NEW YORK — Gilbert Harrison, chairman of Financo, said he expects more consolidations in the retail sector this year, which could open the door for companies looking to find better real estate in key markets. Harrison was a speaker at a recent retail real estate forum hosted by Berns Communications Group, a business communications firm specializing in retail and fashion, at WWD.
Retailers in slow growth modes could have real estate companies and equity funds chasing after their properties, said James Schaye, president and chief executive officer of Hudson Capital Partners LLC.
The overall real estate and financial outlook is positive, according to the panelists at the roundtable, which included: Mike Niemira, chief economist of the International Council of Shopping Centers; Laura Pomerantz, principal of PBS Realty Advisors, and footwear designer Stuart Weitzman. Their take on the near term was bullish, especially in secondary markets.
Pomerantz, for example, enthused about the opportunities in the “smile” markets, which are composed of cities in the Northeast, South and West that form a smile on the U.S. map. Chicago and Michigan — as the “eyes” — are also primed for retail expansion, especially for designers looking to build their brand equity.
WWD: Where is the market headed?
Niemira: The economy is still relatively strong and interest rates are relatively low. Inflation has been a concern this year, but the core rate of inflation of nonfood, nonenergy hasn’t been a problem yet.
This year is likely to be more of a transition year to slower economic growth, and with it there’s clear implication for retail and for real estate. There’s probably some transition in terms of an asset allocation shift in 2006 that may be less beneficial to retail real estate, which has been exceedingly strong and continues to be so at this point. So I would view 2006 first as a year of transition. The parallel for the economy that I would make when thinking about 2006 is 1995. In 1995, we saw a bit of a mini cycle in the economy, but I think the dynamic is a little different. In 2006, my worries are multiple. On the retail front, we certainly have indications that consumer spending is likely to be a lot softer in 2006. The key risk area, which is automotive, may not be of concern to this group, but the ripple effect of automotive softness to the broader economy and back to the automotive side is a problem.
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Harrison: I agree with most of Mike’s comments, except I’m a little bit more bullish over the next year. I agree the first quarter is going to be very soft, in my opinion, because the first effects of heating bills are going to come in. When people are starting to pay another $500 or $600 or $700 a month, and their heating bills double, it’s going to have a direct impact on consumer spending, especially in apparel and soft goods areas. That worries me because this season started off very cold.
WWD: What about the recent M&A [merger and acquisition] boom in the market?
Harrison: The recent M&A deals will all have a tremendous effect going forward. The cornerstone deal of the year was Neiman Marcus, and I believe that is going to be a tremendous burden as Neiman Marcus continues to grow its business. In order to get returns, investors are going to need to build more stores and it will be a delicate balance to keep the Neiman Marcus façade the way it is and to keep the luxury sector the way it is.
The Toys ‘R’ Us acquisition in my opinion will probably bring about a huge divestiture of properties. The boxes that Toys has are going to create big opportunity for some of the other strip-center retailers to build their format. There will be no lack of people coming in to take that space. But there might be a glut of too much real estate on the market.
Companies need to evaluate their real estate portfolios when considering an M&A. If they are at a growth stage, they can either go public or sell their business three or four years out, so going on a rapid business expansion is going to be very important. But you have to balance the ability to do that with increased sales.
WWD: Can you share your experience of financing your company for growth?
Weitzman: John Howard [of Bear Stearns] said to me it was the first time Bear Stearns had someone negotiating that didn’t need any capital to do it with. So I found myself in a position that took away from them the real clout they had to make their best deal, although they made a good one. And I focused on other things that I thought a business like that could help us achieve. And that may be a twist on what you might traditionally expect from a guy like me.
I would say that if a company needs money desperately, it’s almost a shame to have to make a deal, because you lose sight of other things that are more important in growing a business. So I guess you are better off accumulating some funds before you look to make a major expansion with a group like that so you’re a little bit more independent in hanging onto the things that you want.
I was able to make a minority deal with a firm that only makes majority deals. What have they have done for me? They own lots of businesses that were entrepreneurial and that grew into much larger companies with their help. I’ve personally never had the time to search out an executive team to expand into fields that our customers would love us to be in, as I and everyone else have been running the basic functions of the business. Bear Stearns introduced me to some very talented people in real estate, in product, and also introduced me to firms that can help us build a stronger and more secure design base so that much of it isn’t so dependent on just me and a couple of other people only. And that’s what I expect and hope to get from a firm like Bear Stearns. So I looked for a company that had experience in fashion as well as entrepreneurial businesses.
WWD: From your perspective, what markets can retailers take advantage of?
Pomerantz: All malls or streets are not created equally. It’s critical for every designer and retailer to choose the right mall, the right location, and even more important, to pick the right co-tenancies because that’s what creates the energy for what’s going to happen. As in everything else in life, there are measures by which we measure a quality shopping center: the quality of co-tenancies, its anchors and the productivity of the stores themselves within the center.
Designer and image-sensitive brands need their own freestanding street stores in order to control their own destiny, especially because we all know department stores have been going through such a transition.
Harrison: This is the biggest frustration we hear from our clients about the department stores — that they don’t present the line as the designer seeks to do it, and then the product doesn’t sell and then the stores want markdowns. That’s why more and more people like Stuart [Weitzman] are saying that in order to survive in the market, we need to have our own retail stores to manage.
Pomerantz: It allows the brands to control their own merchandising and it allows them to train their staffs within the image and in the decorum of your product. When you go into a Prada store and you see the salespeople and they’re all dressed a certain way, have a certain attitude, there’s consistency; same with Abercrombie & Fitch.
Site selection will continue to be very critical to a retailer’s growth and expansion, and to the success of that expansion. As retail rents have been rising, and they really have been rising, it’s critical to make the most efficient, economic deals to coincide with the ever-important co-tenancy issues. Because the days of having retail stores for just branding and just imaging purposes are over. People have to make a profit, and the only way to do that is to make the right site selection. Focusing on key areas in the country and strategic demographic, geographic and psychographic decisions have become critical also to the decision-making process. This works hand in hand with the ability to dispose of unsuccessful locations as the need arises.
WWD: Can you tell us what the “smile theory” is, in regard to real estate markets?
Pomerantz: It’s really paramount to luxury retail expansion. If you draw your finger across the country, it focuses on the West, South and East Coast, and you actually create a smile, and that’s where business is strongest. You’ve got the Northeast, the South, and then you have Dallas and California, and Chicago is an eye; Chicago and Michigan are still very, very important. If you’re just starting out and you don’t know where to go, that theory really does consistently work.
Schaye: There are some very strong secondary markets out there: Jacksonville [Fla.] and Nashville have become extraordinarily sophisticated and have a desire and need for luxury goods. While they may not be to the same extent as they are in L.A. or Miami or New York, it still exists. I definitely think there is an opportunity there.
Harrison: Laura, what you’re saying is 100 percent right for the luxury retailers, but 90 percent of the retail out there isn’t being bought by luxury shoppers, it’s being bought by Middle Americans. Some people have the strategy of going into small towns, and there’s no competition there, so they can build stores.
Pomerantz: It’s also why a center like the Somerset Collection mall in Troy, Mich., is a good center. It’s phenomenal. because they are in a location where the department stores are not really servicing the luxury customer.
Schaye: I think with companies like Macy’s becoming very mainstream and very safe because they are doing product over the entire country, the opportunity to experiment with luxury fashion products in small markets is tremendous.
Also, look at Target, who is going after so-called upscale customers. They are doing extremely well, but the danger for them is going too much, and the customer gets turned off. The interesting thing about their stores is that they go over the top a little bit, and I think they need to pull back a little bit on the design. The customer now has the perception that the stuff is too expensive.
Pomerantz: The other point is that aspirational shopping allows accessories to run a broader distribution than apparel, so there are more possibilities for successful locations for accessories than clothing for both luxury brands and for Middle America brands. So Prada clothing may not be salable in Iowa. But an LVMH handbag or a Stuart Weitzman shoe is going to have a much broader appeal and it’s easier to assimilate in a population and into a wardrobe than Prada clothing because Prada clothing is an urban kind of product.
WWD: What financial trends are you noticing?
Schaye: One of the things I’ve seen in the past year and a half, and we scratch our heads about it in our business, is that companies that in the past which without question would have been liquidated, are not being liquidated because there are so many available funds now. There is so much money out there, and there are companies that will surface on my plate, maybe not in the first quarter, but in the second, third and going into the fourth quarter 2006. So we believe there is a tremendous amount of opportunity for us.
We anticipate that there will be slower economic growth, especially for distressed retailers who may face higher interest rates and energy prices.
It amazes me sometimes where retailers are really not looking at their real estate portfolio close enough. It’s an asset; it’s a very important asset. A retailer needs to understand what their portfolio looks like, they need to understand what the going-dark provisions are, what’s going to happen if the mall or center if the anchor goes out. The good thing that’s happened is that because consolidation is not just in the retail world but also in the real estate world, all the shopping center guys are merging together and retailers don’t have to negotiate now with many mall owners; they can negotiate with one or two and put together packages.