DALLAS — Searching for growth, J.C. Penney Co. and Sears, Roebuck & Co. are relearning old tricks by turning to off-the-mall strategies.
This story first appeared in the July 14, 2004 issue of WWD. Subscribe Today.
Both national chains had stand-alone stores, but took to malls as shopping centers rose in prominence and drew customers with their varied offerings. Freestanding stores such as Target and Kohl’s filled in the off-mall void and in the last decade picked up significant apparel market share.
“When a person comes to an off-the-mall store, they’re a customer,” Ken Hicks, president and chief operating officer of Penney’s, said in an interview. “We become their destination and they’re coming in with the intent to buy and are much more focused.”
With sales of $17.7 billion last year, Penney’s operates more than 1,016 mall-based units and four freestanding stores across the U.S. The retailer has opened the four off-the-mall units in the last two years and said it could roll out up to 100 more during the next few years.
Penney’s freestanding format, typically constructed in a design referred to as “Box 1,” averages fewer than than 100,000 square feet and includes wider aisles, brighter lights, vibrant trend presentations, centralized checkouts and more compelling merchandise mixes. Hicks is overseeing Penny’s off-the-mall rollout.
“In some cases, shoppers are retail-starved, especially in newer and smaller communities,” he said. “This gives us a chance to get to those people. In the past, we would have missed that opportunity. We now don’t have to lose that market share since we’re opening off-the-mall stores.”
Analysts said retailers looking to expand off the mall face several challenges, including competition from established merchants already in freestanding locations and drawing customers to the new format while merchandising and promoting it effectively.
Standard & Poor’s debt analyst Gerald Hirschberg wrote in a statement last month that Sears’ investment in off-mall locations “appears to have more long-term potential than continued investment in mall-based real estate.” However, he pointed to several risks, including more direct competition for securing more off-mall sites and the need to attract a higher-income shopper.
Retail consultant Walter Loeb said, “The recognition that malls are too cumbersome for people to make quick purchases has caused traditional retailers to understand more why the big-box superstores have become destination locations and why people aren’t going to the mall so much anymore.”
Stores now moving off the mall are trying “to improve on the store format, in other words, do it better than Kohl’s, do it better than Target,” Loeb said.
Additionally, tepid mall growth makes stand-alone locations more attractive.
“With only about half-a-dozen traditional malls being built in the next few years, it doesn’t give us all the opportunities we would like for expansion,” Hicks of Penney’s said. “Off-the-mall stores help us make our profit objectives and are as profitable as our mall stores.”
Off-mall stores are comparatively fast to build: a new Penney’s unit in Cedar Hill, Tex., a rapidly growing community about 20 miles south of Dallas, was put up in seven months — the fastest new-store construction in the company’s history.
Stand-alone stores also are proving to be more lucrative than full-line stores in many instances. Penney’s stores located within malls generate about $143 per gross square foot, while freestanding units produce $200 per gross square foot, though average unit retail figures are about even.
Penney’s takes a methodical and almost scientific approach when deciding where to build freestanding stores, Hicks said.
“We want to build where the customer can see them from a variety of vistas,” he said. “We look for population growth areas that are underpenetrated. Our real estate department does the analysis and helps select the markets, and we work with their data. These stores give us the opportunity to better serve and reach our target customers in more markets.”
Off-mall stores typically cost less to maintain than mall venues, though the up-front investment is higher in instances where Penney’s purchases, rather than leases, land. In land-purchase scenarios, security becomes the responsibility of Penney’s, as well.
“Off-mall stores are a little easier to manage than mall stores,” Hicks said. “There are fewer entrances. Because of the layout, there’s no second level. Everything is condensed on one floor.”
Deborah Weinswig, an equity analyst at Smith Barney, said Penney’s is finding sales off-the-mall are stronger than expected.
“Off-the-mall, it’s easier to get in and easier to get out,” she said. “Over time, you’ll continue to see off-the-mall perform better. I think you see greater frequency of visit and it’s more of that convenience trip.”
Overall, off-the-mall stores are characterized by their smaller size and more tightly edited merchandise mixes than full-line mall siblings, and are viewed as destination vehicles that more quickly and readily reach target shoppers.
With these edited assortments, off-the-mall stores walk a fine line since they need to offer customers a wide enough assortment to make a stop worthwhile.
“The product mix needs to be deeper when you are off the mall,” said Janet Hoffman, a partner with Accenture’s retail practice. “If the consumer has to make too many off-mall stops, then they’ll go back to the mall.”
As stores step off the mall, they also have to replace the sense of community that comes with a grouping of stores, something Hoffman said Wal-Mart and Target have been able to do.
“Fundamentally, it really does go back to the consumer and what is going to best meet the needs of your consumer,” she said. “What’s going to differentiate off-mall and on-mall is knowing end-to-end what are the needs of your consumer.”
Leaving the mall in some senses is a double-edged sword, since stores lose the cross-pollination from other stores, but they are also less likely to lose customers already in the store to competition, said Hoffman.
Sears, with revenues of $41.1 billion last year and 870 full-line doors and 1,100 soft-goods specialty stores, last month agreed to acquire ownership or leasehold interest in as many as 61 freestanding stores for about $620 million in cash from Wal-Mart and Kmart.
Most of the stores will reflect Sears marquees by the fourth quarter of 2005 and will be modeled on the Sears Grand format. Sears Grand is a new stand-alone store concept intended to compete against mass giants such as Wal-Mart and Target. Up to 14 doors under the banner are slated to be operating by the end of 2005. Besides Sears’ usual product mix, Sears Grand also carries a broad range of items, including some food products, toys, health and beauty aids, greeting cards, household cleaning products, CDs and DVDs.
The first Sears Grand bowed last fall in Salt Lake City, though five more are expected to be open by the end of the year. Sears Grand units range from 165,000 square feet to 210,000 square feet and are courting customers with household incomes of $30,000 to $80,000.
“These transactions will jump-start our strategy to grow the Sears brand off-mall, increase our points of distribution and acquire well-located real estate at a fair value in key markets for Sears,” chairman and chief executive officer Alan Lacy said in a statement, noting the chain will spend $200 million to revamp the units. “The acquisitions will allow us to quickly open more stores and significantly boost our off-mall retail presence in priority markets that have synergies with our existing mall-based stores.”
On Monday, Sears said it was seeking to fill a new position, president of retail, who will oversee the stores and guide the off-mall growth.