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How to make vertical work, by The Urbane Franchisor


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Tom Kaiser

Tom Kaiser

Big cities are dusting off old playbooks by once again building multi-level shopping centers in central business districts as suburban malls continue grinding through their Amazon-induced identity crisis.

It’s a big gamble being played out in countless cities to see if developers can offer something different enough from suburban malls to justify making the trip into downtown, without repeating the same mistakes that led to the closure of several downtown malls built in the ‘80s and ‘90s.

Retail watchers note higher-end shopping centers are performing better than lower-end offerings these days, but designing a successful downtown mall isn’t simply a matter of going upscale and hoping for the best. Developers and their tenants must rethink the traditional shopping model to create an experience that’s compatible with modern online shopping habits, rather than pushing against the flow of one-click buying.

My home city of Minneapolis offers an instructive example. Back in 1987, $85 million was spent building The Conservatory, an upscale mall with gorgeous Italianate architecture, imported marble floors, massive tropical plantings and scads of tony retailers like Orvis, Coach and FAO Schwartz.

The project’s promotional materials promised a revitalized city center, which was reeling from the closure of several department stores, and it opened to great fanfare. Virtual cracks in the glossy marble soon appeared, with the first vacancy signs following that year’s stock market crash. The Conservatory was fully empty soon after, and demolished just 11 years later to make way for an office tower.

What went wrong in Minneapolis 30 years ago (and many other cities during that era) is instructive for today’s retailers and food concepts casting skeptical eyes at the big-city shopping developments rising now from Hudson Yards on Manhattan’s west side to “The Bloc” in downtown Los Angeles and The Dayton’s

Project from the ashes of a failed Macy’s in downtown Minneapolis. What’s old is new again, but what’s different this time around?

Dayton's Project

The Dayton’s Project in Minneapolis will turn an abandoned Macy’s into a vertical retail center with a food hall downstairs.

Something unique

Like a deathbed confessional, developers are coming clean with retailers about the vital need to tweak their templates to offer something authentically unique in downtown settings. There is no reason for shoppers to hop on a bus, train or pay for parking for the same-old mix of Applebee’s, Ann Taylor and Abercrombie.

Jesseka Doherty is the vice president of leasing at Mid-America Real Estate Group, and it’s her job to fill The Dayton’s Project with tenants without repeating the mistakes of the past. The renderings are magnificent and she calls this project one of the brightest points of her career.

The plans include blowing out windows to invite pedestrians off the street, uncovering long-hidden architectural details, building a “grand staircase” to connect the many levels and, you guessed it, positioning this reborn vertical retail center as a new landmark in the heart of the city.  

“Ten years ago … it was just a different version of the same retailer coming to town, and now you’re seeing so many differences in how these retailers are attracting customers,” Doherty said. “Nike is adding basketball courts so you can test shoes out in the stores, and retailers are adding interactive mirrors in the dressing rooms—you’re seeing retailers evolve.”

The Dayton’s Project, named for the famed department store family that went on to start Target, is looking to attract a tenant mix that’s 70 percent local versus national concepts, especially in the food hall component going into the basement level.

Garrick Brown, director of retail research for the Americas at Cushman & Wakefield, said urban retail is generally outperforming suburban centers in recent years. As still-mega stores like Sears keep dying, with massive implications for B- and C-level malls, he predicts “the real carnage is only starting to begin.” He predicts 2018 will be the peak year for retail unit closures.

Consumers of all age groups are becoming much more sophisticated, which he said partially explains the struggles of mid-level retailers and restaurants now facing steadily declining traffic counts. As developers work to lure local-this and artisan-that into their new urban projects, Brown said the franchise world still has a seat at the table, especially smaller, newer brands offering something fresher than the timeworn, lifeless concepts that have failed to adapt.

“I’d advise any of those smaller concepts to think in terms of what’s motivating the millennial consumer—authenticity and the unusual—so take some chances,” he said. “I think this is going to be the age of an explosion of smaller franchise concepts, because that’s what’s going to fit into this model.

In New York City, Raj Bhatt is the acting CFO at Woops, a franchised baker of macaroons and pastries with 41 units that are a mix of kiosks and storefronts primarily in “hyper urban” markets, including many in downtown vertical retail centers.

Since launching the brand five years ago, Bhatt has noticed landlords no longer sharing their in-house traffic counts and demographics, forcing his real estate team to do their own on-the-ground research in potential future locations.

Legwork needed

“It’s come down to two things: one is visiting and visually seeing on a Monday or Tuesday afternoon where the traffic is, and then seeing it on Thursday and Friday nights and Saturday afternoons, how the traffic literally flows,” he said. “It’s just sitting there and watching and seeing where the traffic is.”

He advises others to do as much legwork as possible before signing a deal, and added “the layout of the mall on paper says a lot,” especially about expected traffic flows. Bhatt cited the L-shaped Cherry Hill Mall in New Jersey as a good example where most guests inevitably pass through the “armpit” as they walk through the center.

In places where traffic flows are less clear, Woops emphasizes its smaller kiosks so franchisees can be more nimble and react to shifting traffic patterns.

At Retail Food Group, an Australian-based food and beverage conglomerate with multiple brands including Gloria Jean’s Coffees, Laina Sullivan is the director of development responsible for franchising, real estate and construction. She estimates she’s been part of more than 2,500 lease negotiations in her 30 years in franchising.

“Shopping center development and retail activity has changed dramatically, and the biggest changes have happened in the last decade and serious changes in the last five years,” she said. “The vacancy rates at some of these malls in the Midwest are frightening.”

Whether it’s a new metro area or an individual location, she urges franchisees and development experts to think 10 years out, looking at nearby and proposed developments, tenant mixes and changing demographics.

Sullivan’s favorite upcoming Gloria Jean’s is going into the recently re-done Pitt Building in downtown Pittsburgh. The brand secured a corner spot in the century-old building, which is key for a brand focused on grab-and-go goods.

“Visibility is key, that’s the number one factor,” she said when evaluating new retail centers. “This is not a two-hour sit-down meal, they’re going to come in, have a cup of coffee and sit in the store—it might be 30 to 45 minutes.”

With mall operators charging premiums for the highest-visibility spaces, Sullivan said “high rents are the killer of good franchising businesses” and advises her franchisees to keep total occupancy costs as close to or below 30 percent of gross revenue.

Even with their unique challenges—from non-conforming spaces to historic preservation requirements—Sullivan added her favorite projects are those aimed at revitalizing downtown areas.

“The downtowns of America are beautiful spots … but you have to be real careful,” she said. “I love a downtown, it’ll always be my first choice if it makes sense in terms of building success into our franchisees’ lives—but we need to go where the people are.”

Tom Kaiser, pictured on opposite page, is associate editor of Franchise Times and writes about urban tales in franchising in each issue. Send story ideas to tkaiser@franchisetimes.com

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