Wednesday, February 20, 2013

Dealing With the 900 Lb. Gorilla

It’s hard not to notice a growing trend toward retailers going into downsizing mode. The current inclination of larger brick-and-mortar retailers is to develop smaller prototypes; simply put, big stores are getting smaller. There are several reasons for this – higher unemployment, the economy in general, changing technology - but the biggest factor has a great deal to do with the large, menacing creature mentioned in the title – the looming, gargantuan presence known as e-commerce, about which more in a moment. This downsizing trend is especially pronounced in certain merchandise categories, from office supplies, electronics and appliances, to clothing and accessories and, perhaps most dramatically, books.

Office Depot announced last November that in the next five years 500 stores would be downsized or relocated to smaller 5,000 to 7,000 square foot units, or mid-sized 15,000-17,000 square foot prototypes. Staples announced in September that it was shrinking its average store size from 24,000 square feet to 15,000 square feet. Just this month Office Max indicated it will debut smaller prototypes of 5,000 to15,000 square feet, a fraction of the size of their current stores, which run as large as 30,000 square feet (as I write this, there’s news in the industry press about a possible Office Max/Office Depot merger). As noted, higher unemployment has had a role in the downward trend of the office supply category, but the introduction of tablets and other handheld devices, which is paring demand for personal computers, printers and other office accessories, is also taking a toll on this sector. While the Commerce Department doesn’t specifically report e-commerce sales of office supplies, you can be sure they’re significant.

Another brick-and-mortar store type under very severe pressure is electronics and appliances. The demise of Circuit City is no better example. Smaller chain Ultimate Electronics had no better fate, lasting less than a year in New England. And now, even with considerably less physical store competition, Best Buy is struggling to survive. Similar to office supply stores, the trend toward tablets and smaller hand held devises in lieu of personal computers is crimping profits. Regarding clothing and clothing accessories, Kohl’s announced as far back as 2011 that it was reducing its prototype from 90,000 square feet to 60,000 square feet. As part of that announcement, it said that 30 of its next 40 stores would be the smaller prototype, a size it had been testing in smaller markets since 2002.

The greatest damage, however, has been inflicted on brick-and-mortar book retailers, most notably Borders, which of course is no more, and Barnes & Noble, which recently announced that it would shrink its store base from 689 stores today to something in the neighborhood of 450 to 500 stores within a decade.

As noted above, there have been several reasons for the downsizing trend, but by far the biggest is the exponential growth of e-commerce, represented most dramatically, although not exclusively, by that 900 Lb. Gorilla called Amazon. Online sales of books and magazines exhibited 120% growth in the 2005 -2010 period. In 2010, excluding autos and pharmacy, 15% of all online sales were in this category, second only to clothing and clothing accessories at 20%. And who buys a CD or DVD at Barnes & Noble or Best Buy anymore when you have digital offerings available through iTunes, Pandora, and the like? Between 2005 and 2010, e-commerce sales in music and videos grew a whopping 224%, a stronger percentage jump than any other merchandise line.

Other categories are not immune from the 900 Lb. Gorilla’s King Kong-like rampage. Another burgeoning e-commerce category of note came as a surprise to me. With the exception of music and video, this category grew more than any other, 190% between 2005 and 2010. The category is sporting goods. After seeing that growth statistic, I was curious to see how Dick’s has been doing of late. Based on fiscal 2011 results, the sporting goods retailer reported a 2.0% consolidated same store sales increase – which includes an 0.8% increase in Dick's Sporting Goods stores, a 4.3% increase in Golf Galaxy - and a 36.4% increase in e-commerce! That’s a pretty clear statement about the state of retail today, and about the relationship between actual stores and online stores.

Now, before anyone jumps off any bridges, let me be clear: the shopping center industry is not disintegrating any time soon. There will still be stores, and plenty of them, and we’ll see new configurations of retailers. For example, as a result of the fallout of large format booksellers, the American Booksellers Association recently announced that its ranks had grown by 43 stores in 2012, as independent shops sprouted up from coast to coast. Six of those new stores are expansions of existing independent businesses, which would indicate that these smaller operations are not merely able to stay afloat, but flourish even as larger formats fade away.

Perhaps the best news in this regard is that the enforcement of a state sales tax on online purchases is getting closer, with members of both parties in Congress sponsoring legislation this month that could potentially resolve states' decades-long struggle to tax businesses beyond their borders – a major step toward eliminating a key advantage for e-commerce merchants such as Amazon. This will assuredly curtail some of the double digit growth in e-commerce, and be a sizeable competitive boon to brick-and-mortar retailers. Also, as I write this, Best Buy has announced that it is extending its price-match guarantee, and will now match advertised prices from brick-and-mortar rivals as well as 19 major online competitors, including Amazon – a step toward curtailing "showrooming”. With an aging population and the propensity of boomers to spend more and more online purely for convenience, retailers (for the sake of developers as well) need to take direct aim at the 900 Lb. Gorilla.

Bob Sheehan, Vice President of Research

Company News

New Employee: Carla Richman has joined the Burlington, MA office as Accounts Payable Data Entry Clerk, transitioning from the Research team. Previously Carla worked for with Fresenius Medical Care in Waltham, MA. New Business: The Leasing Team has added two new Stop & Shop properties to its portfolio: Old Connecticut Path, a 53,000 SF center in Framingham, MA. Leasing Associate Dave Hough will handle the assignment; and Exeter Shopping Center, a 74,400 SF center in Exeter, New Hampshire. Vice President of Leasing Don Mace will handle the assignment. Lynne Cohen-Friedman will handle leasing for 1247 Centre Street, a 695 s/f space in Newton Centre, MA. A lease has been signed with Whole Foods Market at Westford Valley Marketplace in Westford, MA. Don Mace brokered the deal for the space currently occupied by Market Basket. A 2016 opening is projected. Westford Valley Marketplace is a 142,000 s/f center whose tenants include Starbucks, CVS, Olympia Sports, Radio Shack, The Paper Store, Chipotle Mexican Grill, Koko Fit Club, and others…The Property Management Team has added 4 MA properties to the portfolio: 100 and 200 Ames Pond Drive, Tewksbury, both part of Ames Pond Corporate Center; and 600 and 800 Federal Street, Andover, both part of Woodland Park Corporate Center. Leggat McCall Properties is the Asset Manager. Kelly Oyekoya is the Property Manager.

Industry News: National

US chain store comp retail sales for January rose 4.5% year-over-year as measured by the ICSC's tally of 22 major retail chains, the strongest increase since September 2011 (5.5%). Among merchandise categories, Department Stores and Luxury Stores led, each with a substantial gain of 11.4%. Apparel followed with a 6.7% gain. Wholesale Clubs rose 4.0%, Discount Stores were up 3.1%, and Drug Stores were up 2.9%. Among individual retailers, Gap gained 8.0%, and Limited rose 9.0%; Costco was up 4.0%. Nordstrom was up 11.4%; Target gained 3.1%, and TJX rose by 3.0%. Macy’s gained 11.7%, and Kohl’s rose by 13.3%; Rite Aid was up 0.3%, and Walgreens rose 3.7%.

Industry News: Accelerating

Cabela’s plans to open two new stores, a 100,000s/f store in SC in spring 2014 and an 85,000 s/f store in MN in fall 2014…Dunkin’ Donuts will open 330 to 360 net new US restaurants in 2013 as part of its long-term goal of more than 15,000 restaurants in the US alone. Dunkin' Donuts opened 291 net US locations in 2012…Dollar General Corp. will open 635 new stores in 2013, and relocate 550 stores...Auntie Anne's projects opening 100 new US stores throughout 2013…Five Below will open 60 stores this year, including its first locations in Texas. With the addition of these stores, Five Below will operate approximately 300 locations in 19 states, from New Hampshire to Georgia along the East Coast to Illinois and Missouri in the Midwest…The 27-unit chain Ground Round will boost its unit count by almost 50% over the next several years, with about 40 locations planned by 2015…Starbucks will open approximately 1,300 net new stores globally. About 600 of the stores will be in the Americas, with the majority in the US...Harris Teeter will open 9 new stores during the remainder of its 2013 fiscal year, complete 8 major remodels and reopen 1 store in Washington, DC that was damaged by flooding. It operated 211 stores as of Jan. 1...99 Cents Only Stores will open six stores during the fourth quarter, with most slated to open in CA…Quaker Steak & Lube is on track to open 17 new restaurants in 2013 in Texas, South Dakota, South Carolina, New Jersey, Pennsylvania, Wisconsin and Florida, among other states. The company has nearly 60 locations to date...Jos A Bank plans to add 200 stores to its existing lineup of 602. About 50 of those are slated to open in 2013…Blackstone Group LP agreed to buy a majority stake in 40 US shopping centers from UBS AB property funds in a deal valued at about $1.1 billion. Blackstone is adding retail properties as rents and occupancies rise...GNC will open approximately 150 net new US stores in 2013, along with 30 net new franchise locations. It also will open 30 net new GNC-Rite Aid store-within-a-store locations. At year end 2012, GNC had more than 8,100 locations, of which more than 6,100 are in the US.

Industry News: Decelerating

Magruder’s Supermarkets, which has operated food stores in the Washington, DC area for more than 130 years, will close some or all of its 5 stores shortly.  Magruder’s was founded in 1875, and for years was recognized as one of the region’s leading food discounters. It operated as many as 10 locations in 2005 but closed several in recent years…Delhaize Group closed 33 under-performing Sweetbay stores in Florida  as part of a broader reorganization plan. Sweetbay operates 72 stores after the closings…Dish Network, owner of Blockbuster, will shutter about 300 US stores in the coming weeks, leaving the chain with some 500 US locations. The closures will effect underperforming stores or those nearing the end of their lease. Specific locations have not been announced. Dish acquired Blockbuster and about 1,700 stores in a bankruptcy sale in 2011. It closed about 500 Blockbuster stores last year...Barnes & Noble will close a third of its stores in the next 10 years. As of January, the company operated 689 stores, and a separate division of 674 college book stores…Bob Evans Farms will sell its Mimi’s Café restaurant chain to LeDuff America for $50 million. LeDuff America, a subsidiary of French conglomerate Groupe LeDuff SA, will add the 145 Mimi’s units to its current portfolio of café-bakeries and coffee shops, including La Madeleine Country French Cafe, Brioche Doree, Bruegger's Bagels, Timothy's Coffee and Michel's Baguette. Bob Evans Farms will continue growth initiatives at Bob Evans Restaurants.

Industry News: New England

Seth Greenberg, owner of Mistral in Boston's Back Bay, will open a new, 240-seat, 8,500 s/f restaurant called Bastille Kitchen in September at 49 Melcher St. in Boston’s Fort Point neighborhood…The Legal Sea Foods at Braintree’s South Shore Plaza is moving across the street to the Hyatt Place hotel. The new 8,200 s/f eatery will be ready by summer. The Hyatt Place Boston/Braintree features 40,000 s/f of food and retail outlets including Potbelly, Starbucks, Five Guys, Jos. A. Bank, Vitamin Shoppe and T.G.I. Friday’sJanie and Jack, the children’s clothing store, is the latest retailer to vacate the former Atrium Mall and move across the street to the Mall at Chestnut Hill in Newton, MA. The 1,446 s/f store will be on the second level and will open at the end of January…The Panera Bread Foundation’s Panera Cares cafe in Boston is now officially open at 3 Center Plaza near Government Center. The idea of the Café is to provide a place where everyone can eat regardless of their ability to pay. There are no prices, just suggested donations and bins in which to leave money…Bobby’s Burger Palace opened at the Burlington Mall. The 72-seat restaurant is celebrity chef Bobby Flay’s first MA restaurant and the 13th location for the chain...Johnny Rockets opened a restaurant at 371 Massachusetts Ave. in Acton, MA bringing its tally in the Bay State to 5 locations…Lynn Lumber, which had been in business nearly 70 years in Lynn, MA, has closed for good. The company was founded in 1945 and was run by the third generation of the founding family…Frozen yogurt shop BerryLine has closed its Newbury St. location to be replaced by Forever Yogurt, which will open this spring. Forever Yogurt joins a crowded Newbury St. frozen dessert market which includes Pinkberry, Tasti D-Lite, Smoothie King, J.P. Licks, Ben & Jerry’s and Emack & Bolio’sBee’s Knees Supply Co., a high-quality gourmet market, will open a 5,000 s/f store next month in South Boston’s Fort Point neighborhood. The shop also will feature a deli, butcher, fish monger, craft beer and wine, fresh flowers and produce, and a year-round community supported agriculture program. Bee’s Knees hopes to use the market as a flagship production site for smaller satellite stores...Former Foundation Lounge owner George Lewis and chef Todd Winer will open Pastoral, a 140-seat restaurant on Congress Street in Fort Point…DSW will occupy the former Filene’s Basement space at South Shore Plaza this spring, while Rodizio Grill, an all-you-can-eat Brazilian barbecue restaurant will occupy the former Forever 21, which is relocating to the Nordstrom wing. Other new tenants at South Shore include Call It Spring by Aldo, Vans Expressions,  and iSpa, a day spa with a high-tech theme...Fashion retailer No Rest for Bridget will make its East Coast debut in March, opening a 1,300 s/f store on Boston’s Newbury Street, featuring affordable women’s clothing and accessories for 20 to 39-year-olds...Stop & Shop has purchased the Johnnie’s Foodmaster lease at 105 Alewife Brook Parkway in Somerville, MA. Terms of the deal were not disclosed. Stop & Shop is devising a renovation plan and a reopening date has not been set. Last fall, Johnnie’s, the family-owned grocery chain that was launched in 1947, shuttered its 10 stores…Acadia Realty Trust has paid about $14.1 million for the Village Square at 181-185 Main St. ,a 14,850 s/f retail center in Westport, CT. The center houses TD Bank, House of Clement, Charter Realty and Westport Physical Therapy...Microsoft will open a 3,000 s/f store at the Natick (MA) Mall later this year, based on the success of its kiosk there. Microsoft has 58 US stores and expects to open 11 more this year...Starbucks is opening a new 300 s/f location at the Hotel Commonwealth in Boston's Kenmore Square.

January Retail Sales Report

Notes: figures gathered from individual company websites, press releases, and Federal filings.  Not all companies report all figures; results not reported will be marked “n/r”. Quarterly results will be updated when available; quarterly figures are shown in italics. Figures from companies not calculated to one decimal point automatically received an ending digit of 0. 

Commerce Department Monthly Sales

The Commerce Department said that retail sales rose at a seasonally adjusted 0.1% last month (compared to a gain of 0.5% in December, when holiday shopping boosted the number). Excluding auto sales, retail sales increased 0.2%.

Source: U.S. Department of Commerce -

Treasury Yields

Treasury Yield Sources:;

Consumer Confidence Index

The Conference Board Consumer Confidence Index®, which had declined in December, fell further in January. The Index now stands at 58.6 (1985=100), down from 66.7 in December. The Expectations Index declined to 59.5 from 68.1. The Present Situation Index decreased to 57.3 from 64.6 last month.

Source: The Conference Board -

Purchasing Managers Index

Manufacturing expanded in January as the PMI™ registered 53.1 percent, an increase of 2.9 percentage points when compared to December's seasonally adjusted reading of 50.2 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

Source: Institute for Supply Management - Manufacturing Report on Business -