Feb 23

A ton of bricks

Not only are this year’s expanding retailers scrambling to keep pace with the fastest-changing industry landscape in history, they are also squaring off against increasing numbers of global competitors. Absent from most of today’s business models are any expansion-by-saturation strategies and the old cookie-cutter store formats; in their place are microdemographic site selection, creative use of smaller spaces and multichannel digital presentations.

Armed with these new approaches and working from a relatively robust 2014, retailers and restaurateurs are projecting their expansion visions and initiatives worldwide, observers say. “The world of retail is changing quite dramatically,” said Michael Hirschfeld, senior vice president of national retail tenant services at third-party mall management firm JLL. Improvements in distribution channels and web offerings are giving tenants broader geographic and branding opportunities, he says. “Some of our smaller, emerging clients may go into the U.S. West Coast with their first stores, but may choose London for their second, and Tokyo for their third.”

RBC Capital Markets said in November that the 2,000 retailers in its database indicated they would open nearly 78,000 stores over the following 24 months — an increase of 0.7 percent over the figures projected at year-end 2013. The retail sector likely to see the greatest jump in store openings over the period is men’s apparel, which boasts nearly 400 stores in the pipeline, an increase of about 3 percent. Lingerie shops also have some ambitious expansion plans, with 76 additional stores in the planning stage, similarly an increase of nearly 3 percent.

The store openings include a growing number of online retailers moving into their first physical stores, according to retail consultant Jeff Green, who heads an eponymous firm in Phoenix. Among these is, which will roll out its brick-and-mortar concept in New York City, in -midtown Manhattan, this year, perhaps to be followed by a second one, in Miami. Birchbox and Nasty Gal, which opened their first stores late last year, are at the head of an expanding list of online retailers that have in recent months been leasing stores for the first time. Brick-and-mortar remains primary, but “the way to develop a successful brand these days is through multiple distribution channels,” according to Green. Meanwhile, most major retailers continue to trim back their store sizes, he says. “Everyone is downsizing — anybody who has upsized has realized they have made a mistake,” he said. “Even Walmart is cutting the size of supercenters.”

Fast fashion remains fast growing. The ultimate goal of Los Angeles–based Forever 21, which operates about 600 stores internationally, is to double over the next three years, according to CEO Don Chang. Some of that growth will manifest itself in the form of the company’s F21 Red concept, an ultra-bargain-priced, smaller format (11,000 to 18,000 square feet) that was tested in some U.S. markets last year. Spanish fashion label Desigual is another chain with desires to double in size every four years or so, with Europe and emerging markets in view. Japan’s Uniqlo, which operates about 1,400 stores across 16 markets worldwide, will continue its rapid expansion pace, with ambitions to open about 200 stores outside Japan by late this year. The chain continues a massive incursion into China, where it already has roughly 300 stores, including 50 in Shanghai and almost 40 in Beijing. Now second-, third- and fourth-tier Chinese cities are on the agenda. Uniqlo is set to open at least eight stores in Thailand and two in the Philippines. In the U.S., Uniqlo will open a flagship in Chicago’s affluent Gold Coast neighborhood, a regular-format store at Santa Monica Place and two Boston-area stores, plus additional stores primed for California, Connecticut and New Jersey. Uniqlo is also looking at sites in Toronto, Vancouver and other Canadian cities, according to published reports.

H&M is out to boost its store-opening campaign this year with almost 400 international stores, including some first-time locations in India, Peru, South Africa and Taiwan, plus openings in about 10 new markets on the online side. In the U.S., H&M has stores pegged for DDR Corp.’s The Pike at Rainbow Harbor, in Long Beach, Calif., and for a few other sites. Meanwhile, sister brand COS opened its first Australia store, in Melbourne, last year and has eyes for openings in Brisbane and Sydney this year. Spain-based Zara mapped out nearly 400 new locations worldwide, according to published reports, and both it and Uniqlo are looking hard at Hawaii, according to Colliers International.

Iconic U.K. toy chain Hamleys, now operating in India and Russia and across some Asian and Nordic countries, is mulling a U.S. entry, says Hirschfeld. Hamleys is considered a year-round experience, so it should fit in well with landlords seeking anchors that are consistently engaging, he speculates. “These days you can get almost anything online, so when you walk into a center, it has to be more than just stores in a row to keep you coming back.”

Food-and-beverage retailers are expanding at an unprecedented pace, says Roy Higgs, president of Annapolis, Md.–based planning-and-design firm Roy Higgs International. Denmark-based coffee, juice and sandwich seller Joe & the Juice is opening shops across Europe and also plans to come to the U.S., Higgs says. Tutti Frutti, a California frozen-yogurt concept that operates 850 shops across 48 countries, will be opening in various places around the world this year, while Italy-based Eataly sets about expanding in the cities of Los Angeles, New York, Philadelphia and Washington. Japan’s Yo! Sushi will be setting up 50 stores across the U.S. over the next five years, including openings in New Jersey and in Tampa, Fla., this year.

Retail development remains spotty in Southern California, according to Robert Haas, partner and co-founder of the California-based Cypress Retail Group, “with more projects being discussed than actually built at this time.” Restaurants are turning to the ground-floor spaces of urban multifamily projects for their growth prospects. Among those expanding in the Los Angeles area are Paul Martin’s American Grill and California-based craft beer and burger chain Eureka Burger, which is opening restaurants also in Dallas and Austin. “Restaurants in general are sought after because they’re still some of the best rent payers,” said Doug Jerum, a partner of Ferrara Jerum International, a Rochester, N.Y.–based retail real estate consulting firm.

Shopping centers are not leasing only to first-comers. “The best developers curate their centers and do not simply fill space,” said Anne Mastin, executive vice president of real estate at Columbus, Ohio–based Steiner & Associates. “It takes long-term thinking and a well-thought-out strategy.” More than ever, shopping center owners must think strategically, she suggests. “They have to focus on creating reasons for the consumers to spend time there.”

Cult favorite In-N-Out Burger is entering San Antonio as part of its Texas rollout, while Tampa, Fla.–based chicken quick-serve chain PDQ spreads out into North Texas and Las Vegas, according to the Dallas-based Weitzman Group. Idaho-based potato specialist Boise Fry Co. has opened restaurants in Portland, Ore., and is also seeking out Texas sites, specifically in College Station, San Marcos and Waco. California’s Pieology is making plans for at least 20 units around the U.S., and Utah-based Kneaders Bakery & Cafe is expanding into Colorado and Texas. Tokyo Joe’s, an organic Asian-food restaurant chain based in Colorado, will be branching out of that state to Dallas–Fort Worth, San Antonio and Oklahoma City, according to Weitzman. “There’s so much activity in fast-casual restaurants, due largely to the growing Millennial population,” said Jason Baker, a partner at Houston-based Baker Katz. “We recently negotiated five leases with Chipotle.”

Starbucks is serving up two new concepts this year: an “express” shop that focuses on mobile orders and a digital-pay platform, and a 15,000-square-foot Starbucks Reserve Roastery and Tasting Room format that rolled out in Seattle last year. The company is also ready to introduce 1,600 new shops worldwide this year.

While U.S restaurant concepts expand selectively cross-border, several internationals are coming over here. Di Frabo Ristorante Italiano, an Italian concept from Monterrey, Mexico, is poised to bring out its first U.S. eatery early this year at San Antonio’s Dominion Ridge. There will be other Mexican imports, including Cinépolis Luxury Cinemas with its high-end dining environment, and entertainment concept KidZania, which is also laying plans for Britain, Russia, Singapore and the Middle East.

International retailers are eyeing the U.S. because they perceive it as healthier than most other countries, says Hirschfeld. “A lot of U.S. companies are beating earnings, and the metrics of unemployment and housing are improved, which is attracting new brands.” In fact, European luxury retailers “are now more aggressive in the U.S. than anywhere in the world,” he said. Paris-based luxury retailers Cartier, Christian Dior and Hermès, and U.S.-based Tom Ford announced that they will join the tenant roster at OliverMcMillan’s River Oaks District, still under construction in Houston. U.S. luxury chain Michael Kors says it wants to open 45 stores in North America this year and 10 in Japan, according to published reports.

International expansion
Despite general softness in Europe, global investor confidence hit a nine-year high in November, according to a Bank of America Merrill Lynch survey in which nearly half of those polled say they expect the economy to strengthen this year. Attendees at the International MAPIC Conference, held in Cannes, France, last year, “seemed overwhelmed at the quantity and quality of worldwide development activity,” Higgs said.

J.Crew Group, which expanded to Hong Kong last year and is now looking in Beijing and Shanghai, says it will be opening outlets in Paris and other European capital cities over the next few years. Upscale British department store chain John Lewis says it plans to go from its current 40 stores to nearly 70 by 2023.

Consumers are not back in the European markets in force yet, says Lourens Verweij, global manager of Europe-based Ebeltoft Group, a global alliance of retail consultants. “Retailers who want to increase market coverage are simply increasing their total sales floor in existing and new markets,” he said. Because most mature markets are at overcapacity, retailers are seeking new-store expansion abroad. One exception is the value retailers, such as the Netherlands’ Hema, which is opening stores in France, the U.K. and Spain, or Ireland-based Poundland (under its Dealz banner), which sells most items for 99 cents. Bikini Berlin and Milaneo Stuttgart are toying with new mall formats in Europe. Italy is less saturated, with Italian Mondadori bookshops aiming to grow from 600 to about 1,000 stores within three years, says Verweij. As in most of the West, technology is driving change in European retail, which ultimately creates better service and better experiences, he says. “Experiential and fusion retail will become the new standard, and retail locations will emerge from transactional locations to ‘attractional’ and be playgrounds for products and brands and hangouts for the customers.”

In Australia, Ikea is set to open what it calls a “next generation” store near Melbourne and an additional Queensland location, both of them next year, for an eventual total of nine stores across that country’s eastern coast.

Meanwhile, Lotte, a South Korea–based multinational grocery and mass-market retail conglomerate, remains bullish on China, Indonesia and Vietnam, according to Don Jeong, president and CEO of Thomas Consultants Korea. Lotte Mart has expanded from one overseas supermarket to a total of 146 at year-end and is planning for a combined 700 supermarkets by 2018 — which would make it Asia’s largest supermarket chain. E-Land Group, a South Korean apparel manufacturer and retail chain, is rapidly expanding too, especially in China. “Their brands are mid-to-low-level, which I believe explains why the massive China market responds to them,” Jeong said.

Increasingly, retailers are eyeing the so-called MINT markets (Mexico, Indonesia, Nigeria and Turkey) and portions of sub-Saharan Africa, according to published reports. South African retailers Woolworths and Shoprite are helping to lead Sub-Saharan Africa’s shift to modern retail with expansion into Botswana, Nigeria and Namibia.

Bookstores, a flagging brick-and-mortar category in the U.S., are growing in other countries. Gramedia Books has plans for 21 additional Indonesia stores this year, primarily in Java through three new formats: Gramedia Kids, Gramedia Teeny Teensy and Gramedia World.

Two Chilean retailers — Falabella, which is South America’s largest department store, and the multiformat Cencosud — are planning sizable expansions throughout Colombia, Peru and Brazil. Falabella’s Sodimac Homecenter confirmed that it will enter Uruguay with a pair of $20 million home-improvement stores this year and two more next year. Madrid department store chain El Corte Inglés and Walmart aim to enter Lima and other Peruvian cities this year. Aéropostale is expanding into Chile too, in partnership with Sociedad Comercial Grupo, to open P.S. from Aéropostale stores and some core stores this year. Chile’s increased consumer affordability, low jobless rate and demand for international brands helped place it at No. 1 in the A.T. Kearney global retail development index. China rose two spots to No. 2, followed by Uruguay, the United Arab Emirates and Brazil.

Rio de Janeiro–based mass-market retailer Lojas Americanas says it will open 800 stores in Brazil over the next five years with an investment of 4 billion reais (about $1.5 billion).

There has been some trimming also. Walmart pruned its portfolio in Brazil and China, and Tesco has closed some China stores. Spooked by recent instability, fashion chain New Look closed 20 stores in Russia and six in Ukraine and will be focusing now on China and Poland. Finnish department store retailer Stockmann is among the chains that have frozen plans to open in Russia. Wendy’s has also exited that country. On the other hand, fashion retailer Benetton, with 6,500 stores worldwide, says it will be adding about 40 stores in Russia over the next three years. And Pizza Hut, McDonald’s and KFC have not backed away from ongoing Russia expansions; neither has Starbucks, which controls 6 percent of the coffee market there.

United Arab Emirates–based LuLu Hypermarkets has plans to open roughly 50 larger-format stores over the next two years in Oman and Qatar, according to A.T. Kearney. The Middle East and Asia are picking up the retail construction slack, Higgs says. Work on the 8 million-square-foot Mall of the World, in Dubai, is under way. And Higgs’ firm is designing the retail portion of the mixed-use Metropol Istanbul project going up as part of the Istanbul International Financial Center.

Grocery, drug and c-stores stocking up on sites
Even as competition from Sprouts Farmers Market and other specialty grocery chains heats up, Whole Foods is expanding aggressively, including a push in Canada. The retailer’s November opening in Ottawa and a Calgary store slated for this year — its first two units outside Toronto and Vancouver — are forerunners of up to 30 potential outlets in that country. The chain is aiming to expand as fast as ever — with about 40 stores planned for this year and at least that many again for next year, according to Co-CEO Walter Robb.

In the Los Angeles area, where the economy grew at a modest 2 percent last year, some of the hottest retailers are specialty grocery chains. “Southern California consumers have a desire to eat organic, farm-to-table food,” Haas said. Locally based Bristol Farms’ Lazy Acres brand and Sprouts are both actively seeking sites there, he says. Superior and El Super, both of which occupy several former Albertsons buildings, lead the brisk expansion of Hispanic grocery stores in Southern California, says Scott Burns, president of Los Angeles–based Wilson Retail Group.

In Dallas–Fort Worth, roughly 40 grocery stores are opening or ready to open, according to Marshall Mills, president and COO of the Dallas-based Weitzman Group/Cencor Realty Services. Among them are WinCo, which is new in that market and whose stores typically measure about 85,000 to 95,000 square feet. The Dallas–Fort Worth market is set to introduce about 3 million square feet of new space this year, up from 2 million last year, according to the firm. “We’ve seen rental rates firm up,” said Mills. In the similarly dynamic Houston market, HEB and Kroger are flexing their muscles with plans for about 15 to 20 combined stores over these next 18 months, says Baker. Whole Foods is also planning four new stores in Houston for this year.

Germany’s Lidl, Europe’s largest discount supermarket chain, with some 9,000 stores, had wanted to enter the U.S. this year with 100 stores but has delayed that plan until 2018 after the departure of two top executives. The chain is going forward, however, with expansions in Lithuania and Serbia. Germany-based Aldi’s acquisition of Bottom Dollar Food last year was part of a strategy to bring out nearly 700 new U.S. stores by 2018. Aldi opened about 130 U.S. stores last year.

For the fiscal year ended Jan. 31, 2016, Walmart is set to roll out nearly 30 million square feet worldwide, off from the previous year’s roughly 34 million square feet, owing to a moderation in large-format store growth and accelerated e-commerce investments.

Fresh Thyme Farmers Market is poised for about 60 stores in the Midwest by 2020, while Sprouts is looking at opening 16 this year, according to Retail LeaseTrac and Chain Links Retail Advisors. Public, Safeway and Save-A-Lot are planning about 30 each this year, and Harris Teeter, Walmart Neighborhood Market and Grocery Outlet are on track for about 20 each.

Costco is one year into its plan to open 150 warehouses over a five-year span. The U.S. will get 55 Costco stores, with the balance spread between Canada and other international markets. Half those openings are pegged for first-time markets.

Walgreen, now whole owner of Swiss-based Alliance Boots, is anticipating a net increase of 60 to 120 U.S. stores in fiscal 2015, following a net decrease of 273 the previous fiscal year. CVS says it will continue to open the popular in-store MinuteClinics at nearly all its stores this year.

On the convenience-store front, John Lewis sister company Waitrose is preparing for about 200 of its meals-to-go-focused Little Waitrose convenience stores in the U.K. by 2020. U.S.-based QuikTrip, which opened its 700th store last year, is working on a large-format travel center in Muskogee, Okla.
QuikTrip, Casey’s General Store and Wawa brought out about 45 stores each last year but have announced no plans for this year, while 7-Eleven says it will open its first Middle East store in Dubai, United Arab Emirates, in mid-2015 — one of 10 slated for that market.

Evolving U.S. expansion
E-commerce retailers continue to test demand with brick-and-mortar stores, as evidenced by reports that is set to open its first physical store, on the ground floor of a 470,000-square-foot Vornado Realty Trust–owned building in New York City. Amazon leased the entire building for offices and same-day shopping fulfillment. The e-commerce giant also reportedly has tentative plans for a Miami-area store, where it recently leased a fulfillment center. Meanwhile fashion-forward Nasty Gal opened its first brick-and-mortar store in Los Angeles, last year, and beauty service Birchbox also opened its first, in New York City. “We’ll see retailers with both strong online channels and physical storefronts continue to flourish,” said Higgs. “The general trend is that consumers are shopping online, but making actual purchases in-store, where they can interact with products first-hand.”

Though the worst of the mass closings may be over, “watch list” retailers Barnes & Noble, JCPenney and Sears remain iffy, and more mergers like that of OfficeMax with Office Depot seem imminent, says Green. Redundant store sites from that merger slated for closure next year will have some ready replacements, he says, including nonretail users. One such, a 60,000-square-foot former grocery space leased by John Peter Smith Health Network, was revived in Arlington, Texas. “The medical industry continues to realize the benefits of retail space,” said Mills. “Some long-vacant box spaces are also being repurposed for charter schools, and that’s adding a lot of traffic to older centers.”

Previously undeveloped shopping center end caps and pad sites are filling new-space demands, along with the lobbies of office buildings and such mixed-use projects as Cencor’s West Plano Village. Increasingly, arts districts, meatpacking and manufacturing districts and other urban sites with historic buildings are being retrofitted for retail, Hirschfeld says. “They’re doing some amazing installations,” Hirschfeld said. “They want the customer to remember their experiences.”

The fitness segment is filling an increasing amount of in-line space in the Northeast: Blink Fitness, LA Fitness, Planet Fitness and Orange Theory Fitness spas among them, says Jerum. In the Los Angeles market, the most-active operators besides L.A. Fitness and Planet Fitness include Crunch, Fitness 19 and UFC Gym, says Burns. Gold’s Gym is hatching plans for about 70 clubs nationally this year, according to Crittenden. Vitamin sellers are surely being energized: GNC is bringing out about 200 U.S. stores this year, and this after opening 250 last year.

Hobby Lobby says it will open about 70 shops this year, while Ross Dress for Less is out to match its last year’s total of 75; DD’s Discounts is set to put out roughly 20.

“Houston is a top-performing market for retailers, even those retailers that aren’t doing particularly well elsewhere,” Baker said. Houston-based Academy Sports, for one, has been growing quickly in its home region “due to the absence of Dick’s Sporting Goods here.”

A consensus forecast by the Urban Land Institute says retail vacancies in the U.S. will probably decline from 11.6 percent last year to 11.2 percent this year and 10.9 percent next year. Rent rates will rise by 3 percent both this year and next, on the heels of a 2 percent jump last year, the forecast says. “Due to a lack of meaningful retail development and the volume of space absorbed over the last few years, quality chain-retail space will become more scarce, especially for anchor tenants,” said Burns. “This will result in a more competitive leasing environment and an increase in lease rates for existing space; new development for single-level retail remains virtually non-existent with the exception of small unanchored projects at desirable intersections.”

Retailers seem to be bent on expanding, but they continue to do so cautiously in most of the U.S. — “particularly in any market that’s not a must-have,” Jerum said. Mastin concurs: “If you don’t have the ‘A’ center in the market, it will be very difficult to attract the best retailers,” she said. “Retailers overcame a soft first quarter to generally finish 2014 with some momentum.”

That should lead into a good 2015, as the U.S. economy remains stable, fuel prices are down, and the market is up.

“It’s a bright day dawning for shopping centers and for retailers in emerging markets,” said Hirschfeld. “They’re as positive as I’ve ever seen them.”