POWERHOUSE GAP INC. FLEXING MUSCLE TO GET SPECIAL DEALS IN MALLS
Byline: Sharon Edelson
NEW YORK — As one of the most successful specialty store organizations in the mall, Gap Inc. has long enjoyed perks such as prime locations and favorable rents. But now the San Francisco retail giant wants more and is chipping away at areas mall operators consider sacred.
The company has laid out several initiatives that would limit its occupancy costs. Among other tactics, the Gap is looking to negotiate gross rent leases with fixed common area maintenance (CAM) charges rather than the customary pro rata CAM charges that increase annually, sources involved in the discussions said.
And the Gap, which spent $160 million on advertising last year, has also balked at paying advertising and marketing fees to shopping centers.
While developers have had no qualms about luring coveted retailers to their malls with promises of free rent and build-out money to pay for store construction, many mall operators consider CAM and marketing fees off limits because they benefit the entire mall.
The Gap’s attempt to strike new deals is an indication of the retailer’s enduring clout even after more than a decade of dominating the specialty store arena.
“I’ve been working on a lot of repositioning of malls, and the Gap has everybody by the short hairs,” said Therese Byrne, principal of Therese Byrne Associates and editor of the Retail Maxim newsletter. “They really do.”
“Mall developers haven’t been very astute in how they rent their space in recent years,” said Maggy Gilliam, principal of Gilliam & Co., a retail consulting firm. “The department stores don’t draw customers the way they used to. That’s pretty evident in their sales gains. The Gap is racking up 20 to 25 percent in comparable-store sales growth and department stores think they’re doing well if they do 3 percent.”
“It’s an interesting tug of war,” said John Konarski, staff vice president of the International Council of Shopping Centers. “The malls want to keep the places clean and keep them going. That costs money.
“The whole advertising issue is an interesting one,” Konarski added. “Does the mall advertising really help individual stores or should stores do their own advertising? You have different interests here. What Gap is trying to say is that they’ve become similar to an anchor.”
Developers rely on CAM charges for their administrative fees for managing all the costs of operating the mall, including security, housekeeping, grounds maintenance, heat, electricity and sometimes insurance.
Altogether, CAM and advertising and marketing fees can account for an additional $6 to $30 per square foot, developers said. For Gap stores, which average 6,000 square feet, that could be anywhere from $48,000 to $180,000 per year per store. For Old Navy stores, which range in size from 10,000 to 60,000 square feet, costs could top $1 million per year at the high end of the fee scale. Of the 2,194 stores Gap operates, retail experts said 60 percent are in shopping malls.
Mall operators are loath to waive CAM and marketing fees because “the inside of the mall has more of a cooperative-type setup,” said Byrne.
“I would not do a deal with them [Gap], and we haven’t done a deal with them in some time,” said the leasing director for a portfolio of regional malls. “I wish they had a lease coming up for renewal, because they would be forced to leave.”
A spokeswoman for the Gap said the company does not comment on proprietary issues, which include lease agreements.
“They are without doubt the strongest player out there today,” the leasing director acknowledged. “They spend a lot on advertising, a lot more than the other retailers do. But in my mind, that does not give them the right not to participate as a member of the mall family. If they feel they are spending and promoting themselves enough to be freestanding, then they can go outside the malls, which is a position that they have publicly said they are willing to take.
“If other developers fold their tents and do what the Gap wants, it’s going to change the way we, as developers, do business with all our tenants,” he added.
That would set a dangerous precedent, said Rebecca L. Maccardini, director of operations at Forbes/Cohen Properties. “There’s a real danger in the gross lease because if costs escalate in areas that are essential to the center, the developer may attempt to cut costs elsewhere, and the center will go into decline,” she said.
“We don’t give caps on CAMs,” said the leasing specialist. “We believe that with regard to promotions and common-area charges, all the tenants should pay their fair share. We’re asking for the opportunity to promote the mall as a unit and a collection of stores. Gap has elected to promote their stores by themselves. They’ve been very successful, but that in our minds doesn’t entitle them to get a free ride when it comes to promoting the mall.”
Department stores have historically been the beneficiaries of developers’ largess. For their ability to attract scores of customers to a shopping center, developers have charged department stores nominal rents, often $2 to $5 per square foot. Anchor stores are not required to pay the mall a percentage of their sales nor do they pay CAM, Byrne said.
Malls usually give riskier tenants a percentage rent lease, where the retailer pays the mall a percentage of sales, but the store must achieve a certain volume before the percentage rent kicks in, Byrne said.
Perhaps the most sought-after anchor in recent years has been Nordstrom, renowned for its high level of service and coveted for its ability to draw major traffic to the mall.
“Nobody gets better deals than Nordstrom,” Gilliam said. “Does Lord & Taylor get wonderful deals? Does J.C. Penney get wonderful deals? I don’t think so. Nordstrom has this upper-crust image, but sells to masses, which is ideal.”
The Seattle-based retailer has cut some of the sweetest deals, with developers offering to build stores and pay for parking lots or parking decks, where prices vary from $7,000 a space in rural areas to $20,000 a space in high-density areas. In addition, some developers offer allowances of $20 to $30 a square foot to build store interiors.
With few strong national specialty retailers and a dearth of new concepts, successful retail formats have become increasingly valuable to mall developers.
“I don’t see anything new going into the mall,” Byrne said. “Most of the new store formats and innovations are happening outside the mall.”
Old Navy Clothing Co., the lower-priced division of Gap Inc., is especially sought after, mall operators said.
“There are situations where they might be a more important tenant than some of the department store anchors in a mall,” said one mall operator. “Old Navy can be anchor-like. They can be more important than Macy’s.”
The Gap, which plans to open 400 stores next year across its three divisions, wants to streamline the process of renewing leases and hold down occupancy charges.
“They’re growing exponentially,” said Richard Hodos, retail service director at Lansco. “A lot of that growth is going to come from Old Navy. They’re doing 16,000-to-20,000-square-foot stores in suburban markets and mini flagships, and flagships of 60,000 square feet in urban markets.
“The Gap is trying to use its clout in the same way the department stores did,” Hodos said. “The Gap has gotten better and continually reinvents itself. It tracks not only the demographics, but psychographics of their customers. Each one of their divisions has a very definitive point of view, and customers understand that.”
In 1988, The Limited Inc. used similar tactics. The company gained power by amassing large chunks of real estate in malls. When the malls began seeing a drop in customers in the early Nineties, Leslie Wexner [chairman of the Limited] used the argument, “Mall traffic’s down, why should I be paying a premium for this space?” Byrne said.
But the Limited ran into problems when the productivity of some of its chains did not increase in proportion to the amount of space it added. On the other hand, retail experts said Gap continues to maintain the same volume when it doubles its space, which in malls is between $400 to $800 a square foot.
Real estate experts said the Limited is improving.
“They’re especially strong in middle markets, because malls have a more severe vacancy problem there,” Maccardini said. “Some of their divisions are incredibly good, like Victoria’s Secret, Bath & Body Works and [the recently spun off] Abercrombie & Fitch. Express and Structure have gotten better again. Limited Too is very good in a number of markets. Overall, the Limited is much stronger as a company than it was two years ago.”
In general, specialty stores are demanding more from malls these days, Maccardini said.
“In the weaker centers in particular, there’s oversupply, so retailers can demand a lot,” she said. “Hot new stores are getting a tenant allowance for build-outs. J. Peterman, for example, is getting big tenant allowances.”
“Restoration Hardware is hot right now,” said another leasing specialist. “Malls are throwing money at them. There are developers who are offering to build their stores.”
“There are fewer good national tenants out there,” said Barbara Ashley, senior vice president of the Taubman Co. “The Gap is the best.
“Basically, the upper hand fluctuates between the developer and the retailer, depending on the quality of the product,” she said. “If you have a high-quality mall, you have the upper hand. If you have a good quality store and a bad quality mall, the retailer has the upper hand.”
“Where’s this industry going?” Byrne said. “There’s lots of pressure points out there. It’s a very concessionary market because there’s so many alternatives today for the retailer. The mall is probably the only place the retailer has some negotiating power. They certainly don’t have it with the consumer.”