What Makes Shopping Centres Work?

There is no shortage of mud thrown at shopping centres by retailers. A lot of it justified, but more often it’s not. This is because very few retailers really understand what makes shopping centres tick. Understanding may not eradicate all the complaints, but what it can ensure is that well thought through challenges are made within the operational context of the business model. Challenges that should lead to a continual improvement for all stakeholders in the way shopping centres are developed and operated.

The first understanding – and by far the most significant – is that the owner / operators of shopping centres are NOT retailers. They are developers.

Their job is to create and improve property asset values. Asset ownership, asset improvement, design and delivery, property management, leasing and marketing are their core skills aimed at the outcome of improving the value of the asset. Anyone levelling criticism at a shopping centre owner for failing to act like a retailer is barking up the wrong tree.

Secondly, if you think retail is complex you should try being a shopping centre owner / operator. These are very complex animals.

The ultimate power of a shopping centre comes from it’s ability to unify a large and divergent stakeholder mix; to be able to create the asset in the first place, to make it trade profitably and then to be able to continually improve it’s value.

When you think of shopping centres there is a shortlist of well-known brands that spring to mind. Westfield, AMP, Stockland, Lend Lease, GPT, Centro, DFO to name but a few. However the brand is the tip of the iceberg and shorthand for the complex skills that must be harnessed collaboratively to produce an outcome.

21st century shopping centres are a bit like the massive 19th century department store leaders – only on steroids. With shopping behaviours narrowing and becoming habitual, modern shopping centres are growing ever more powerful. They thrive on offering the customer the perception of access to ultimate convenience, rewards, aspiration and entertainment all under one roof. At a different time in history, this was exactly the claim of Gordon Selfridge when he founded the great Selfridges department store on Oxford Street in London in 1907.

In the era we live in today, development opportunity for the big shopping centres is pretty much confined to re-development of existing facilities. Greenfield sites are rare and usually in newly emerging locations that will take a decade or more to mature. Urban brownfields sites usually rely on some form of restrictive re-zoning that limit development returns.

Access is the key word for developing and operating shopping centres.

A shopping centre needs ongoing access to: – research analysis & insight – capital – know-how – design & construction resources – people resources & people management skills – retailers – brands – lifestyle & leisure groups – community leaders – authorities
and more. All these elements are blended together in a carefully managed mix to deliver a positive outcome.

The output of the process that uses the access of the shopping centre developer, is access for the shopper. Access to a great shopping experience that includes all their needs shopping, their wants shopping, leisure and entertainment, social interaction and stimulation – in a convenient, easy to find, easy to park at package that they can shop regularly as their primary place of shopping. Convenience that has to be maintained or better still improved upon – profitably – to maintain the centre as the shopper’s primary choice.

The great department store owner / operators of the world in the 19th century were rare and applauded for what they could achieve. In the 21st century best practice shopping centre owner / operators are even more skilled. This is because of the difficulty involved with managing the complexity of moving parts and balancing the needs of a complex stakeholder group including: – investors & shareholders – company management – staff (centres/head office/retailers/retail staff/services staff) – retail tenants – shoppers – community – authorities – media – interest groups

Compromise and trade-offs are becoming harder to manage in an era of increasingly competing self-interest. Even recognition and plaudits are few are far between.

The argument at the end of the day for retail tenants should be that shopping centres offer the tenants (who choose to renew their leases) increasing opportunity for growth. They don’t run the retailers business and are not responsible for their profitability. But they are responsible for delivering a better growth opportunity for the tenant through the improvement of quality and quantity of shopper foot traffic in return for increased rents.

Shopping centres aren’t set and forget exercises. They require a continual improvement process – capital improvements, functional improvements, aspirational improvements, promotional improvements and mix improvements.

The best way to demonstrate the power of the ongoing opportunity that shopping centre owner / operators create is to examine two best practice case studies of re-development.

Westfield Valley Fair – San Jose California USA
When Westfield bought this asset, it was some 114,000 m2 of gross lettable area in a high volume location within Silicon Valley (one of the United States most affluent catchment areas). The centre contained a Macy’s department store and a small scale Nordstrom. It had 158 specialty stores, 4,000 parking spaces and a 10% market share.

In numbers its gross sales were around US$522 million per annum, it generated around US$6,500 per m2 and the average customer expenditure was US$90 per visit.

It was a successful centre but Westfield had the vision, the skills and the ability to manage a process that improved the centre for all stakeholders.

What emerged was a centre that was increased to 150,000 m2 in gross lettable area. Westfield kept the Macy’s store but upgraded the Nordstrom store and increased its size. Upon completion the centre boasted 256 specialty stores, 7,600 car parking spaces and a market share that exceeded 14%. In it’s first full trading year after re-development had been completed the centre turned over more than US$820 million in gross sales, achieved sales per m2 of more than US$7,250 and average expenditure of more than US$160 per shopper visit. Foot traffic numbers had leapt by over 35%.

But this doesn’t tell half the story. In fact one of the important things about the job great owner / operators do is that you can’t really appreciate the enormity of the change unless you’ve experienced it first hand. I was lucky enough to visit that centre at various stages through the transformation. It not only created a better shopping experience, it transformed the community.

Something the next case study performed to an even more obvious degree.

The Bullring, Birmingham – England. When AMP Henderson formed a branded consortium to re-develop the Bullring in the heart of Birmingham , the only word that fits its state of dilapidation is “shit-tip”.

Birmingham is the second largest city in the United Kingdom with a catchment area twice the size of Glasgow or Manchester. At the time of the redevelopment it had half the retail and more people who lived in the catchment area shopped outside it than inside it. The whole city was in decline.

Along with willing authorities, the Bullring Consortium went about not only creating a multi-usage shopping centre, but rejuvenating a city. The result was nothing short of magical. By blending retail, education, culture, residential and commercial activities into one beautifully designed and integrated package they created over 8,000 new jobs and turned the toad into a Prince.

Birmingham went from being a nett exporter of shoppers to becoming an importer – many from London itself. They made Birmingham the second most visited shopping city outside London in the UK. The city saw the addition of new stores from retailers like Selfridges, Debenhams, House of Fraser, Harvey Nichols, Zara, Mango, Next, GAP, Miss Sixty, H&M and many others. Of the 160 new stores created, 73 retailers were new to Birmingham.

Average spend per shopper increased by over 82% and occupancy rose to over 98%.

That is what a great shopping centre developer can achieve.

Shopping centres owner / operators are not beyond criticism.

In fact, well-structured challenge is what continues to push the product to improve globally. But shopping centres are an important part of the retail landscape and they do contribute a great deal to the improvement of shopper experience.

The issue for every retailer – understanding the context in which the shopping centre developer runs their business – is how do you exploit the opportunities they create for profitable growth for yourself?

Like death and taxes, rental increases are a certainty. Developers have to get asset improvement. But asset improvement is generally based on gross sales improvement. Shopping centres have to get better to trade better. They have to deliver increased quality and quantity of foot traffic.

If you can’t find a way to exploit that growth opportunity, then your profits and tenure in the centres you operate in now are only going one way.