Fall 2006
Who’s Your Anchor?

Macy's|J.C. Penney|Bloomingdale's|Lord & Taylor

Federated Department Stores is converting to the Macy's name a host of stores across the US, including some Filene's, Foley's, Hecht's, Kaufmann's, Meier & Frank, Robinsons-May and Strawbridge's stores. The company is also selling several dozen stores to buyers as diverse as Target and Simon Property Group. Indeed, more than a half-dozen developers have lined up to purchase various Federated stores in the last year.|

In a May, 2006 conference call, J.C. Penney Chairman & CEO Mike Ullman told analysts the company "plans to open 50 new stores annually, beginning in 2007, primarily in our successful off-mall format."|

Federated Department Stores, Inc. now operates more than 850 department stores in 45 states, including Bloomingdale's, Macy's, Filene's, Foley's, Hecht's, Kauffmann's Marshall Field's, Meier & Frank, Robinsons-May and Strawbridge's.|

Federated Department Stores, Inc. purchased May Department Stores Company in 2005, bringing aboard, among others, the Lord & Taylor and Marshall Field's brands. In June of this year NRDC Real Estate Advisors agreed to buy the 48-store Lord & Taylor chain. The Lord & Taylor New York flagship store (shown here) appears safe at the moment, but changes may be in the offing for Lord & Taylor's mall locations.

Daniel Parks had barely moved his Fifth Avenue women’s accessory business into Danbury Fair Mall when Federated Department Stores shuttered one of the center’s five major anchors, a 172,000-square-foot Filene’s. In addition, another of the Danbury, CT, mall’s anchors, Lord & Taylor, faces an uncertain future. In June NRDC Equity Partners agreed to buy the 48-store chain, but as of this writing it’s unclear what plans the company has for the brand and there has been talk on the street about some stores closing. A closure of the Danbury Fair Lord & Taylor would leave a second gaping hole in the 1.5-million-square-foot center, owned by the Macerich Co. of Santa Monica, CA. The remaining anchors—JCPenney, Sears and Macy’s—appear safe. “It’s upsetting. You cannot deny that,” Parks says in reference to the anchor problems. “The economy overall has been a downer, so the news about Filene’s and Lord & Taylor doesn’t make me happy.”

It’s too soon to tell if either anchor’s situation will have a negative impact on Parks’ business, one of four specialty retailers who occupy in-line space in the mall, but Parks says he struggles to stay optimistic. The one positive, he says, is the greater cooperation and concern of mall management than he found with his former landlord. “Here [at Danbury Fair Mall], they try to help any way they can, but [in the mall] where I used to be, it was different. I closed that shop because business was sluggish and management wasn’t willing to help. We didn’t get any support from them. All they did was charge us rent and forget about us,” he says.

Anchor change

Anchor closure is only one of many major mall changes that can have a serious impact on specialty retailers. Anchor change is another, as is happening at dozens of properties while Federated completes the relabeling of many former May Co. stores as Macy’s. Though most of the stores will remain in-place and open, familiar regional monikers such as Meier & Frank, Bon Marche, Marshall Field and Robinson-May are disappearing from facades to be replaced by the Macy’s name, which, while very familiar, might not garner continued customer loyalty.

Federated is shutting some stores completely, as at Danbury Fair, leaving affected mall owners scrounging to find replacements in a field with few contenders. According to the International Council of Shopping Centers in New York, in 1989 there were 59 department store chains; by the end of 2004 there were 18. Today the number is smaller yet.

As a result, shopping center owners are breaking the mold by bringing in retailers they might never have considered mall tenants, let alone mall anchors. Some, like Wal-Mart and Target, are not all that different from traditional department stores, many would argue. But others, like Century Theatres, Dick’s Sporting Goods, Lucky Strike Lanes, Kroger Marketplace and The Home Depot, represent a major change.

While the innovations appear to be working well for shopping center owners, few observers have attempted to gauge the impact on malls’ smallest and most vulnerable tenants—the specialty retailers. Their status as short-term tenants, even though many operate year-round, often leaves them out of both the information and decision-making loops.

At Danbury Fair, specialty leasing manager Vince Martinelli thinks the loss of Filene’s will have little impact on specialty retailers. Overall mall sales have actually gone up since the store’s closure, he points out, a fact he attributes to ongoing retenanting efforts to attract more affluent shoppers. Among the stores added since 2004 are J.Jill, Coldwater Creek, Forever 21 and H&M. Ann Taylor Loft and Chico’s Grill are coming soon.

To some extent, says Martinelli, the closure of Filene’s, which catered to mass-market shoppers, will benefit specialty retailers because it provides an opportunity to bring in a major retailer capable of attracting more-affluent customers. He adds that the loss of an anchor can actually benefit specialty retailers by limiting shoppers’ alternatives.

As a specialty retailer, Parks is less sure about that “benefit,” but he acknowledges his concerns stem as much from what he perceives as a retail decline in general as from the loss of this or that anchor. “Even a lot of the big guys seem to be having difficulty,” he says. “The Gap is closing something like 60 stores. People don’t seem to be going to the mall as much.”

Nonetheless, he believes small retailers like him deserve more help than they typically get in times of change. In particular, he would like to see a break on rent. “Definitely, there have to be rent adjustments, based on business,” Parks asserts. “My rent has increased every single year, even when business wasn’t picking up. That’s not right.”

Parks’ tenancy is too new for him to have faced rent bumps at Danbury Fair, but Martinelli says several specialty tenants have requested rent concessions since last year’s announcement of Filene’s closure. “The first thing they do is use that to leverage lower rent. They say the mall is in trouble, even if it isn’t,” he remarks. At the same time, he emphasizes Macerich’s commitment to its specialty retail program, noting that occupancy of the center’s 23 specialty spaces has never dropped below 90 percent this year. He also says that expansion plans call for adding eight more RMUs.

Working together

Retail consultant Vicki Henson, president of the Henson Retail Group, in Stone Mountain, GA, faced a JCPenney going dark when she headed specialty leasing at South DeKalb Mall in Panthersville, GA. “The first thing you want to do is try to relocate your tenants. If you can’t do that, the whole management structure has to work together to keep traffic coming to that end of the mall,” she says.

Among Henson’s suggestions are moving some special events closer to the vacant store, getting other retailers to use the shuttered store’s display windows for their presentations and, most important, putting in temporary lighting. “I work with Underground Atlanta, and even if a small store goes dark there, it can affect two or three nearby carts. You need to get them lighted right now,” she declares.

Walter Watson, who operates his Monogram Express kiosks in Underground Atlanta and other Atlanta malls, says his biggest concern with a dark anchor is security. He complains that some mall managers fail to take extra security needs into account, leaving specialty retailers like him more vulnerable to quick-footed thieves who have fewer shoppers blocking the path of escape. “There’s not much I can do, except coach my workers,” he says. When an anchor closes, retailers “have to get help from management.”

Communication is key

But it’s not only anchor status that can impact specialty retailers. A significant renovation can cause as many, if not more, business disruptions. But that needn’t be the case, says Alicia Diaz Johnson, specialty leasing manager for the Mills Corp.’s Potomac Mills mall in Prince William, VA. She reports she was able to keep all 50 of the center’s RMUs leased during a recent reconstruction. Furthermore, she lost no tenants despite frequent relocations. Communication was the key. “As soon as we had the renovation scheduled, I had a breakfast meeting with all my tenants and went over everything they might have to face,” she says. “After that, I sent out frequent construction updates to keep them up-to-date.”

She also communicated with the contractor so she could alert tenants as quickly as possible to construction in their area and was on the floor much more often than usual, dispensing “TLC” to make sure none of the operators felt overlooked. Additionally, if renewals were due during the renovation, she compensated any tenant who could show that business had dropped off. “It was usually a 10 percent decrease in rent, but we’d gain it back because they’d usually sign for a longer term. They wanted to be in place when the work was finished,” she explains.

Sunglasses vendor Ladis Arany, proprietor of Shady Business, praises Potomac Mills management for its handling of the situation. While he concedes the construction caused him headaches, he could endure them because Diaz offered whatever assistance she could and made tenants aware of how the improvements would benefit them.

Regarding rent reductions, consultant Linda Frakes, president of The Retail Source in Cummings, GA, tells specialty retailers not to be timid about approaching management to request a break. “The first thing I’d do is ask for rent relief, maybe a percentage rent, instead of a base plus percentage. Or be bold enough to ask for a month’s free rent. People think because they’ve signed a lease that they can’t do that, but it happens all the time. Some centers are nice about it, some aren’t, but you have to ask,” she advises.

If such relief is not forthcoming, Frakes continues, the retailer needs to consider whether it might be best to pull out temporarily, then come back when the situation has improved. “You have to take a hard look at your business and make a non-emotional decision whether this is the right place to be. I know that’s tough for someone who’s finally got the courage to start their own business, but you have to be tough to survive,” she says, adding, “The beauty of specialty retailing is the short lease. You can pull out almost any time you want without penalty.”

Another alternative Frakes suggests where anchor closures have significantly reduced overall mall traffic is to open a second RMU or kiosk selling a non-competing product, with one person manning both spaces. “Go to the landlord. Ask for one month’s free rent or a very low rent to try out the new concept. If the mall is losing business, they should be happy to have something with the potential to bring in more sales,” she says.

Demographic shift

Apart from construction hardships, renovation and re-anchoring often bring with them another problem for specialty retailers: a change of demographic. Typically, that means an attempt to capture a higher-end shopper. Concomitant with that, management may decide to “weed out” specialty retailers who don’t fit the new image.

When Wattson Breevast LLC undertook a two-year, $140 million project to redevelop the Tanforan Park Shopping Center in San Bruno, CA into The Shops at Tanforan, the Newport Beach, CA developer replaced most existing tenants, including all RMU-based vendors, with retailers selling more expensive or better branded merchandise.

Specialty retailers at northeast malls potentially face a similar situation when Nordstrom enters the region by taking over at least a half dozen Filene’s spaces. The Seattle-based department store tends to attract other upscale retailers to centers in which it operates, shifting a center’s overall tone toward a higher price point. SouthPark mall in Charlotte, NC landed Louis Vuitton, Neiman Marcus and Tiffany & Co. after signing Nordstrom, while Phipps Plaza in Atlanta was able to lure Barney’s and Theory. But even if mall management is content with the current roster of specialty retailers, competition for RMU and kiosk slots could heat up as more operators try to position themselves to catch the Nordstrom, Tiffany and Neiman Marcus shopper. One result could be higher rents. Another could be slots filling up sooner.

Proactive advice

Without cooperation from management, say Henson, Diaz Johnson, and Martinelli, there’s little that specialty retailers can do to mitigate impact from major mall transitions. Their best advice is to locate in malls with a good reputation for supporting specialty retailers. Short of that, vendors can band together to pressure management to take a more active role, or possibly develop their own marketing campaign.

Specialty retailers could also designate a delegate to liaise with contractors if construction is involved. Unfortunately, none of these suggestions is likely to provide an ideal solution. For that, management will have to be involved.

“Communication is the key factor in all of it,” asserts Diaz Johnson. “Without communication, it’s chaos.”

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