Many of the nation's top retailers have retooled real estate strategies as they adapt to a fast-changing competitive landscape and focus on getting more mileage out of a store.
For some, such as upscale department stores Saks (SKS) and Nordstrom (JWN), that's meant expanding outlet locations to enhance revenue and expand the customer base.
Others, like Limited Brands (LTD), have spawned new shop concepts. And retailers such as giant discounter Target (TGT) have been expanding via smaller-size stores as they enter more urban markets.
As store chains pursue their new strategies in the wake of the recession and a commercial real estate crisis, the retail real estate market has slowly begun to recover.
There's renewed interest in expansion, says John Bemis, executive vice president at the retail arm of commercial real estate firm Jones Lang LaSalle. Retailers that may have opened five stores in 2011 are looking to open 10 to 12 this year and as many in 2013, he notes.
"We are seeing a slow uptick," Bemis said. "I don't think there will be a huge, massive explosion of retail expansion. But we will continue to see slow, steady growth of expansion as the economic situation continues to normalize and improve.
Vacancy rates are down at U.S. regional malls, typically with 40 to 80 stores and a department store anchor. In the second quarter, the rate in the top 80 U.S. markets fell to 8.9% from 9.3% a year ago, says real estate research firm Reis. It was the third straight quarter with a decline. Rents inched up 0.3%, the fifth straight quarter of increases.
"The overall climate is a slow convalescence," said Reis senior economist Ryan Severino. "The sector has been recovering since it hit its low in last year's third quarter. "It's a very tepid pace of improvement.
Necessity Breeds Invention A lack of regional mall construction has has helped the "marginal" improvement, Severino says.
With no significant regional mall development expected over the next decade, U.S. retailers have found new ways to expand their footprints. Back when there was continual new mall development, retailers could increase their sales by opening new stores, says Sandeep Mathrani, chief executive of mall owner General Growth Properties (GGP). Now, he says, the way for retailers to grow their top line is to increase productivity within their stores or introduce new concepts.
He cites Limited, parent of Victoria's Secret and Bath & Body Works. The retailer "incubated" a new concept — the PINK collection of loungewear and other products for college kids — in Victoria's Secret stores starting in 2004, and has since built free-standing PINK stores in malls. It has a handful and plans on expanding the number, according to press reports.
Retailers are also lifting productivity by shrinking stores, Bemis adds.
"They're making sure stores are right-sized and that they have fully maximized their square footage, so they're using every square inch of their stores to drive ... profitable sales," Bemis said.
Stores are expanding their "flexibility," he adds, as they enter different markets, such as urban ones.
Take Target. It opened its first three small-format urban stores — called CityTarget — on July 29 in Chicago, in the Westwood area of Los Angeles and in Seattle. Two more are on the way in October, for a total of five this year, says spokeswoman Amy Reilly.
CityTarget stores range from 80,000 to 100,000 square feet vs. an average of 135,000 for a general-merchandise Target store. CityTarget carries an edited assortment tailored to appeal to the urban guest, such as smaller package sizes.
The smaller locations reflect Target's strategy to put stores in an urban core and make shopping more convenient for customers.
"It's about bringing Target stores to that area and being flexible to put stores in a space that wouldn't allow us to build a full-size store, which is still our preference even in dense urban markets," Reilly said.
Shops Where Prices Drop Retailers are expanding their outlet store operations too, as they move to feed the consumer's strong hunger for value.
There's a lot of interest in the outlet business, a trend spanning good and bad economic times, says Cyndi Holt, spokeswoman at upscale outlet mall operator Tanger Factory Outlet Centers (SKT).
"Retailers love the outlet business because it's the most profitable channel for them," Holt said.
She says Tanger's costs of occupancy as a percentage of tenant sales are lower than mall stores'. It's "because outlets have less enclosed space, and are cheaper to maintain and build, while still providing an upscale shopping environment.
'Limited Customer Overlap' Saks will have added five new Saks Fifth Avenue Off 5th outlet stores by year end for a total of 66, spokeswoman Julia Bentley said in an email. It's announced six for 2013. The company has announced no potential Saks Fifth Avenue openings other than San Juan, Puerto Rico, expected to open in 2015.
"There are numerous opportunities to add outlet stores all over the country either in upscale outlet centers or lifestyle centers as these are essentially the only retail developments and expansions taking place," she said. "We see Saks Fifth Avenue Off 5th as a good growth vehicle for the company, one that complements our full-line stores and saks.com. There is limited customer overlap.
High-end peer Nordstrom has fared well with its Nordstrom Rack off-price store business. It's been gaining market share while achieving high sales productivity and return on invested capital, said its president, Blake Nordstrom, on a second-quarter conference call.
Based on the strong performance and availability of quality locales, Nordstrom plans to accelerate expansion of the business, which now has 110 stores, he says. The company will have added a total of 15 new Racks this year, followed by 24 openings in 2013. He sees the potential for over 230 Rack stores by 2016.
