RECon Revisited, a Series: Part 1
As part of our ongoing coverage of RECon, the annual retail real estate convention conducted by the International Council of Shopping Centers and held May 22-25 in Las Vegas, Chain Store Age talked with Adam Ifshin, president and CEO of Tarrytown, N.Y.-based DLC Management Corp., to get his take – post-convention – about the state of the industry.
What are your key takeaways from RECon 2011?
Clearly, the mood and tenor of the industry are much improved. Tenants increasingly have open to buys. Value-oriented tenants remain our focus, and more and more of them are looking for space to open in. The continued dearth of new development is driving tenants to take a second and third look at second-generation space they might have previously passed on. Tenants remain selective, however, and rents remain in check.
Tenants still have more options than they need and it is unlikely that rents in most markets will appreciate significantly any time soon. Rent roll-downs from previous cycle highs continue in many markets although the spread is narrowing in many markets. The financing markets continue to heal but still only for A and B+ assets. The financing of B and C assets remains a challenge, and lenders are still picking and choosing assets and borrowers selectively.
Many more CMBS 2.0 programs continue to announce, but the overwhelming bulk of the originations are being done by a handful of megabanks. Construction financing remains non-existent except for the best borrowers and the most well thought-out, conservatively structured projects. Lenders are increasingly getting constructive on new loan originations but appraisals remain a major stumbling block in most financings.
Finally, the transaction market is heating up as late 2010 and early 2011 sales results prompt owners to come off the sidelines and bring product to market. The market remains awash in equity for Core assets. Will that equity venture away from core in the coming months? Many sellers and their investment sales brokers hope so because they are bringing increasing amounts of that product to market. A number of large portfolios are poised to enter the market including portfolios from several major REITs.
What about the activity in the DLC booth during the show … were you making deals?
At our booth we had over 450 leasing meetings, and over 600 meetings in all! We were quite busy in our booth, at our leasing networking events (four held over four days), and at other venues. Deals were started, advanced and made over our stay in Las Vegas. Of course, the real measure of the result is how many additional leases get made in the succeeding months as a result of those 450 meetings. Deals literally ranged in size from 1,100 sq. ft. to 158,000 sq. ft. Tenants were definitely saying, “How can we get this done?” At the same time, we concluded terms on several financings, equity commitments, and new third-party assignments. Overall, the mood was that people were there to deal.
What projects were getting the most traction?
It’s hard to say, but what was markedly different this year was how tenants were open to far more ideas in a portfolio review than they were a year ago. Many of our projects garnered increased interest from a year ago, including our current re-development projects in Garland, Texas, and Elgin, Ill. We left many meetings wishing we had more product to offer our tenant relationships.
Do you think the mood at RECon bodes well for the rest of the year? What will your priorities be between now and the end of 2011?
I do. We have been waiting for fundamentals to improve along with the capital markets. It seems like RECon set in motion a wave of new leasing momentum that should carry us into the fall. Of course, we need the economy to continue to improve to help sustain that. Our priorities are always the same: lease, lease and lease! Seriously, adding value through lease up and re-development are always priorities 1 and 1A at DLC. In addition, we continue to look for opportunities to put our equity and human capital to work on new value-added and opportunistic projects.
Finally, we remain laser focused on delivering value to our retail customers and partners. The future continues to improve in our view.
Growing the next generation of buyers
More than ever, companies are relying on their merchants to make game-changing decisions that significantly impact top- and bottom-line performance. While it’s no secret that these great buyers are in high demand and hard to come by, many organizations are still baffled by the puzzle of how to take entry-level merchants and turn them into the next great buyer or DMM. While we are not offering a magic bullet, there are key differentiators that enable the best organizations to cultivate, develop and retain top merchandising talent.
Dip toes before jumping in
Historically, buyers started out buying small volumes for regional retailers. This narrow focus minimized risk, while giving buyers valuable exposure to the local stores and customers. They gained firsthand knowledge about customers and how products were selling. When these buyers were recruited by national footprint retailers, like Athena springing from Zeus’ forehead, they were fully formed and ready for battle. With the nationalization of retail, many of these regional retailers are gone and companies have to grow their own talent capable of buying large volumes.
The organizations that are the best at developing buyer talent today still allow them to start small. As associate buyers, fresh talent are given a small area to buy under the watchful eye of an experienced buyer. With this oversight, the junior buyer is given the opportunity to make small mistakes, learn, and gain valuable real experience that will make the transition to a full buyer smooth and easy. Organizations that aren’t giving junior buying staff this opportunity put themselves and their employees in a high risk situation — newly promoted Buyers with minimal buying experience are purchasing hundreds of millions of dollars’ worth of inventory. If the assortment flops, the company loses money, and the buyer may be out of a job.
When did your organization last move someone from buying roles to planning or allocation, and vice versa? Is the organization openly sharing talent or are functions fighting to keep the “stars?” Over the last decade, the buying career track evolved to provide only buying experience, i.e. moving from assistant buyer, to buyer to DMM. This created great specialists, but they often lack context to understand the intricacies of panning and allocation.
Many organizations have moved to “team buying” where buyer, planner and allocator work closely together to make decisions in managing the line. However, the best organizations are moving junior talent across all three functions with a focus on creating well-rounded merchandising leaders. Employees with this diversity of experience have a greater appreciation and understanding of all aspects related to managing a category, including financial and inventory management and working as a true team to reach the same goals. It also gives aspiring buyers a chance to test their chops in another function. Not everyone is cut out for being a buyer, and this gives the organization a chance to encourage employees with a knack for planning or allocation to stay in those functions, allowing the company to build up talent there as well.
Cross-pollination also serves another purpose — preventing restlessness. We have all read articles and research about how the new generation isn’t happy unless they receive a promotion every two years. Cross-pollination, done correctly, can be communicated as both a developmental step and a promotion with a little pay bump.
Hire a tour guide
Having a clear career road map is critical to keeping junior talent. The new generation wants to understand their career and growth opportunities in an organization. If they see or sense a ceiling, they will not hesitate to find a better opportunity at a competing retailer. Clearly articulating potential and probable career paths, and plotting out what an employee needs to do to reach the next level, can help improve retention efforts.
The best organizations are actively managing their talent pipeline and carefully orchestrating career moves. Merchant leadership is partnering with HR to calibrate performance, plan promotions and identify development roles — a process enabling GMMs and DMMs to look outside of their teams for talent. These organizations value experience in multiple categories and well-planned career moves give incumbents the necessary experience and knowledge to continue moving forward.
Throw a little money at it
Organizations that are developing merchandise talent well have also thoughtfully accounted for the compensation piece of the puzzle. As a key function, merchandising usually has a slightly different (usually higher) compensation philosophy than the rest of the organization. The best companies are able to fully utilize their pay ranges and compensation increase guidelines to best deal with three key factors:
1. There is an extremely large pay gap between an entry level assistant buyer and a senior buyer – at least 2x to 3x.
2. It is cheaper to develop talent internally than to hire fully functioning buyers from outside.
3. Typical merit and promotional increases do not increase compensation commensurate with the additional value junior buyers are bringing to the table as they increase their capabilities.
While many developmental roles are lateral moves, they are defined as promotions with a small pay increase, and then “true” promotions may receive pay increases above the company guidelines. Guidelines are typically 10%-12%, but key talent may receive 20%. A higher merit budget may be utilized for the Merchandising function or just for key roles/talent as well. The best organizations are ensuring a good return on their reward investment by creating opportunities for growth and development, rewarding appropriately and ensuring that buyers are working at their full capacity every step of the way.
Organizations must invest in giving junior talent the necessary experience, development and compensation to become engaged, successful buyers to insure against having a dearth of inexperienced talent in this critical function. The key differentiators outlined above do not cost a fortune, but do require thoughtful and deliberate planning.
Lindsey Lanzisero is senior associate at Hay Group’s Retail Practice. She can be reached at [email protected]. Craig Rowley is VP and global leader of Hay Group’s Retail Practice. He can be reached at [email protected]. Hay Group is a global management consulting firm.
MarketStreet Lynnfield, Lynnfield, Mass.
The mixed-use project MarketStreet Lynnfield continues to forge ahead, as co-developers WS Development and National Development announced on June 6 that Whole Foods Market, Kings and Legal C Bar have signed leases to join the property.
Whole Foods will open a 45,000-sq.-ft. store at MarketStreet Lynnfield, which is located on Route 128/I-95 spanning Exits 42 and 43 in Lynnfield, Mass.
“Powerful anchors such as Whole Foods Market and Kings, along with the popular Legal C Bar, will provide energy and excitement to MarketStreet Lynnfield’s mix of retail, office and residential uses,” said Ted Tye, managing partner, National Development.
At 21,000 sq. ft., Kings will offer 10-pin bowling lanes, sports action on large screen high-definition TVs, food and music. Legal C Bar will occupy a 7,100-sq.-ft. space and feature favorites from Legal Sea Foods, as well as exclusive menu items. The modern, casually-styled restaurant will feature two bars (including a food bar), communal tables, wedge booths and mezzanine seating.
When complete, MarketStreet Lynnfield will include 395,000 sq. ft. of retail shops and restaurants, 80,000 sq. ft. of office space, 180 residential apartments and the King Rail Reserve golf course. In addition to the developed areas, the project will include substantial conservation land.
Infrastructure work is ongoing followed by a full construction start in early 2012.