San Diego — Many retailers are remaining cautious in their pursuits of bargains.
San Diego — September was not only the time for industry experts to gather for the annual ICSC Western Division Conference, held last week in San Diego, but also a time to reflect on the five-year anniversary of what was deemed the start of the Great Recession. The collision of these two events was not lost on panelists and attendees. Many were happy to see deal volumes returning to healthy levels, but worried some might once again throw caution to the wind in pursuit of a perceived bargain.
“There are lots of opportunities out there, but you have to be careful about what you’re seeing,” said Mark A. Schurgin, president of Los Angeles-based The Festival Companies and an ICSC trustee. “Don’t be lulled by interest rates, we don’t know where interest rates are going three years out. Assess all costs up front. There’s nothing worse than forgetting those fees.”
Despite these worries, Schurgin, like his fellow Director’s Cut panelists, was quick to point out that a little unpredictability wasn’t keeping his firm on the sidelines. Festival has nine new projects under development, including four ground-up neighborhood shopping centers, as well as a Hispanic grocer with sub-anchors. It is also acquiring four additional properties for rehabilitation, including a shuttered supermarket that will be converted into a Hispanic grocer.
While ethnic grocers never seem to go out of style out West, panelists did note that a few industry fundamentals have since 2008.
“Square footage isn’t everything anymore,” said Robert Roscoe, divisional vice president of asset development for Walgreens. “We look at it linear now. It’s about what we can get in a box.”
Like Festival, Walgreens is also in growth mode. It’s growing at a rate of about 2 percent annually, which will translate to about 150 stores this year, according to Roscoe, who voiced his own concerns about the future.
“Deals may get more difficult in 2015 and 2016, and beyond,” he cautioned.
Even in today’s market, Roscoe noted Walgreens wasn’t jumping into any open space in any seemingly “hot” market.
“Southern California has its own set of challenges for us,” he said. “Our goal is to be number one in every market. That’s not the case for us right now. It’s hard for us to make money in that market. Hard to see the pro forma work. If we can get the real estate, we’d like to add 25 to 30 stores a year in this market, but it’s just a matter of whether it presents itself as a profitable store.”
While retailers like Walgreens and Hispanic grocers will likely continue to grow at a steady pace, other retail staples that have not adapted to a changing economy – and consumer – may well be on their way out.
“I think Sears has lost its way as a retailer already,” said panelist Arturo Sneider, a partner in Los Angeles-based Primestor Development and an ICSC trustee. “Most people I’ve talked to look at this company and they’re trying to figure out what to do with it. The single biggest factor is that Sears probably has 300 to 350 million square feet in the U.S. It used to be thought of as historic, but how many brands still exist today that we think of as historic?”
Moderator Bruce D. Pomeroy, president of Glendale, Calif.-based Evergreen and ICSC Western Division vice president and trustee, echoed these sentiments. He noted that when he started in this business, Sears was the No. 1 retailer, while Kmart was No. 2.
Today, Kmart no longer ranks among the top 100 retailers. Sears is now ranked No. 13, though its sales growth (-9.2 percent) is lower than any other company in the top 30. That is, aside from JC Penney, which occupies the 29th spot and experienced a 24.7 percent dip in sales growth between 2011 and 2012.
“Sears has 300,000-square-foot boxes to sell tools and appliances, it doesn’t match,” Schurgin added. “And nobody thinks of them as fashion.”
While it’s easy to say the panelists were simply picking on Sears, this is not likely the case. Rather, the 120-year-old retailer served as a case study and a fairly harsh lesson on what happens when you don’t adapt to change. Smaller stores, more convenience and tech-centric designs were the wave of the future, panelists agreed.
“There has been a departure from the basic principal of our business, and that’s technology,” Sneider said. “Sales are now driven more by a volume of people, versus income per capita. We’re seeing lots of flexibility on prototypes and sites, and there is a huge opportunity to bring new retailers into certain communities. We’re now doing Chipotle deals in purely Mexican neighborhoods. Think about that, it’s a very important turning point.”
Fellow Director’s Cut panelists included Terry M. Evans, vice president of real estate for The Kroger Company; William B. Horner, senior vice president and chief real estate officer for Fitness International; and Michael F. Marino, executive vice president and division manager for Wells Fargo Bank.
— Nellie Day