Village Solutions

Pedestrian Thoughts

Whole Foods

Sales at Whole Foods continue to slide with sales down 4.8% in their last quarter.  The upscale super market is facing new competition from the major chains such as Kroger and Safeway and has a core shopper problem that buys items rather than an entire cart of goods.   Likewise, many of their core shoppers have switched to cheaper goods within the store and to lower priced retailers such as Traders Joe.

On top of competitive and consumer problems the company is trying to swallow a pill of bad real estate decisions.  A combination of too many stores in marginal markets; markets that are too small for a new generation of larger stores up to 80,000 square feet; and high rents have significantly reduced profits.  In response the chain has slowed new store openings from a planned 25-30 for 2009 but openings have been scaled back to 15.

More importantly, Whole Foods has begun a major repositioning program where it is moving away from gourmet foods to natural food and healthy eating.  Likewise, founder John Mackey has vowed to remove the junk food from his store.  Makes you wonder how he is going to fill up all of those oversized stores acquired in the last few years.

J.C. Penney

In recent years J.C. Penney has tried to upscale its stores to compete for a higher share of department stores sales, especially those of Macy’s.  Will it work?

In addition to fighting Kohl’s head-on, the store often is being squeezed on the low side by Target and Wal-Mart and on the high side by Macy’s.  In response the company has engaged name fashion designers to create proprietary lines and formed a partnership with Sephora to open mini-cosmetic boutiques across the country in Penney stores.

Recent research found that consumers thought of Penney as a place where their mothers or grandmothers shopped and they did not know that a fashion upgrade was underway.

Aloft

I recently stayed in Starwood’s new Aloft Hotel in Chesapeake, Virginia.   As expected I arrived to find a hip entry lobby with an island reception desk, concrete floors, open industrial ceilings and a thriving little bar inhabited by a couple traveling sales men and several career service men from nearby Norfolk.  Perhaps it was the suburban location adjacent to a Residence Inn, but the whole arrangement seemed a little contrived and misplaced, which brings me to a point.  Commercial developers seldom really understand the underlying principles of a trend and often respond to a shift in consumer attitudes with misplaced embellishments that cater to an attitude about a trend but far from the essence of a trend.

I couldn’t help thinking this was the case in suburban Virginia.  Perhaps if the location was downtown Seattle, I would have been more forgiving but my Aloft experience was not as lofty as imagined.

Other examples include adding the words village, commons, green, street, town, and the like to the name of every new shopping center, along with the addition of a simulated town squares and the proverbial village green.  While the name evokes memories of another era, the physical manifestation often incorporates bits and pieces of a variety of styles and liberally draws from different eras with little understanding of why those elements were created in the first place.  These different styles, icons, and embellishments result in a confusion of place and only serves to cloak the true essence of the commercial marketplace which it was intended to be in the first place.

I suspect my impression of Aloft may have been a little different if I was just off of Lincoln Road in Miami or on University Avenue in Palo Alto, but sandwiched in between the Residence Inn and Holiday Inn Express and a sea of parking just did not seem to match-up with the expectation, with one exception – being the $99.00 room rate, which was the lowest of the half dozen or more hotels in the area.  Then it occurred to me, perhaps Aloft has been positioned at a price point that may only work in low rise suburban areas and  cannot support downtown real estate costs unless located in a fringe area.

Chinese Consumers

Many experts predicted that China would enter into a recession after the 2008 Olympic Games as a result of the staggering investment to stage the games, and these predictions were before the collapse of the subprime and capital markets in general.  Likewise, the Chinese economy has been largely dependent on its exports which have fallen as a result of the global slowdown.  On top of all of those problems it has a citizenship which would rather save than spend.  But, to the surprise of many, China’s GDP is projected to grow anywhere from 7% to 8%. How are they doing it?  The Chinese consumer is driving growth.

Luxury goods in a consumption slump

The first recession in the luxury-goods markets in nearly 20 years has forced companies like Bulgari, Burberry, Cartier, Montblanc and other high-end labels to modify their traditional focus on glamour and glitter. Luxury goods sales dropped worldwide by 15%-20% in the first half of 2009, the first time the sector has recorded an annual sales decrease since Bain began tracking it in the early 1990s. Christian Lacroix and Escada have both filed for bankruptcy in response to the times.  Bulgari has embarked on broad cost-cutting that includes shelving plans for new stores, except in locations where leases have already been signed. Burberry has announced a similar initiative, while Richemont, the owner of Cartier and Montblanc, is limiting openings to a few fast-growing markets in the Middle East and Asia.

The consumer is still buying luxury, they have just moved to entry level goods and surprisingly to high end items that evoke craftsmanship, exclusivity, and one of a kind, while leaving the brands in the middle in trouble.  Overall, Brioni suits in the $4,000 range are still selling as well as are Zegna suits in the $900 to $1500 range. Getting caught in the middle is the $2,000 suit house brand suit at Saks and Bergdorf.  Ties are selling at $100, but not $150; shirts are selling at $200, but not the $350 Borelli’s.

Internet Sales

Internet retail sales still only represent 6% of all retail sales, but that is more than $156 billion, a whopping number when you consider that auto sales, lumber, gas station sales, and groceries are all part of retail sales.

Housing market still has problems

Homes in lower priced markets have picked-up in recent months.  Sales of new homes and existing homes rose for three consecutive months through June 2009, the last month that data was available.  However, home prices remained 17% below those of a year earlier.  Fueled by the $8000 tax credit for first time buyers and increases in low interest loans backed by the FHA, Fannie Mae and Freddie Mac recent homes sales have been up and as much as 70% in Las Vegas.  But the housing market on the higher end remain slow.  While the high priced market for homes of $750,000 or more make up less than 5% of the total housing market, they contribute a disproportionate share of retail purchases.  The top 10% of U.S. Households in terms of income account for 20-25% of all retail purchases.

Our research shows that a household with an income of $100,000 or more typically spent 2-3 times as much as a household with an income of $50,000.  Additionally for every $100 decrease in home value, consumers tend to spend $5-8 dollar less on retail purchases.  Likewise, it is the housing at the top end of the market which is facing the largest decreases in home values with projected total reductions expected to be as much as 40% from home value peaks in 2007 to a bottom projected to occur in late 2009 or early 2010.

With tighter credit controls that require down payments of 20-30% people in general are trading down to lower prices homes.

Based on the above, we do not project a full recovery of the retail market until 2012.

Golden age of commercial development

Is there a golden age of commercial development on the horizon?  Not yet? Actually, a new age of failed developments will appear over the next several years as the consumer refuses to move back to conspicuous consumption, and as the global capital markets absorb a round of foreclosures, walk-a-ways and  give-backs.  In response the media will be quick to chronicle failed commercial properties including functionally obsolete malls, vacant strip centers and dismal lifestyle centers, and poorly planned lifestyle centers.  But while the world laments the failure of many projects,   the seeds of financially viable and dramatic new projects will be planted in China, Brazil, India and the Middle East. Look to our predictions of an era of 100 story towers, 21st century versions of Rockefeller center where art, commerce, and culture are produced side by side.  Look for entirely new visions of mixed-use projects, eco developments and agro-commercial resorts and many others becoming the benchmarks of a golden age of development.

Should the mall survive?

Not long ago, the concept of an enclosed mall included a vision of a better main street with its year round climate controlled common areas filled with fountains and lush landscaping.  One national developer of mall always strived to lease to the best local jewelry store and even encouraged the relocation of his symbolic sidewalk clock to the center court location in the new mall.  Over the years, the mall included the notion of Muffy and Buffy shopping multiple national chain stores, all primarily new to the market followed by lunch in a mall café.  As teens acquired their own cars, jobs in the mall, and liberal curfew hours the mall became the place to be. But today, with Twitter, I-phones, working mom’s, and over expanded chains the mall has lost its uniqueness and consumer appeal – in many cases.  Interestingly enough it is the non-mall discount stores such as Wal-Mart, Ross, TJ Maxx, and Marshalls that are doing well in this economy while once the darling of the mall, Abercrombie, is consistently turning out 20%+ decreases in sales.  Likewise, the back bone of the mall, the department store, is now only a shadow of their former selves.  Which raises the question, should the mall survive and will it?

Tags: economy, market, Retail, sales

This entry was posted on Tuesday, September 8th, 2009 at 9:09 am and is filed under Retail. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.