They may not be going the way of the dinosaurs anytime soon, but big-box and superstore retail outlets will have to adapt and find ways to survive in a changing economic climate.
There is growing community resistance to such developments, particularly in more upscale neighborhoods. Also, higher interest rates and a cooling of economic growth have tapered the wealth effect and are expected to hurt retail sales.
Both retailers and developers are looking at new ways to effectively incorporate superstores into shopping centers while generating sales and keeping the surrounding neighbors happy.
“You’re going to see different concepts and more smaller, service-oriented specialty stores,” said John Golisch, retail partner with Arthur Andersen LLP. “The bottom line is that the big-box concept is more difficult to execute than people might have expected. There isn’t one unique formula that works everywhere, and many retailers stopped trying to be all things to all people.”
Golisch sees more and more retailers scaling down their new stores and focusing more on core merchandise, instead of offering a slew of ancillary goods and services to attract more business. Moreover, instead of having a stand-alone big box or a small group of two or three superstores, these retailers are looking to surround themselves with a variety of smaller stores and restaurants.
“Part of the challenge for the superstores is to generate enough traffic, which they need to continue to grow,” said Golisch. “So they want to have these smaller boutiques and restaurants nearby, which attract people with fresh concepts, but it’s important to have the right combination, so that the same people who will come to go to the restaurant will also want to go the retailer.”
A project along these lines is now planned in West Hollywood. J.H. Snyder Co. is planning to build a mixed-use retail center at the corner of Santa Monica Boulevard and La Brea Avenue. Although the project will have superstores Best Buy and Target as anchors, they will be towards the back of the project. The front will be dominated by restaurants and boutiques.
“The buzz word is that nobody wants big-box development right now,” said Milt Swimmer, the J.H. Snyder partner in charge of the West Hollywood Gateway project. “It’s all about mixed-use, but you need to have your anchor tenants, because they are the economic engines of the project and without them it’s impossible to get financing.”
Not a traditional mall
Another development aiming for a mixed-use scenario is the overhaul of the Northridge Fashion Center where a Gelson’s supermarket and other upscale retailers are combined with a Super Kmart store. Other local mixed-use retail projects include The Plant in Van Nuys and The Citadel in Commerce.
Although such mixed-use retail centers may in some cases resemble a traditional mall, there are some significant differences. Aside from not being enclosed, there tend to be fewer and bigger stores in these centers and they are not structurally designed for people to wander from one store to the next as in a classic mall.
Swimmer is quick to point out that at the West Hollywood Gateway, Best Buy and Target stores will not have the same stripped-down, oversized warehouse quality as some of the quintessential big-box outlets, such as Costco and Home Depot.
“People see Best Buy and Target as more community friendly,” said Hassan Haghani, a senior planner with the city of West Hollywood. “It’s a matter of perception, but there was a lot of aversion to having a large-scale big box at the project. It wasn’t universal, though, there were still a lot of people who wanted to have a Costco instead.”
Most community opposition, according to Haghani, tends to focus on traffic and parking issues. Many people are concerned about the volume of traffic that big-box retailers generate. Also, big-box buildings are often considered unsightly, driving away upscale retailers and depressing property values in a neighborhood.
In some cases, community opposition may also be sparked by labor leaders, who object to big-box retailers that generally hire non-union workers.
But less-wealthy cities often are not as choosy, and welcome the sales tax revenues that big boxes can generate.
Inglewood, Montebello and Pico Rivera are some of the cities that are busy attracting big-box retail or power centers with a number of superstores such as Bed Bath & Beyond, Linens ‘n Things or a Super Kmart.
“These less-expensive neighborhoods may become more of a factor in new retail development,” said Richard Giss, a retail analyst with Deloitte & Touche LLP. “In wealthy neighborhoods, people have a lot of money right now and they’ve started to shift over to higher-end stores, which undermines the advantage big-box retailers might have had in those areas.”
Reaching market saturation
The almost exclusive reliance of local municipalities on sales taxes to finance city services makes them chase big-box retailers. This has prompted efforts to overhaul the state’s tax code to diversify local sources of tax revenue.
Can the saturated L.A. market support more big-box retailers and superstores?
There are strong hints that the era of double-digit annual sales growth for some of the biggest retailers may be over, and this may make them more reluctant to expose themselves to untested, new markets.
A few weeks ago, shares of the major, national retail chains were hammered when Home Depot Inc. warned that third-quarter earnings would not meet the Street’s expectations. Not only did Home Depot’s shares drop 29 percent, investors also sold off Wal-Mart Stores Inc., Target Corp. and Best Buy Co., among others, as fear spread that consumer spending may be starting to slow down.
