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Recycling Wal-Mart Boxes

BY CSA STAFF

Wal-Mart Stores rarely leaves a market, but changing market dynamics and expansion opportunities often prompt the retailer to vacate a location. During the past three years, Wal-Mart has redeveloped approximately 100 store locations annually and is on track to meet or exceed that number this fiscal year. As of March 31, 2007, there were 4,046 domestic Wal-Mart locations including 1,063 discount stores, 2,285 Supercenters, 116 Neighborhood Markets and 582 Sam’s Club stores. Wal-Mart has projected it will open 305 to 330 new stores in the United States this year and will expand or relocate 160 of its existing stores.

When the decision to relocate occurs, Wal-Mart Realty steps in to manage the redevelopment process. Tony Fuller, senior VP of Wal-Mart Realty, is responsible for the disposition of excess property including the redevelopment of former stores. A 20-year Wal-Mart veteran, he also has responsibility for realty management, store planning, global indirect sourcing as well as maintenance. Fuller spoke with senior editor Connie Gentry about how the world’s largest retailer redevelops excess properties.

Chain Store Age: What are your key objectives for redevelopment?

Tony Fuller: When Wal-Mart relocates a store, we have a responsibility to the community, our customers, our associates who live in that community, as well as to our shareholders, to maximize the value of that building. We work at the local level with brokers, economic development officials and elected leaders to find users that best suit the needs of each community and will generate economic growth and opportunity.

Our objective is to have a deal in place before the new store ever opens. We begin marketing the property as soon as a decision is made to relocate the store, usually more than a year before we “grand open” the new store.

CSA: What challenges do you face in the redevelopment process?

Fuller: One of the biggest challenges is the fact that the majority of our excess portfolio is leased, which puts us in a position to structure the redevelopment of a property that we don’t own. Working with the owner of the property as well as the community to accomplish the redevelopment is critical. It is always a challenge to build a consensus among a group of people with diverging interests.]What we’ve learned is that somebody has to take the initiative to pull the parties together and focus on a solution. That is a big challenge that we place before our people every day.

CSA: When you find out a store is slated for redevelopment, whom do you call first?

Fuller: We immediately engage the local broker; our own in-house economic-development manager contacts local economic development officials in the community; our real estate managers pursue potential buyers; and we place the property on www.wal-martrealty.com. Because of our commitment to [expedite] deals, these activities are occurring almost simultaneously after making the decision to relocate.

CSA: After a new use is determined for the property, does Wal-Mart remain involved in the redevelopment process?

Fuller: After a sale, we’re involved until the closing of the deal. Up to that point, our real estate managers partner with buyers and tenants to help them gain a clear understanding of the property. On a sublease transaction, we have a team of asset managers who are very involved in meeting the needs of our tenants and maintaining the building. In addition, we have an in-house design and construction team available to help tenants redesign the space.

Wal-Mart Stores

Headquarters: Bentonville, Ark.Annual sales (fiscal 2006): $312.4 billionNumber of stores (as of March 31, 2007): 4,046 (U.S.); 2,884 (International)Average redevelopments per year:100

CSA: Does Wal-Mart continue to act as a landlord in some instances?

Fuller: Yes, we sublease many of our leased properties to the new user and continue to act in the landlord capacity through the term of our lease. However, we have worked to sell most of our owned properties.

CSA: Wal-Mart has taken a lead with “green” construction and environmentally sound initiatives. Have you led redevelopment projects that are notably “green” as well?

Fuller: Although we have not done a “green” project in one of our former stores yet, we are proud of our record in the areas of sustainability and continue to look for opportunities as part of our collaboration with cities, landlords and tenants.

CSA: Are there stores that were damaged by Hurricanes Katrina or Rita that have been redeveloped for other uses?

Fuller: Immediately after the hurricanes, we offered more than 25 vacant facilities in Katrina-impacted states to be temporarily used as evacuee shelters, supply depots and food pantries. One of the stores was even used as a temporary dialysis clinic, and another was used as a tent city for utility crews. Wal-Mart paid the utility costs on these facilities while they were in use. We were able to reopen all but three of the impacted stores, and those stores are still being evaluated.

CSA:What are the most commonre development uses?

Fuller: Retail is obviously the most common reuse of former Wal-Mart stores because the property is in a proven retail location. But former Wal-Mart stores can meet a variety of needs, including retail, manufacturing centers, communications complexes, technical colleges, call centers, car dealerships, banks and medical centers.

CSA: Are there advantages, in addition to the obvious real estate location, of retailers acquiring a former Wal-Mart store?

Fuller: It is often cheaper for a retailer to retrofit a Wal-Mart store than to construct a building from the ground up. A former Wal-Mart or Sam’s Club location is a proven retail location with built-in infrastructure, including improved roads, a network of neighboring businesses, zoning and ample parking for customers.

CSA: In your personal opinion, what has been the most unique reuse?

Fuller: Most recently, I’ve been impressed with the former Wal-Mart in Canyon, Texas, which was convertedinto the Randall County Justice Center. The building looks fantastic and was retrofitted to accommodate state-of-the-art technology. They made great use of the space by bringing courtrooms, county offices, and document archives under one roof. It’s just what the county needed and shows that former Wal-Mart and Sam’s Club locations can become anything.

CSA: Do you have a favorite redevelopment project?

Fuller: I’ll share a couple of my favorite projects. The first is a retail redevelopment in Chesapeake, Va., that was a leased property. When the decision was made to relocate the store, our real estate manager began working his contacts, and today the building has been demised into three separate spaces housing Best Buy, Old Navy and Ross Dress for Less.

One of my favorite alternative-use redevelopments is our former store in Cody, Wyo. Cody Laboratories approached us about the building for a pharmaceutical lab, but it could not afford to pay the market rent we needed for the building. Our real estate manager worked with his local broker, the city, the landlord and Cody Labs to create an escalating rent structure that allowed the lab to move into the building at a less-than-market rent. In time, its business matured and it was able to cover the rent escalations, providing us with the rent we needed and creating 120 jobs for that community. Later, we were able to negotiate a purchase from the landlord and a sale of the building to Cody Labs.

CSA: Are there instances when Wal-Mart has donated a property either for a community use or for a nonprofit use?

Fuller: An opportunity that really sticks with me was our involvement with West Jones High School in Laurel, Miss. In 2002, a tornado hit the town, destroying the high school. Our former store building was available at the time. City officials contacted us over the weekend and on Monday morning they had possession of the building. The following May, the senior class graduated from “Wal-Mart High,” and today that building houses a hospital.

CSA: Is the redevelopment of former stores a profit center for the company?

Fuller: A common mistake many [retailers] make is that they don’t really understand the value of their excess-property portfolio. Our objective is to obtain true market value for our properties. You have to understand each market and be reasonable about what your property is worth in that market. Depending on what you have invested in that property, it may or may not be profitable, but that’s the risk we all take in real estate.

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Weekly Retail Fix

BY CSA STAFF

THE NEWS: SAM’S REALIGNS STORE-LEVEL MANAGEMENT

BENTONVILLE, ARK. Sam’s Club is changing the management structure in its stores. In the realignment, approximately 250 positions will be eliminated, Wal-Mart Stores announced last week. The company said it’s replacing five lower level management positions at each Sam’s Club location with three new higher level and higher paying assistant manager positions.

“This is not a cost cutting effort. We expect a slight increase in payroll upon completion of this change,” said Sharon Orlopp, senior vp of Sam’s people division.

THE FIX: Differentiation would better help Sam’s

Since Sam’s decided that its refocus on the business customer was too narrow, it has sought to find ways to make its clubs more attractive to primary shoppers, i.e., women. And that’s a pretty tough row to hoe, as Costco has done a pretty good job at satisfying the club customer in general and BJ’s has been going after female shoppers for several years now, with some success.

Having fewer managers with more direct responsibility could create a tighter knit club-level management and shorten lines of responsibility and accountability. Yet, without differentiating the offering, execution isn’t going to overcome all of Sam’s challenges.

That being said, a store-level management realignment might be overlooked at other retailers, but, this being Wal-Mart, everyone has to make a big deal about it. But that’s the price you pay as the big guy on the block.

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Weekly Retail Fix

BY CSA STAFF

THE NEWS: TOYS ‘R’ US EARNINGS GAIN 40.1%

WAYNE, N.J. Toys “R” Us today posted net earnings of $199 million for its critical fourth quarter, which meant it turned a profit for the fiscal year ended Feb. 3. But special charges and gains had an impact on its numbers.

Sales for the previous fiscal annum were $142 million, the difference translating into a net earnings increase of 40.1% year over year. For the last fiscal year, Toys “R” Us posted net earnings of $85 million versus a net loss of $384 million for the previous period.

Operating earnings in the fiscal 2006 fourth quarter gained 53.1% to $571 million versus $373 million for the fourth quarter of fiscal 2005. For the last fiscal year, operating earnings were $649 million versus an operating loss of $142 million for the previous period.

THE FIX: Improved shopper experience ups comps

Of course, any observer has to take into consideration special financial circumstances. Fiscal 2006 operating earnings were positively impacted by $96 million from gains on property sales, slightly offset by restructuring and other charges. In fiscal 2005, operating earnings were negatively impacted by $410 million in costs relating to the merger of the company, as well as $58 million of costs and charges relating to contract settlement fees, restructuring and other charges.

Still, sales were trending up at last year’s end. Net sales gained 15.8% to $5.7 billion. In the full fiscal year, net sales advanced to $13 billion, up 15.2%.

Comparable-store sales for the Toys “R” Us’ U.S. division gained 0.6% in fiscal 2006, and that represents the division’s first comps increase in six years. Comps at Babies “R” Us were up 4.8% and those at Toys “R” Us international were up 2.6% for the fiscal year.

Jerry Storch, chairman and ceo of Toys “R” Us, said the company is “pleased with the strides we made in fiscal 2006 to improve at all levels of the organization and reposition the company for profitable growth over the long term.”

He said the company’s new management team has been focusing on executing a strategy that would turn the retailer into a global toy and baby products authority.

“This translated into higher overall sales, positive comparable-store sales, improved gross margins and strong operating earnings growth for the 2006 fiscal year,” Storch asserted. “The key to our strategy has been improving the customer shopping experience in our stores. We are accomplishing this by delivering a more compelling merchandise selection, better service and a cleaner and more comfortable shopping environment.”

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