Nearly six in 10 Americans — an estimated 137.4 million people — plan to or are considering shopping during Thanksgiving weekend, according to an annual survey. The numbers include in-store and online shopping from Thursday through Sunday. Black Friday is still the most popular day to shop across all age groups.
However, as retailers gear up for a weekend of strong sales, grappling with excess retail space from inefficient large store formats is dampening Macy’s holiday spirits, along with many other department store retailers.
It’s one thing for department stores struggling with slower sales to close a few underperforming stores here and there, as Macy’s announced it plans to do, affecting 140 stores in all. But that still doesn’t address the underlying problem: that many of the 575 stores Macy’s presumably plans to keep open still have a large amount of excess or underutilized real estate within those stores.
How much is anybody’s guess. What the department store operator chooses to do with the 50 stores it selected Brookfield Asset Management to produce redevelopment plans for over the next two years may offer an better indication.
However, it’s clear that other department stores that the amount of excess real estate inventory in their profitable mall-anchor stores could be substantial – as much as 25%.
Kohl’s Corp. this past week revealed that it plans on limiting the inventory in its stores, stocking its typical 88,000-square-foot stores as if they were only 64,000 square feet.
“That will eliminate the need to just buy product to fill fixtures,” said Wesley S. McDonald, CFO of Kohl’s Corp. on the retailer’s quarterly earnings call. “We’ve done it in over 100 stores already and it has not affected any of the sales results, and driven pretty nice gross margin improvement.”
Kohl’s is planning to implement the same strategy in about 100 more of its stores in time for next year’s back-to-school season. “I think that will allow us to continue to reduce inventory without hurting sales,” McDonald said.
J.C. Penney, Macy’s and Nordstrom’s all said they were either aggressively aligning their inventory plans to reduce expenses, or cutting back the amount of merchandise they stock regardless of store size.
How anchor retailers handle this excess space is going to affect markets and landlords for years to come.
“This could very well be a permanent right-sizing,” said Sara Coers, senior vice president of Pillar Valuation Group in Indianapolis. “I expect department stores as we know them will all but disappear in the long run, and I foresee a significant rise in excess retail space inventory in the next two to three years, as leases signed during the recession reach maturity and retailers make major moves to right-size their real estate inventory and improve profitability.”
Retailers are trying various strategies to use the excess space they have for now, said Jordan Barker, founder and principal of Bark Equities, a retail brokerage and consulting firm in New York.
“Retailers are finding ways to use the excess space to create a positive consumer experience,” since a shopping experience is what is driving in-store sales now, Barker said.
He cited the four-year, $400 million makeover of Macy’s Herald Square store on 34th Street in Manhattan as a prime example of this trend. Macy’s brought in several brand retailers to operate boutiques within its store, including Louis Vuitton, Burberry and Gucci’s. It also added an in-store Starbucks and Stella 34 Trattoria, an Italian restaurant.
Dennis Duffy, managing director of Integra Realty Resources in Washington, DC, sees a similar scenario playing out in other department store chains.
“I can’t see department stores wanting to be on the hook for all of that excess real estate forever,” Duffy said. “Not right away, but eventually I envision anchor space becoming a real estate mall of its own.”
Markets outside major urban markets are already beginning to see this trend on a smaller scale. JCPenney opened 61 Sephora stores within its department stores this year.
“Our new locations continue to generate some of the best grand opening results that we have ever seen,” Marvin Ellison, chairman and CEO of JCPenney said. “We plan to continue pursuing new opportunities through our partnerships with Sephora to develop new ideas and test various prototypes in an effort to maximize the productivity in these smaller stores. In fact, we are currently testing a smaller mini concept store by recently opening a Sephora Collection shop inside a small rural store.”
In that regard, Macy’s new agreement with Brookfield is taking the issuing of addressing excess store space to an extreme.
“Macy’s is great retailer, but due to their remaking the business, today they have a substantial amount of excess real estate in the company,” said Bruce Flatt, CEO of Brookfield Asset Management. “For Macy’s, they’re in the retail business, they’re not in the real estate business. So we should be able to make them more money out of their real estate than they would otherwise receive.”
As a hypothetical example of what might come from the redevelopment opportunities, Karen M. Hoguet, CFO of Macy’s offered an example of one of its typical eight-acre, stand-alone 100,000-square-foot furniture stores. Hoguet said one scenario might be to relocate the furniture store operations back into a nearby Macy’s mall location, and then demolish the furniture store and redevelop the site with a denser mixed-use project, for example, 100,000 square feet of retail, a new parking garage and a mid-rise residential tower.
Of course, another aspect from the current excess capacity of anchor stores is the future downsizing of department stores altogether.
Several retailers, such as Target, have begun opening smaller sized stores, primarily in densely populated infill areas. This past quarter, Kohl’s opened six 35,000-square-foot prototype stores, about 60% smaller than its current average store size.
“The strategy there had two prongs to it. One was pretty straightforward, which is, it gives us new points of distribution in smaller markets where we can’t make the economics of a larger store work, and makes our ability to reach customers more effective,” said Kevin Mansell, chairman and CEO of Kohl’s Corp. “We’ve put a stake in the ground, that brick and mortar is really important as an omni-channel retailer, both to have a place in the customer’s mind, but also as a point of distribution.”
The second prong of the strategy is equally straightforward, Mansell added: If digital sales are going to continue to grow as a percentage of overall sales, then the retailer is simply going to have to operate out of smaller stores.