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Savvy Retail Sizzles in Southern California

LOS ANGELES — Retailing in Southern California is benefiting from powerful economic forces that are aligned to boost development. <BR><BR>In fact, if the business climate here was likened to a school prom — with a mix of desirable...

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LOS ANGELES — Retailing in Southern California is benefiting from powerful economic forces that are aligned to boost development.

In fact, if the business climate here was likened to a school prom — with a mix of desirable partners, ones to stay clear of and wallflowers — then “retail is definitely the most popular kid at the dance right now,” said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp. “Retail is red hot because you can easily find investors and tenants, and cities favor it because of the sales tax it generates.”

As of the third quarter of 2003, the most recent figures available, year-to-year increases in taxable retail sales, which do not include grocery products, showed 8.3 percent growth in Los Angeles County, 10.6 percent in Orange County, 14.9 percent in Riverside County, 12.2 percent in San Bernardino and 11 percent in Ventura.

While once it might have paid to play it safe, retailers now are finding that it pays to be on one end of the spectrum or the other. Those that find themselves in the middle — such as Mervyn’s, Kohl’s and even Wet Seal — are having the hardest time defining their niche and reaching today’s savvy customer, who knows the market and is either demanding luxury and uniqueness or stellar value.

Discount

Wal-Mart’s third Supercenter has opened in Riverside County. The retailer, which wants to build 40 superstores in California in the next several years, has come under fire from state residents who say the 200,000-square-foot Supercenters, which combine a traditional Wal-Mart store with a supermarket, hurt small businesses and that the retailer pays unfair wages, causes more crime and traffic and discriminates against women.

In April, voters in Inglewood, Calif., an L.A. suburb, voted to reject a ballot initiative that would have allowed construction of a 60-acre Wal-Mart. However, Wal-Mart in September won permission to build a Supercenter in Rosemead, Calif., about 12 miles east of downtown L.A., where the city council approved the project in a 5 to 0 vote.

“All the stores are doing much better than the company ever anticipated, and we’re moving forward to open up more Supercenters to meet the needs of the customers,” said Wal-Mart spokesman Pete Kanelos.

But Wal-Mart might have new competition. Sears Grand opened its first California store in Rancho Cucamonga last week, only the fourth in the U.S. Eighty percent of the merchandise is what customers find in a regular store, and 20 percent are convenience items such as lunch meat, cereal, household cleaning supplies, baby supplies, pet supplies, health and beauty products, a plant nursery and more.

“We feel like to grow even more, we need some off-mall positions,” said Sears spokeswoman Lisa Gibbons, who said sales were well above plan. When asked if Sears was going after Wal-Mart’s business, Gibbons only offered that the company “compete[s] with a variety of other retailers.”

Mass

Although the building of traditional regional malls has slowed dramatically, with about 20 being built for 2004, lifestyle centers, such as developer Rick Caruso’s popular The Grove in L.A.’s Fairfax District, have found success with customers who see them as a fresh format and retailers who have been pleasantly surprised at the traffic.

Caruso has been involved in an epic battle with General Growth Properties, the owners of the Glendale Galleria, over his proposed American at Brand lifestyle center, which is being built next to the Galleria. General Growth has objected to the center over concerns about traffic and the environment. However, Caruso won a voter referendum in September that allowed him to move forward with the project.

Fueling this growth in lifestyle centers is their relatively compact size, which makes it easier to find land parcels for them than for traditional regional malls. The typical lifestyle center measures about 150,000 to 500,000 square feet, compared with the 400,000 to 799,999 square feet of traditional regional malls.

“You’re going to see double-digit growth in that format continue for at least the next couple of years, through 2006 and 2007,” said Patrice Duker, spokeswoman for the International Council of Shopping Centers. “They really are still in their infancy.”

It’s not hard to see why these centers are popular, said Kyser. “Caruso is bringing the fun back even though he has a lot of the same tenants [as the other malls].”

But many of these malls face an uphill battle trying to attract smaller retailers, which add a certain hip quotient and neighborhood feel, Kyser said. “A lot of the small retailers that would give you some flavor don’t want to put up with mall hours and all the other things that come with being in a mall.”

Specialty

Erica Thomas, owner of the Erica Dee boutique in Orange County’s Corona Del Mar, is just one specialty retailer who shudders at the thought of conforming to a mall’s hours and rules.

Thomas, who bucked the popular retail adage of location, location, location, and chose an out-of-the-way site off the Pacific Coast Highway, said she quite deliberately chose a destination locale. “When I was looking for spaces, I looked at mall spaces and everything. My gut told me that if I wanted to be unique, I couldn’t be in a shopping center or mall,” she said. A Coffee Bean and Tea House and Starbucks have since gone into the neighborhood and added a little foot traffic to the clients who already come with a purpose.

With $1.4 million in sales, Thomas is certainly not crying any tears of regret. Rather, she’s entering her fourth year of business in the 1,500-square-foot location and shopping around for a place to open her second store.

“Robertson [Boulevard] is too saturated — I have to open where there’s not a store similar to mine, because I want to carry the collection and lines that are not similar to anyone else’s,” said Thomas citing such vendors as Splendid, Theory, Diane von Furstenberg, Joie and Vince. While they have become staples of many other boutiques, in an area with a dearth of specialty stores like the one in which Erica Dee is located, they stand out.

Meanwhile, as the revitalization of downtown L.A. continues with new residential units, lofts and restaurants, more specialty retail would appear to be just around the corner.

It’s an uphill battle trying to entice larger stores, however, said Kyser, because too many people are relying on the 2000 census to make their decisions, and a lot of residential units have opened up since then.

“Mainstream retailers don’t know what to do with it [downtown],” said Kyser, citing the 125,000 people who work downtown and earn more than $50,000. “During the week, it’s full of workers and then during the weekends, it’s people from surrounding areas and it tends to be lower income.”

Luxe

Luxury retailers are still enjoying their day in the sun. Despite the announcement from Saks Inc. that it would be closing five Saks Fifth Avenue stores in California, other high-end retailers like Neiman Marcus continue to do a brisk business.

Rodeo Drive has undergone an $18 million renovation that widened sidewalks, improved lighting and replaced aging ficus trees with leafy palms. The facelift also heralded the arrival of newcomers, such as the 24,000-square-foot Prada Epicenter designed by Rem Koolhaas and Ole Scheeren that opened in July, and the October arrival of Louis Vuitton’s second North American flagship, its fifth largest location at a total of 16,000 square feet.

Although business has been good, there has been some tenant reshuffling on Rodeo, which has left several spaces available for even more luxury to find its way to the tony shopping street. Among the spaces are a couple on Two Rodeo between Gucci and Cole Haan, and a new building between Dolce & Gabbana and Van Cleef & Arpels. Retail rents on Rodeo average around $300 a square foot.

“The vacancies don’t really mean a lot, you just have a couple of buildings in transition,” said Chuck Dembo, a partner at the real estate firm of Dembo & Associates, who handles many Rodeo Drive deals. But the real issue, he said, is that retailers are only looking for 2,000 to 3,000 square feet of space instead of 5,000 square feet and up, and landlords, in turn, are looking for the right retailer.

“They know the market and they aren’t going to take someone who doesn’t have a strong label,” said Dembo, who frequently receives calls from retailers that have the money to rent on Rodeo but not the cachet the landlords seek.

For the moment, cachet remains king. But, as at any school dance, there’s always drama and upsets, and plenty of new players in the wings.

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