Real estate plays a key role in optimizing retail store portfolios. Stores must have enough square footage but never too much. Portfolios must also match the number of stores across regions to customer demand.
“Portfolio optimization means reducing or adding store square footage and matching merchandising and inventory to customer demand in a trade area,” said Kenneth Katz, principal with Houston-based Baker Katz.
“Right-sizing is a real portfolio optimization issue,” agreed Jeff Green, president and CEO of Jeff Green Partners in Phoenix. “I’ve seen retailers get side-tracked by competitive issues. Competing drug stores, for instance, sometimes make decisions about maximizing market share and maintaining competitive advantages. That can be dangerous. You can cannibalize your stores if you put too many into a market.”
Green noted that national retailers use technology to model trade areas and match the number of stores to demand.
“Technology enables us to understand customers better today — especially customers with loyalty cards and an address on file,” Green continued. “Retailers can see that a customer in a Chicago neighborhood has no children and a large disposable income. Using that information, retailers model demand and determine the right size, best locations and an appropriate number of stores for a trade area.”
On the surplus property side, retailers pare down square footage. “Retailers might try to negotiate a rent reduction,” Katz said. “At certain points in the cycle that works, but not now. Landlords today won’t reduce rents — there is too much tenant demand for space.
“Second, retailers can reduce the size of existing stores — which often doesn’t work. It’s difficult to redesign an interior to accommodate another retailer — if the landlord doesn’t object. Better to build smaller stores going forward.”
Finally, continued Katz, a retailer might relocate to smaller stores and dispose of a portfolio of large stores.
In today’s competitive retail environment, making the right decisions about adding and disposing of retail square footage is a key element in retail success.
Northeast Market Profile Case History: Fashion Bug Disposition
Disposition firm: A&G Realty Partners
Number of properties: 600
Locations: 95% in strip centers, with the balance in middle market malls across the United States
Status: A&G successfully terminated more than 300 leases. The balance had natural lease expirations.
Last year, the Ascena Retail Group Inc. acquired Charming Shoppes for more than $900 million. Ascena wanted Charming Shoppes’ three apparel chains: Fashion Bug, Lane Bryant and Catherines Plus Sizes. Eventually Ascena decided to close the troubled Fashion Bug and dispose of the brand’s 600 locations. The company brought in A&G Realty to handle the disposition. A&G reviewed the list of stores with other women’s apparel retailers, while approaching growing retailers and brokers in individual markets around the country. When retailers showed interest, A&G negotiated lease assignments with landlords. When stores couldn’t be placed, A&G negotiated lease terminations with the landlords. The effort succeeded thanks to the comprehensive communications effort by A&G and a retail real estate environment with little to no new development and landlords motivated to replace old leases at below-market rents with new leases.
Project Profile: Yorktown Centre
Location: Downtown Erie, Pa.
Size: 196,728 sq. ft.
Developer: Existing property acquired in August 2013 by Phillips Edison-ARC Shopping Center REIT Inc.
Major tenants: Giant Eagle, Panera Bread, The UPS Store, GNC, Wells Fargo, Eat’n Park
Yorktown Centre is located in a densely populated trade area in downtown Erie, Pa., less than a mile from I-79. In addition to the primary trade area’s 71,000 residents, the 1-mile radius includes nearly 310,000 sq. ft. of office space, where more than 11,300 employees work every weekday. Anchor Giant Eagle, the region’s dominant grocer, is currently carrying out a comprehensive renovation of the Yorktown Centre store, which will further strengthen the attraction of this popular, 100% occupied center.