In an extraordinary piece of triumphalism by the standards of British investor research, Citi analyst David McCarthy wrote a research note in October 2007 on Tesco's launch in the US that pretty much told the American supermarket industry to run up the white flag.
McCarthy's 20-odd page tribute to the superiority of British food retailing concluded with: "As we have said, the US is potentially a $100bn opportunity for Tesco. An opportunity that the incumbents have largely missed. US supermarket retailers should be concerned. Very concerned."
McCarthy was not alone. Tesco execs gushed with confidence from the outset.
Last week, after five years, 200+ store openings, weak productivity and mounting losses, Tesco's CEO announced that in all likelihood the company would sell or close the entire chain.
I visited a number of Tesco's "Fresh and Easy" stores in California and Arizona over the five-year period and quite liked them. They are larger than the standard convenience store and much smaller than a full-line supermarket. Their selection of prepared foods and private-label merchandise is fairly good. Trouble is, most US consumers, unlike me, didn't go for it. They remained loyal to their own. Fresh and Easy was caught in a Bermuda triangle consisting of high-service models like Trader Joe's, traditional supermarkets and large-format supercenters and warehouse clubs.
Tesco's was a stunning failure in the US and a reminder to all international retailers that overwhelming success in one's domestic market coupled with intensive market research prior to entry into a new market do not guarantee success in the latter.
The US is a tough market, sure, but it also highly segmentable. Minor niches can be huge in absolute volume terms. Tesco should have done better. Either their research was very faulty or they did a lot less research than they made out.
Everyone raves about the Apple service model but maintaining this kind of excellence uniformly across a store fleet becomes more difficult as that store fleet expands. And when it comes to countries like Australia that are notorious for a lack of service culture, the difficulty is elevated.
Here's an example. A little while ago I bought my wife an iPhone at an Apple store in Sydney. She subsequently made an appointment to bring the phone into the store to meet an Apple associate, go over basic functions of the phone and get her specific questions answered. (She's a university lecturer but certainly not a technophile.) Sadly, the rep assigned to her for this meeting was not just unable to answer her key questions about how the phone worked but compounded the problem by pretending that he could. After about 20 minutes of pure frustration she walked out of the place and eventually found the answers the hard way - and is now happy with the product.
I doubt this is an isolated case. The moral of the story should be obvious. In a country where retail service is, for want of a better word, rotten, even retailers like Apple will risk impairing their standards. And the risk will rise the further they expand.
If anyone else has any interesting service stories about Apple that depart from the routine admiration, please let me know.
I'm back in the U.S. in July, partly for meetings and partly to film retail documentaries in New York, Washington, D.C., south Florida, Phoenix and southern California. I'll be visiting more than 30 retail locations.
If you think you might like to join me for any part of this trip and learn about the industry and where it is going, do let me know.
Non-food retailers in mature markets have recently pinned their hopes for future growth on three things: factory outlet locations, e-commerce and expansion into emerging markets. The trade press has been fueled for the past couple of years by reports of high-profile retailers expanding abroad. While the common assumption has been that the retailer tide will flow in one direction - from the US and Europe outward - a key trend on the radar is the exact reverse of this. Retailers are going to be heading in the opposite direction and will exert a material influence on fashion and shopping in mature markets.
Shanghai Tang was one of the notable early movers but others are looking to get a foothold in the West as well. Examples are China's Li-Ning sports apparel brand, which has just kicked off its US e-commerce site, and India's Malabar Gold & Diamonds that is targeting a major international rollout from its current regional store base of 64 units.
This is just the tip of the iceberg. Watch for a steady stream of fashion, health & beauty brands influenced by Eastern philosophies, fabrics and ingredients to come knocking on the door in mature markets over the next few years.
Are there positive implications for shopping centers and other retail distribution channels in places like North America and Australia? The answer is a qualified "yes." There will be a pool of new tenants for shopping centers and fresh brands for department stores and other wholesale channels. However, with regard to the benefits to shopping centers, much depends on whether incoming brands take the flagship/e-commerce road or decide to establish full-blown store networks.
Either way, after the mess that some Western architects, developers and retailers have made in emerging markets they came to conquer, it's refreshing to see imperialism in the retail industry is now set to work both ways.
Last year I published an article in which I presented a list of what I thought were the five most innovative shopping centers I've seen. Having been in the industry for 15 years and travelled perennially as a consultant and tourist, I can claim to have seen a few.
The list evoked a lot of reaction, which I had expected, and so I'm reproducing it here for anyone who hasn't seen it already. Remember though that the list is not meant to represent the best-performing, or the biggest centers, or even personal favorites (although a couple of them are). It's about centers that were influential well beyond their own trade area and their own time by pushing the shopping center concept in a new direction. See what you think.
1. Southdale Center, Minneapolis, Minnesota (opened 1956). Created by Victor Gruen, Southdale was the world’s first climate-controlled mall, made possible by engineering breakthroughs in air conditioning technology. Southdale was also revolutionary because it brought two competing department stores into the same property. These “anchor stores” were separated by the entire length of the mall, which consisted of an enclosed pedestrian walkway lined by specialty stores. The modern regional centre was born.
2. Potomac Mills, Woodbridge, Virginia (opened 1985). With over 1.5 million square feet of gross leasable area and 20 anchor stores, Potomac Mills was a pioneering “value megamall." By combining large entertainment anchors with numerous big box stores and value- and full-priced specialty retailers, Potomac Mills merged and expanded the regional mall, factory outlet and entertainment centre concepts at a single stroke . Not resting on its laurels, the centre has led another trend in recent years by hosting the off-price units of several large department store chains, including Nordstrom, Saks Fifth Avenue and Bloomingdales which have all set up outlet shops there.
3. Easton Town Center, Columbus, Ohio (opened 1999). Not the first town centre development in the shopping centre era but industry analysts, including this one, believe it brought the concept to a peak that has probably not been bettered anywhere. Developed by Steiner + Associates, Easton has a retail GLA of about 1.5 million square feet that includes more than 150 specialty stores and restaurants, one upscale department store (Nordstrom) and one moderate department store (Macy’s). The centre does an immaculate job of combining alfresco dining, shopping, open-air community space and architectural design features to achieve an authentic sense of place and an outstanding shopping experience. Among other things Easton also boasts a 30-screen cinema, three on-site hotels with 559 rooms and 800+ units ranging from studio apartments to three-bedroom townhouses.
4. The Lab/The Camp, Costa Mesa, California (opened 1993 and 2002 respectively.) The twin inspirations of clothing designer Shaheen Sadeghi, these two centres face each other across the same suburban street that hosts the much better known Goliath of shopping, South Coast Plaza. The Lab “anti-mall” has 50,000 square feet of floorspace and The Camp “eco-retail campus” has 60,000. Both centres have only about a dozen tenants each, which are focused on apparel suited to the lifestyle of the immediate neighbourhood and restaurants with fanatical local devotees, such as The Camp’s vegan “Native Foods.” Both centres have unique layouts and design features, stores that occupy eccentric shapes, and a vibe that speaks directly to an unconventional segment of the local market.
5. K11, Tsim Sha Tsui (Kowloon), Hong Kong (opened 2009). K11 is the brainchild of Adrian Chang. K11 departs from the humdrum in so many ways it's impossible to catalog them all. For example, while plonking an art gallery into a shopping centre has become a bit of a fad lately, only K11 has seamlessly interwoven two- and three-dimensional art into the very fabric of the mall so that it is part and parcel of the shopping and recreation experience. K11 has also walked the walk when it comes to community involvement, leasing to an unusually high percentage of independent retailers and operating several design stores of its own in the mall that source exclusively from local producers, designers and artists.
If my list were to be extended to 10, then other centres that could make the cut are some of Steve Tanger's early outlet centers, Country Club Plaza in Kansas City (opened in 1923) and Ayala Malls' Greenbelt center in Manila, which is important for demonstrating how a well-executed open-air center can work brilliantly in a tropical climate.
In America there is a saying that the most chilling words you can ever hear are "I'm from the government and I'm here to help you." After spending much of the past four months trawling shopping centers, traditional markets and other retailing venues in six booming Asian countries, I returned to Australia earlier this week to find that it is still in the depths of a retail recession. And the government - or at least a government - is trying to help out.
In this instance it's the Victorian government, which is now incrementally fooling with the rules governing so-called "bulky goods" centers. The rules are being relaxed to enable a slightly expanded dribble of retail categories to operate out of these centers. The minimum store size threshold is also being lowered.
Since I'm pro-consumer and pro-market, I like the idea of competition, so it beats me why there are bulky goods zones and bulky goods centers in the first place. Why not just zone for retail and allow all retailers and shopping center types to compete on an equal footing everywhere? This works fine in the US where supercenters, powers centers, regional centers and everything else compete head to head without any special rights, protections or restrictions on what you can sell and who can sell it.
Interestingly, of the six Asian countries I've worked in recently, the one with the retail sector that is serving its consumers worst is India. As in Australia, part of the reason is government interference that restricts competition by limiting the types of retail that can operate.
India uses foreign direct investment (FDI) laws to prevent certain kinds of retailers - specifically, foreign ones - from setting up there. Multi-brand foreign retailers are not allowed at all. Single-brand retailers can operate but may only have 51% equity unless they source 30% of their merchandise from local SME suppliers.
The FDI rules have survived because of strong support by the politically powerful small shopkeepers, of which there are approximately 20 million in India.
While recognizing the concerns of the domestic shopkeepers, increased competition in the Indian market engendered by FDI reform would have a number of positive impacts, including:
- Provide a larger tenant pool for shopping centre operators of all kinds
- Provide a more diverse pool of tenants and tenant categories
- Raise the quality of retailing
- Force all retailers and shopping centers to compete
- Make supply chains more efficient
- Lower prices
- Raise health, safety and environmental standards
Note how the first four of these and possibly the sixth as well would also be outcomes of the elimination of archaic zoning practices in Australia:
India's shopping centers are generally of poor quality, partly as a result of its FDI laws. Analogously, Australia's shopping centers are not as good as they could be as a result of its planning regs. But maybe it will take a much bigger retail recession than the one Australia has now to get a more rational planning environment.
On the road over the past couple of weeks making a shopping center movie documentary in Singapore, Hong Kong, Shanghai and Manila. The objective of the film, which is being made in partnership with the International Council of Shopping Centers, will be to showcase Asian shopping center and retail trends.
Each of the four markets is of great retail-related interest for different reasons. Singapore has a handful of centers that are fairly new, Hong Kong has its outstanding mix of sophisticated, sometimes edgy shopping center and street retail, and Shanghai is chaotic and still shaping itself.
Manila is also of great interest, not just for its frenetically busy conventional malls but also for its bold implementation of the open-air lifestyle center concept in the form of Greenbelt, developed and owned by Ayala Malls.
Having been involved with these centers for about 15 years in the US and seen them either scorned or botched in other countries, including Australia, I have been interested in what Ayala came up with in Manila ever since I first heard about Greenbelt.
The center has won a number of international awards but so too have a few projects that I would regard as a bit ordinary.
This time I was not disappointed. Greenbelt, which is anchored by a plethora of large-format casual dining establishments, consists of five buildings wrapped around a magnificent tropical green space. Some of the buildings are enclosed and air-conditioned and some are open to the breeze.
The retail ranges from luxury brands right down through fast fashion to the value end. In the middle of the green space is a church with a dome-shaped roof. Center management regards the church as a legitimate anchor in the sense of drawing pedestrian traffic that not only worships at the center but shops and dines there as well.
I also visited the Bonifacio Global City mixed-use project, another of Ayala's projects in the Manila metro area. This is also an exceptional project, combining a vertical enclosed mall with traditional Asian market, modern streetscape shopping center and medium-rise residential units.
I am anticipating that the first movie documentary covering the cities visited on this trip will be ready for prime time before the end of the year, so please contact me if you are interested in obtaining more details about what is in it and where to get it.
India is next country on my itinerary for early December.
Format flexibility is now one of the key requirements for a successful retailer growth strategy, especially in mature markets where growth is no longer being driven by rapid development of new cookie-cutter shopping centers.
Getting free of formulae that chain a retailer to a particular kind of real estate (e.g. neighborhood centers or suburban Main Streets) can open up a host of previously ignored real estate opportunities. Each of these may provide a slightly differentiated way of getting close to customers who otherwise would be less accessible. For example, urban infill plots, large university campuses, factory outlet centers, mixed use developments, pop-up shipping containers and many overseas opportunities each have a distinct set of requirements for store size, store configuration and, of course, merchandising.
There are many examples of retailers that have become good at adopting flexible formats to suit local sites and conditions. They have demonstrated the value of thinking outside their format comfort zones.
US department stores such as Bloomingdale's, Nordstrom and Neiman Marcus, with their forays into heavily edited and value formats represent one example.
Walmart has become masterful at it. The world's largest retailer has developed a whole slew of customised formats to suit every occasion, from 18,000 sq.m freestanding supercenters at one end of the continuum, through discount stores about half that size in suburban power and community centers, to 8,000 sq.m supercenters for urban areas, to 4,000 sq.m supermarkets, to 1,000 sq.m edited food stores. This year it also came up with a 325 sq.m concept designed specifically for university campuses. It includes a pharmacy and licensed apparel.
Australia's major retailers have not been quite so proactive in meeting the needs of their customers. Myer and David Jones in particular will need to change this or their "growth" strategies will end up consisting of resisting store closures.
For small retailers in Australia who are frozen out of shopping centers, a number of opportunities exist for expansion both at home and overseas.
And the days of waiting until your domestic market is saturated before leaving home are over. This should resonate in places like Australia where demographic limitations and planning controls at home make overseas markets look particularly tasty.
The news that Microsoft plans to open another 75 stores on top of the 11 it already operates in the US should come as no surprise. Neither should the news that one of Amazon's businesses, BeautyBar.com, is planning a store in Manhasset, New York.
These will be the first of many such announcements that show the two faces of the internet. Pure play internet retailers, along with multichannel players in categories thought to be on their way to being gobbled up by the internet, will start opening stores in shopping centers and CBDs. They are recognising how important it is to market products in physical as well as virtual space, a thesis that Apple's 300+ stores has developed sublimely.
Shopping centre operators may want to think about how they can team up with internet players to make their properties more vibrant. This need not only involve having them occupy space but also helping to drive traffic to other tenants in the centre. Shopping centres will increasingly be part of the technology revolution rather than passive resistors.
A number of factors, of which the internet is just one, are also combining to force shopping centres into reducing their dependency on fashion apparel. At the present time, shopping centre specialty space is heavily loaded toward apparel (over 40 per cent in most regional centres anywhere you go in the world). How much apparel in the tenant mix is "right" depends partly on competitive conditions in the specific market and partly on the quality of the tenants themselves. Landlords could be drawing up a strategic merchandise plan for each of their properties that targets a specific maximum threshold for apparel, taking into account both anchor and specialty stores.
While Myer in Australia has been building a grand monument to itself on Bourke Street, most of the world’s premier department store companies have been going small and customized with their new units, breaking out of the old 20,000 sq.m box blueprint. Some of the new department stores in value shopping centers are as small as 2,000 sq.m. This makes sense for a variety of reasons.
First, you have to edit your assortment to suit the size and preferences of the local market. One size fits all just doesn’t cut it anymore.
Second, the local real estate opportunity might not fit the box you’ve been accustomed to building. This is typical of infill situations.
Third, department stores like other retailers that operate out of large formats are experimenting with models that will allow them to replace physical store space with e-commerce.
Nordstrom and J.C. Penney in the U.S. are both getting very good at this in their different ways. By making their warehouse and store inventories both accessible to the customer at home and in the store, they accomplish several objectives at the same time:
- Put their customers in more control of the shopping process by given them more choices as to where and how a transaction is completed
- Free up existing store space for other uses and open up the possibility of using smaller stores
- Capture sales that might in the past have slipped away when a customer fails to find the exact item he or she wanted in the store
Sears, another national department store chain is going a step further and while it pushes sales online it is actively subletting large amounts of redundant space within its boxes to other retailers and even non-retail users.
It isn’t just the department stores that are doing this of course. Any retailer working out of a large format has to be looking at e-commerce as a way of slimming down on physical real estate.
Shopping center operators needn’t worry too much because while the big formats are trying to slim down there are usually smaller fry wanting to bulk up on space, particularly if it means obtaining access to real estate that it wouldn’t have had a shot at in the past.
Of course, it means shopping centres will need to be configured differently to accommodate these changes, but that’s a story for another time.