial activities indicative of urbanization and not in keeping with our unique character. To put it simply, having Wal-Mart and K Mart at the gateway to Park City would make us trite."

Peterson is supportive, however, of the new factory outlet center. Such developments are meeting with surging popularity nationwide for their wide selection of discounted, name-brand merchandise from major manufacturers. The centers are almost always geographically distanced from major metropolitan areas because manufacturers don't want to compete with the retailers who carry their goods.

Many are located in resort communities like Park City and have met with phenomenal success, Peterson said, adding that since such a project couldn't be built in the Salt Lake area it adds to Park City's unique appeal.

Grocers-Never Out of Style

The grocery industry is, without question, the most competitive retail sector. While most other retailers can make a 35 to 55 percent mark-up on their merchandise, the grocer's mark-up is only 20-25 percent, yielding a slim 1 percent or less profit, making volume sales and high traffic vital to success, according to Darryl Alder, vice president of the Utah Retail Grocers Association.

Utahns spend $3,500 per household on groceries each year, the third highest state in terms of this expenditure in the country. Since grocers' per-item margins amount to pennies rather than dollars, it takes savvy marketing and close attention to customer service to remain competitive, Alder said. Grocers in Utah vary only slightly on pricing despite any advertising to the contrary, he added.

Convenience and customer service are quickly replacing price as the primary considerations behind shoppers' choice of a grocery store. Both large chains and independents are including more services such as video stores, dry cleaners, banks, fast food, and the like under one roof, a trend which is relatively new to Utah, but which took root in southern California and the Eastern Seaboard a decade ago.

According to a study conducted by Maclean Hunter Media Inc., Smith's Food & Drug Centers controls 26 percent of the grocery market in Utah, with Albertson's following at 21 percent, and the remainder falling to independents.

Utahns' bargain-conscious shopping habits have forced some of the country's most powerful national chains out of the state, Alder noted. "People here demand bargains, and that drives grocers into thin margins. Those that can't generate the volume die," he said, pointing to Safeway, Farmer Jack, and Alpha Beta as examples of major chains that have pulled out of Utah.

With most groceries now featuring a veritable smorgasbord of services, what's in store for the future? Even more service, Alder says. It's likely Utah will follow trends already established elsewhere in the U.S. In many cities, drive-up windows are becoming prevalent. The customer can call in an order before leaving work and have it assembled, bagged, and ready to load in the car before he or she reaches the store. More grocers are also expected to affiliate with banks, national fast-food chains, and other enterprises to provide on-premise services.

Consistent, Conservative Growth

In spite of soft retail sales in the nation as a whole, Utah retailers continue to post consistent, conservative growth. Certain areas of Salt Lake, however, are reporting significant increases, and some sectors doubled or tripled sales in 1990, according to the Utah State Tax Commission, which has provided direct, taxable sales by zip code data and by industry since 1987.

The Tax Commission report published in July identifies six "hot" retail areas in the Salt Lake Valley. They include Rose Park, up $51.9 million and 35.7 percent in 1990; East Downtown, increasing $123.8 million and 39.6 percent over 1989; West Downtown, up $48.8 million and 10.2 percent; South Salt Lake, with a $204.2 million and 26.3 percent increase; Murray, up $79 million and 10.7 percent; and East Sandy, which reported figures of $28.7 million and a 33 percent increase over the previous year.

PHOTO : The retail industry rang up $8.58 billion in sales last year.

Teresa Browning-Hess lives in Salt Lake City and specializes in business topics.
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Author:Browning-Hess, Teresa
Publication:Utah Business
Date:Oct 1, 1991
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