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Caruso Grows The Grove

With 10-year leases up, the Los Angeles shopping center’s tenant mix is shifting to make room for retailers that have track records of recent success.

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LOS ANGELES — A decade after the nation’s premier lifestyle center, The Grove, opened, Rick Caruso still doesn’t get exactly what a lifestyle center is, but he’s convinced it’s something that’s here to stay.

“I don’t really know what the definition is. Some definitions, I hear there is no anchor. Some definitions, there is an anchor. Some are not more than 300,000 square feet,” said Caruso, president and chief executive officer of Caruso Affiliated, owner of 13 residential and retail properties in Southern California, including The Grove and The Americana at Brand. “We are building what we know the guest responds to, which is an environment that feels more like a street and is architecturally real, has great landscaping and is programmed. Every day there is something happening on the property. I think that if that’s the definition of a lifestyle center, it will be successful forever. It’s natural to the human being — how the human being lives and works and plays.”

Caruso has certainly banked the future of his company — even without him at the helm, should he choose to step into the race for mayor of Los Angeles — on lifestyle centers being a permanent fixture of the California shopping landscape. With 10-year leases up at The Grove, the shopping center’s tenant mix is shifting to make room for retailers that have track records of recent success. And Caruso Affiliated is pursuing an expansion program designed to double its net operating income within the next five years, in part by acquiring properties that he believes will prosper by following in The Grove’s footsteps.

Attracting more than 18 million visitors annually — more than Disneyland, more than the Great Wall of China and more than the Eiffel Tower — Caruso estimated The Grove should end this year with sales per square foot in excess of $1,400, placing it among the top-performing shopping centers in the nation. The International Council of Shopping Centers reports the average annual sales per square foot in shopping centers was around $442 as of June. The Americana is close behind, generating nearly $1,200 in sales per square foot, according to Caruso.

“We’ve had a really good year. At The Grove, the performance is just unbelievable, and we are investing a lot back into it,” he said. Ultimately, though, he said, “I’ve always predicted that The Americana, in the long run, will outpace The Grove in sales, and I’m confident I’m right.”

Caruso calculated his company would pump $20 million into The Grove this year to upgrade the lobby and storefronts, and enhance services. He is bringing Stylehaüs, a personal styling service, in with the upgrades to provide customers access to clothes that are right for them, regardless of whether those items are sold at The Grove. Caruso argues that if people come to his shopping centers, they will shop or eat. “The spend rate on our properties is twice that of a mall,” he said. “Our conversion rate is 90 percent, which is unheard of on a property. Malls, on average, are 50 percent, so we have more people spending more frequently on the properties, but we put them in a good mood. When people are in a good mood, they are going to spend.”

In addition to Stylehaüs, the new slate of retailers at The Grove will be a major draw. Topshop, scheduled to officially open in February, is probably its biggest coup. After some two years of negotiations, Topshop owner Sir Philip Green decided upon a 25,000-square-foot store at The Grove that had housed Banana Republic, which has relocated to a former Victoria’s Secret space, for the first Topshop in California. Michael Kors will also enlarge its footprint at the center with a fresh store, while Vince is heading to Michael Kors’ current spot. PacSun will become a J. Crew Men’s store, one of the first outside of New York, and the existing J. Crew store will be strengthened by inserting J. Crew Collection. Madewell will open where Arden B. is, and Nordstrom will start remodeling its store soon to finish a restaurant and an expanded shoe department, among other improvements, possibly by summer 2013.

“We are adding the best retailers in the country—frankly, in the world,” said Caruso, who continued, “We are looking at adding a little bit more luxury, but we don’t want to be Rodeo Drive. We still want to have a pretty wide band so that there are a lot of shopping opportunities. We just always want to be ahead of the curve. I know in retail if you are not evolving and moving forward, you are falling behind very quickly.”

The retail mix isn’t solely responsible for Caruso Affiliated’s performance. The company has been a pioneer in using its facilities for entertainment purposes. Its properties host around 350 events a year, and The Grove receives television exposure every weekday due to the celebrity news show “Extra” filming at the shopping center. Caruso asserts the events are critical, but stresses not all of them are right for his properties. “A concert — I don’t want to name a name of the entertainer we’ve had on the property —pulled a very, very young crowd. It was hugely successful, but we became a babysitter, and we learned a lesson that that didn’t drive sales, that just drove chaos.” he said. “I always say, ‘We are not an entertainment center. We are a shopping center that’s entertaining to be in.’ I think there’s a big difference.”

Given today’s demanding retail climate, Caruso contends that shopping centers must pamper shoppers and retailers must offer them value, but Caruso Affiliated’s growth demonstrates that shoppers will part with their money. “The consumer in the United States is over the hump,” he said. “They are cautious because I don’t think the average consumer, rightfully so, understands all the issues going on in Europe and how they affect us, and then you have an election going on.”

With consumers being finicky about where they spend, he added, “ ‘A’ malls will continue to do well. ‘B’ and ‘C’ malls are going to get redeveloped into something else. I don’t think they have a long life ahead of them. I think the lifestyle centers, like all of our properties, are going to continue to thrive, because they are well located, they are well tenanted, they are well designed and they fit the needs of the community.”

The Grove’s results have allowed Caruso to engage in leases with shorter terms and no options, but that hasn’t dissuaded retailers. They are clamoring to secure space, and wait lists are the norm. Millard “Mickey” Drexler, chief executive officer of J. Crew Group Inc. and a critic of malls, said the reason is simple: “The Grove is arguably the best shopping center in Los Angeles, the most productive, drawing the most people.”

He added, “I think he [Caruso] is extremely picky about his tenants. He is always working to improve the center. Any great center is the vision of the developer.”

Caruso Affiliated details the center’s customer has a median age of 35 and an average household income of $125,000.

The Nordstrom at The Grove “has from Day One performed well and exceeded our expectations,” said Nordstrom Inc. president Blake Nordstrom. The company is remodeling the store, he said, because “we want to make sure that store in that environment is current and up to date. We think we have an opportunity to make some adjustments.”

Nordstrom, which had a store at the Glendale Galleria, will open a store at The Americana in fall 2013. “We have been in Glendale for a long time and have done a lot of business there. The [Glendale Galleria] center is a good center, but it is an older center. Rick’s Americana is newer and more current, and the mix of tenants and other attributes are very attractive,” said Nordstrom. “We just always aspire to be in the best locations.”

Additions to The Americana this year include Ilori and Disney Baby.

Although The Americana and The Grove, where Caruso maintains an office, are clearly the gems of Caruso Affiliated, Caruso is looking beyond them to build his company. Graphs on the company’s Web site show compound annual growth rates in its revenues and its asset base of 19 percent and 15 percent, respectively, since 1996 — and Caruso is making moves to keep the momentum going. He said there are three properties in the Los Angeles area that he is interested in buying, two retail and one residential.

Outside of Los Angeles, Caruso is making a push into Northern California and the San Diego region. In Northern California, he divulged, “there are about three that we would like to get. There’s one that we are about to sign a purchase agreement on, and we are excited about that.” In the San Diego area, he said, “We are planning on building a project that is very much The Grove. Right now, we are calling it The Grove as a working name. We are in escrow.” Long before the shovels enter the ground on those projects, Caruso will have polished off 8500, a complex with 88 luxury apartments, a Trader Joe’s and an eatery called The Larder at 8500 Burton Way in L.A.

The best-laid plans have not always turned into retail reality for Caruso Affiliated. He tried for seven years to put a shopping center in Santa Anita, but stopped that process last year. His partner in the effort, Magna Entertainment Corp., had filed for bankruptcy, and Caruso faced opposition from rival shopping center Westfield Santa Anita.

Caruso doesn’t shy away from opposition. He fought pitched battles against Glendale Galleria owner General Growth Properties Inc. in court and the ballot box over The Americana. He prides himself on taking on difficult developments where barriers to entry are high. In the early days of Caruso Affiliated, he said, an “underlying premise was that I wanted to find properties that had complicated entitlements that we could get through and, since I had been a [police] commissioner with the city, I sort of understood how the bureaucracy worked and how I could get through the bureaucracy.”

Caruso admits he is highly competitive, and Drexler said he can be dogged in leasing negotiations. “He has a great product, and he charges for his great product. He’s tough, and he deserves to be,” said Drexler. Nordstrom said, “He is focused, and he is committed to seeing things through. You need those qualities in his niche of the business. Our folks have had success working with him because I think he’s pretty straightforward in his communication. It is easy to know where he stands and what he can and cannot do. To date, his word has been good.”

Caruso considers his personality a good fit for a political campaign (“I would find it fun,” he said) — and Angelenos might get a chance to judge if that’s the case. He has toyed with the idea of running for mayor for quite some time and said he would determine if he is going to run within weeks. He has already prepared his company to operate without him in the event he becomes a candidate. “I would appoint an interim ceo and there would be [chief operating officer] Paul [Kurzawa] and the executive committee that would run the company,” he outlined.

Caruso’s possible platform will rely heavily on his business background. “You have got to create an environment in which people want to invest in the city. I know from my experience building things inside of Los Angeles and outside of Los Angles that in Los Angeles, it is unbelievably complicated and difficult, and it shouldn’t be,” he said. He continued, “You also have got to get rid of the gross sales tax in this city. You can take your business and move it to Glendale or El Segundo and have no gross sales tax. So El Segundo has picked up most of the businesses that have moved out of L.A.”

Winning the race for mayor won’t be easy. Caruso did get help last week when Los Angeles County Supervisor Zev Yaroslavsky, who would have perhaps been the front-runner, said he wouldn’t run. Still, the remaining candidates — City Controller Wendy Greuel, and City Council members Eric Garcetti and Jan Perry — will provide fierce competition. Sherry Bebitch Jeffe, a senior fellow at the University of Southern California and political analyst for KNBC Los Angeles, said Caruso has the advantages of having a deep well to draw from for campaign funding — the Los Angeles Business Journal this year approximated his net worth at $2.2 billion — and the ability to emphasize his role as a government outsider. On the other hand, she said his problems are that he isn’t well known and his business background alone won’t persuade voters that he should be mayor. Bebitch Jeffe said, “It just doesn’t count that you are a businessman and you remind people of [former mayor] Richard Riordan. You have to have a lot more.”

Caruso is not discouraged. “If I didn’t think I could win, I wouldn’t spend a lot of time thinking about it,” he said. “We’ve done a number of polls. We understand the voter base pretty well. I think the timing is right, because there is a frustration level in the city. The two or three competitors are all terrific people, but they are part of the problem, not part of the solution. They’ve been there for years and years and years. So I think the timing is very right and the polling shows that. The challenge for me is making the decision to step away from the company.”

 

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