Los Angeles developer Jerry Snyder has ripped the roof off of a struggling shopping mall in Huntington Beach and is building a 4,000-seat movie theater and more than 700,000 square feet of new retail space.

But no department stores.

"We totally redesigned it," Snyder said. "The people we are doing deals with now are Costco and Target."

Snyder's project reflects the increasing view of shopping mall developers and operators and it hangs ominously over Federated Department Stores Inc.'s proposed $11 billion acquisition of rival May Department Stores Co.

As department store sales and market share plunged in the last few decades, mall owners have shifted their dependence away from mass merchandisers and towards national chains, popular restaurants and big box discounters.

The strategy appears to be paying off. Nationally, sales per square foot at malls in 2004 averaged $366, up more than 4 percent from the prior year, according to the International Council of Shopping Centers.

Meanwhile, department stores had sales of $140 per foot in 2004, slightly below the prior year, according to the Urban Land Institute.

Wall Street has taken notice of the shift. While department store shares have as a group done poorly, mall owners such as Santa Monica-based Macerich Co. have been some of the stock market's best performers.

"The specialty shops are doing a better job at a narrow focus than the department stores," said Randy Brant, a Macerich senior vice president.

Open-air concepts

As mall owners become less dependent on department stores, developers are including fewer of them in their new projects. These days, the focus is on building so-called lifestyle centers largely open-air complexes where entertainment and dining attractions rope in shoppers instead of anchor stores.

If a department store even gets included in one of these new centers, it's typically placed off to the side and is smaller than it had been in the past.

At the Grove, an L.A. lifestyle center where Nordstrom Inc. is the sole department store, sales per square foot are more than double the national average, according to Rick Caruso, the center's owner and developer.

"Department stores haven't been vital to our centers," said Caruso, who has more than $1 billion worth of similar "lifestyle" centers under construction. "We like them and at times we like them as tenants but they've never been the focal point."

Of the 37 new malls that opened last year nationwide, only three were traditional enclosed malls anchored by department stores. Most were lifestyle, hybrid or mixed-use centers.

Snyder's mall in Orange County, called Bella Terra, was once home to a Broadway department store, a chain that was acquired by Federated nearly a decade ago. Now the former department store space is an outpost for Menomonee Falls, Wis.-based Kohl's Corp., a chain of specialty department stores that has made a major push into California. The center also features two chains that have been struggling: Mervyn's LLC, which was sold last year to an investment group, and Circuit City Stores Inc., which itself has received an unsolicited takeover bid from a private investment group.

"You have to have multiple anchors now," Snyder said. "There has to be a mix to keep people interested these days."

New types of anchors

When malls were built in previous decades, getting a project financed relied heavily on convincing lenders that the completed structures would attract shoppers and that meant department stores.

With their aggressive advertising and well-known brand names, department stores acted as regional magnets to the centers, which were essentially long corridors connecting two or more anchors. Mall owners made their money on renting the shops between the department stores, which either own their space or were given long-term leases requiring little or no rent.

But that structure began to change with the emergence of national apparel retailers that could advertise on the level of a department store and draw shoppers on their own. Stores such as Gap Inc., Abercrombie & Fitch Co. and Euromarket Design Inc.'s Crate & Barrel became mainstays.

"The whole theory behind having an anchor was that they were national, or at least very strong regional, companies that had the ability to advertise and draw customers in," said Malachy Kavanagh, a spokesman for the International Council of Shopping Centers. "Now you have a lot of smaller retailers who (are) national chains and advertise nationally. They act in some ways like an anchor."

New malls also emphasize specialty stores because the rent is better. On average, department stores pay $3 a foot, while big box tenants such as Kohl's or Bed Bath & Beyond Inc. may pay more than $20 a foot and specialty retailers often are charged more than $30.

That has led developers of lifestyle centers to depend more on non-traditional anchors. The Grove draws crowds with its grand movie theaters, restaurants and dancing water fountains. At Hollywood & Highland, the 637-room Renaissance hotel, Kodak Theatre and deluxe restaurants are considered the anchors.

CIM Group Inc., which acquired the center from TrizecHahn Corp. for $201 million, is investing $10 million in upgrading the 3-year-old center by adding escalators and replacing solid walls with glass to improve appearance and accessibility.

The center's 2004 sales rose 8 percent from the year earlier impressive numbers for a property that struggled badly in its early going. "I think the jury is still out on us," acknowledged Cindy Chong, a CIM senior vice president and general manager. "This year will be a defining time."

CIM's approach is reflected in its recent signing of music vendor Virgin Megastore as a major tenant. "You can measure success in a couple of ways, but you can't underestimate the success of that entertainment component," she said. "Those elements are huge drivers to the property."

Realignment begins

Macerich is experimenting by replacing some traditional department stores with discounters. A Target opened last year at its Lakewood Center mall, for example. "It's proven to be a very good fit," Brant said. "The sales volume increased dramatically at the surrounding stores."

If a store like Target increases sales at nearby shops in the mall, a role originally assigned to department stores, owners can then charge more rents for those spaces.

This could be an important dynamic as Federated begins the process of disposing of as many as 98 stores nationwide. In Southern California, more than 25 malls have overlapping Federated and May stores; Federated has already said it will convert most of May's regional stores, like Robinsons-May, into Macy's.

Of the locations to be shuttered, retailers ranging from Nordstrom to JC Penney to Target have shown some interest, according to news reports. That should be comforting news to mall owners fearful of having an empty anchor store in their complexes.

Still, it's not clear sailing. Mall operators will be competing with developers of so-called big-box centers (sometimes called "power centers"), which have become an important retailing force.

These centers are typically open air, with customers being able to take shopping carts to their cars parked on a surface lot. Adapting multiple-level buildings occupied by former-department stores for a big-box tenant is challenging because customers must take shopping carts between floors and to their cars.

Also, big-box retailers have product offerings that don't always mesh with other mall tenants. "The mainstay of the mall is fashion and fashion retailers," said Kavanagh. "Target and Wal-Mart carry some fashion but they don't carry a dominant amount of it compared to general merchandise."

Caruso speculates that as more big-box retailers venture into malls, there could be a dilution factor that lessens their appeal.

"It's going to be more of the same out there," he said. "From the consumer standpoint, they lose because their options are narrowed considerably. And that could make shopping much less interesting to them."

*Staff reporter Rachel Brown contributed to this story.

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