Chasing the rooftops, 2.0
By Jeff Green
The economic crisis affected nearly everyone in the retail sector, but the retailers and developers who were hardest hit happened to live by a common rallying cry: “chase the rooftops.” The idea, of course, was to aggressively expand out in the exurbs as quickly as possible. Few had a problem with ramping up construction of new stores and shopping centers in these far-flung areas. In fact, Wall Street effectively insisted upon the strategy, chanting “Grow! Grow! Grow!” at every available opportunity. After all, America’s roaring residential market would eventually bring density to every last nook and cranny in the country. Better get into these markets now, the thinking went, before the best locations are gone.
Well, we know how that story turned out: Either the rooftops never went up at all in many of these exurban neighborhoods, or the subprime borrowers who took advantage of teaser rates to get into newly built homes were evicted after the bubble burst and their payments went up. Unlikely as it might sound, however, “chasing the rooftops” is making a comeback yet again — only in a different direction.
Whether you’re talking about development or redevelopment, retailers always dictate what developers do. And today, retailers of all types and sizes are saying, in effect, that they can no longer build for population growth and, instead, need to build in areas where strong populations are already in place. Thus, retailers have turned their backs on the exurbs and are chasing the existing rooftops, closer to the city (or even within the urban core). Having been burned by their exurban strategies, even large-footprint stalwarts such as Walmart and Target are looking within, so to speak, to find new opportunities. So, too, are a growing number of supermarkets and junior-anchor specialty retailers.
This strategy has always worked. Landlords such as Jacksonville, Fla.-based Regency Centers have done well by focusing on the best grocery-anchored centers they could find in densely populated areas. Indeed, in our post-collapse retail landscape, Regency’s basic assumption — that value is all but predicated on density — looks right on target. Why, then, did so many retailers chase phantom housing developments out in the exurbs? They had little choice, given Wall Street’s appetite for growth. For Wall Street, the longer development curves that predominated in closer-in areas were not enough. Investors had a need for quantity and speed.
Today, however, closer-in sites are the only game in town. Drive around first-ring suburbs in major markets across the country and you will hear the rumble of bulldozers once again. Some developers are doing relatively cosmetic makeovers of their centers’ facades. Others are knocking their properties down completely. Closer in, the retail demand is strong enough that these landlords can afford to push the “reset” button and start all over again.
Historically, whenever owners have redeveloped a center, one of their biggest challenges has been figuring out how to fit retailers’ fixed prototype stores into the existing framework. In the worst-case scenarios, they simply couldn’t do the deals they wanted to do. It was a bit like trying to put together a puzzle that came with incorrectly sized pieces.
But one of the biggest shifts in retail as of late is the new willingness among chains to actually modify their prototypes in order to fit into urban and first-ring centers. Oftentimes in the past, chains would not do the deal if the available space did not meet their specifications exactly. To the delight of centers’ leasing and development teams, however, that paradigm has shifted. Even Walmart has openly embraced the idea of smaller-format stores.
Meanwhile, trends like environmental concerns and high gas prices — whether short-term spikes caused by turmoil overseas or long-term increases brought on by the global economic recovery — bode well for closer-in properties. If gas prices keep going up, as many believe they will, how many shoppers will want to make, say, a three-hour round-trip journey to get to one of those far-flung outlet centers? Some might even give up driving to that super-regional mall a couple of counties away.
Does all this mean redevelopment is a magic bullet for any first-ring or urban property? Not exactly. Clearly, some centers have strategic advantages over others. Tomorrow’s winners will be those centers that are retail, dining and/or entertainment destinations with regional access, but also offer convenience. This is not always doable. Some centers are hamstrung because they are located in-between blocks, rather than on a hard corner. Others might be too expensive to redevelop, possibly because they have been neglected for years. And while centers that have succeeded in landing top destination and convenience tenants will lease-up their small-shop space quickly, the same cannot be said for all of those properties that, for whatever reason, have failed to replace lost anchors.
Nor is this strategy a sure bet for all retailers. The greater possibility of cannibalization, for example, is a legitimate concern. If retailers are going to expand inboard, they had better understand the cannibalization footprint on their surrounding stores. When they were expanding into the exurbs, chains only had to worry about cannibalizing those stores that were located closer in. It was a one-directional equation. When they move closer in, though, they might find that they have sister stores in all four directions. And yet hand-wringing about cannibalization can be overdone, too. In the wake of the economic crisis, retailers’ real estate committees have been laser-focused on meeting the often-narrow criteria set by their companies’ operations departments, which typically have veto power over the entire deal. It is fair enough if retail executives want to nix deals based on myopic criteria. But what about the broader, more strategic questions, like what is in the best interest of the brand? Things like cannibalization and net new sales are important, but there are other factors and long-term implications that should go into deciding where a retailer locates a new store and why.
How long will this inward focus last? My guess is that it will be with us for years to come. The country simply has too many empty stores — and houses — out in its hinterlands for the original “chasing the rooftops” strategy to make sense anytime soon.
Ours will be an age, not of development far from the city, but of redevelopment closer in.
Call it “chasing the rooftops, 2.0.”
Jeff Green is President and CEO of Phoenix-based Jeff Green Partners, a leading consultant in retail real estate feasibility, retail expansion planning, medical retail planning, location analysis and commercial land use. For more information, please visit jeffgreenpartners.com.
Ross remains a value leader
PLEASANTON, Calif. — Ross Stores has emerged as one of those value retailers that has shined during the recent economic downturn. The company once again reported strong earnings and sales growth for the fourth quarter and fiscal year, showing that while the economy may be improving, value remains an important concern for consumers.
The company reported earnings per share for the fourth quarter ended Jan. 29 of $1.37, up from $1.16 for the fourth quarter ended Jan. 30, 2010. Net earnings for the 2010 fourth quarter grew to $161.8 million, up 13% from $142.9 million in the prior year. Sales for the fourth quarter ended grew 8% to $2.145 billion, with comparable-store sales up 4% on top of a 10% gain in 2009.
For the fiscal year ended Jan. 29, earnings per share were $4.63, up a robust 31% on top of a 52% gain in fiscal 2009 when earnings per share totaled $3.54. Net earnings for fiscal 2010 grew 25% to a record $554.8 million, from $442.8 million in the prior year. Sales for fiscal 2010 rose 9% to $7.866 billion, with same-store sales up 5% on top of a 6% increase in 2009.
Michael Balmuth, vice chairman and CEO, commented, "We are extremely pleased with our robust sales and earnings gains for the fourth quarter and full year that were well ahead of our expectations. This strong growth is even more notable considering that it was on top of very large increases in the prior year. These results demonstrate that we continue to benefit from our favorable position as a value retailer as well as the efficient execution of our off-price strategies."
Looking ahead, Balmuth said, "We believe that the current record level of operating profitability we achieved in 2010 is sustainable, mainly due to our ongoing ability to offer customers desirable name-brand bargains while running our business with much lower inventory levels. Reducing the amount of merchandise in our stores has stimulated sales growth by increasing the freshness of our assortments. It has also been a key driver of record levels of merchandise gross margin, as faster inventory turns have resulted in much lower markdowns as a percent of sales. Going forward, we remain confident that our steadfast focus on diligently executing our off-price strategies will enable us to continue to deliver compelling bargains and achieve our targets for both sales and earnings growth in 2011 and beyond."
Lowe’s to donate $1 million for Japan disaster relief
MOORESVILLE, N.C.— Lowe’s announced that it will donate $1 million to support the Red Cross Japan Earthquake and Pacific Tsunami relief effort that is assisting victims in Japan. The company said that customers who want to help Lowe’s support Japan relief efforts can do so by making a donation on Lowes.com and Lowe’s Canada website, Lowes.ca. Money donated will go to the American Red Cross and the Canadian Red Cross.
“There are millions of people who have been affected by the earthquake and tsunami in Japan and the devastation resulting from this monumental disaster,” said Robert Niblock, Lowe’s chairman and CEO. “As a longtime partner of the Red Cross, we’re proud to support recovery efforts in Japan and we encourage our caring customers and employees to join our efforts to help those affected by the earthquake.”