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January 26th, 2011Stores within stores: Retail’s savior?

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by Kit R. Roane

Fortune — Sometimes the best thing retailers can do these days is hand over part of their store to someone else.

Sears is carving out about 15% of the square footage its Costa Mesa, California store to house the much trendier retailer Forever 21. Target (TGT, Fortune 500) will have 1,450 Radio Shack-run mobile phone shops in its stores by the end of June. And Wal-Mart Realty says it has almost 400 in-store leases ready for some well-matched retailer who sees the benefit of letting “Wal-Mart’s repeat customers become [their] repeat customers.” Wal-Mart (WMT, Fortune 500) has a lot of competition, as Sears Holdings (SHLD, Fortune 500) is offers thousands more such sub-lease opportunities within its own Sears and Kmart stores.

Wounded by a slump that continues to batter department stores despite a recent surge in sales at other retailers, many large U.S. chains are making similar arrangements. All are drawn to the idea that partnering with specialized retailers and manufacturers can help them fill holes in their product offerings and help them profit from hot trends more quickly. A number of these retail chains are moving beyond just letting the other company build and sometimes staff a space within their stores; in search of a more stable revenue source during these trying times, they are becoming something of a mall — leasing the square footage to their partners as well.

“For brick and mortar retailers, the recent Sears/Forever 21 arrangement, and Target’s expanding relationship with Radio Shack (RSH, Fortune 500) are only indicative of things to come,” says Z. John Zhang, a professor of marketing at University of Pennsylvania’s Wharton School. He adds that “Sears has a worn out, old-timer image and obviously wants to make sure young people have a chance to again see how good it is,” while the Radio Shack partnership allows Target to “acquire different capabilities quickly.”

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