During a visit to Australia in 1980, Richard Green was surprised to see the latest shopping malls. Built on six levels, the new models included conventional department stores and discounters, fish markets and grocery stores. That was a far cry from American malls, which focused on department-store anchors and offered a limited range of retailers.

Inspired by the Australians, Green tried introducing discounters to U.S. malls. For years, discounters and mall tenants resisted, but now the mall environment is dramatically changing.

In the past two years, Westfield has signed up five Target stores to serve as anchors. And it has one Wal-Mart under construction at the Westfield Shoppingtown Parkway center in El Cajon, Calif., near San Diego. “These are terrific anchor tenants,” says Green, vice chairman for the U.S. operations of Westfield Corp., an Australian company that owns 61 shopping centers in the U.S. “Every time we have added a Target, sales for the center have gone up.” The new anchor has increased total sales at Westfield shopping centers by 3%.

The Shift to Discounters

The new generation of anchor tenants is part of a massive shift in the retailing industry. Not so long ago, traditional department stores were considered crucial for attracting customers and enticing other retailers to a regional mall. Prominent anchor names included Montgomery Ward, Macy's and May Department Stores. But in recent decades, the department stores have slipped as time-pressed consumers showed a new preference for discounters, stores with huge selections, or retailers who could offer unique luxury goods.

“Years ago people went to Macy's or Bloomingdale's, and that is where they bought all their home furnishings, linens and clothing,” says Faith Hope Consolo, vice chairman of Garrick-Aug Worldwide, a New York-based retail brokerage. “Now, people are much more price conscious, and they want to shop at a variety of discounters and department stores.”

Mid-price stores are caught in the squeeze. At the low end, they face tough competition from discounters such as Wal-Mart, which provides clothes at very low prices. Meanwhile, luxury stores such as Neiman Marcus have come to offer service and styles that the middle-range department stores can't match.

May and Federated Department Stores are responding by adding high-quality private label goods. They also are seeking to eliminate weak units. May recently announced the sale of 32 of its Lord & Taylor stores. Federated said in October 2003 it was closing its Lazarus-Macy's in Columbus, Ohio, after sales had dropped 60%. Federated also announced last year that it was closing four Macy's in Atlanta and that another 34 stores would be improved to include comfortable lounges and high-visibility signs.

In the past, many mall department stores resisted being placed next to a discounter, fearing that the value-oriented stores would lower the shopping center's image and bring in low-income shoppers. Now, the traditional department stores are welcoming any well-run operation that can attract traffic and improve sales.

Seeking Room to Grow

While the department stores have struggled, the discounters and big-box operators have come to face problems of their own. After two decades of rapid growth, some chains are having difficulty finding new locations near urban centers. They are beginning to discover that malls may provide the only avenues for reaching some densely populated areas.

“If you locate in a mall, you don't have to buy two blocks of existing industrial space and then fight off the people who prefer keeping the neighborhood as it used to be,” says Michael LaRue, president of LaRue Associates, a consultant to retailers in Deerfield, Ill.

When Target entered Niles, Ill., an inner-ring suburb of Chicago, it built a store in the Golf Mill Shopping Center. Despite the mall location, the discounter was able to maintain its distinct identity. Outside the Target are the familiar red signs, and the discounter has a big parking lot facing a major entry for the store. “They have tried to maintain the same level of convenience and store identity that you would have at a freestanding location,” says LaRue.

Big-box stores normally sprawl over one level and feature their own massive parking lots. But some of the new anchors must make compromises in order to fit into malls. Target built on two floors in order to locate in Harlem Irving Mall, situated in a densely populated section of Chicago 15 minutes from O'Hare Airport.

To fit into the mall in El Cajon, Calif., the new Wal-Mart will cover two floors. To assist customers, the store will feature escalators with a cart conveyor that will move shopping carts between the floors. The 160,000 sq. ft. store will rank as the largest Wal-Mart in San Diego County.

One of the heaviest users of big-box stores is Palisades Center, a 1.8 million sq. ft. mall that generates $700 million in sales annually. Located 20 miles north of New York City in West Nyack, N.Y., the regional mall has four levels, including a BJ's Wholesale Club, Home Depot and Target built on top of one another. The setup works because the section of the parking area was built on a slope, and each store has direct access to the lot. “You have to work to find a design solution to the operational needs of your big-box tenants,” says Tom Mott, general manager of Palisades Center.

Even when they have to make adjustments, the big-box stores may save time and money by building in a mall. It can take 18 to 24 months to build a big-box location from scratch; fixing up a mall location may take only 8 to 10 months, says Consolo of Garrick-Aug. And building a stand-alone location may cost $200 per sq. ft., twice the cost of constructing at a mall site.

Besides reducing construction costs, a mall location may boost foot traffic for the new anchor stores. Malls still command the loyalty of millions of time-pressed customers, who want to park once and do all their shopping. In many communities, the mall is the dominant retail location with a strategic site close to a major thoroughfare.

“If someone wants to build a freestanding unit, the regional centers have created barriers to entry in many markets,” says Soozan Baxter, spokesperson for The Pyramid Cos., a private mall developer based in Syracuse, N.Y.

‘All Things to All People’

The Pyramid Cos., which owns and operates malls in the Northeast, reports that traditional stores have come to appreciate the discounter and have adjusted to life in the new mall environment. At Pyramid's Hampshire Mall in Hadley, Mass., a JC Penney is going head to head with a Target. To gear up for the battle, JC Penney is paying for an expensive renovation. “They recognize that they must co-exist with all kinds of stores,” says Baxter.

Many of the new anchors add to their appeal by advertising heavily. Home Depot mall outlets send out circulars promoting special products. Target stores typically advertise heavily — no matter where they are. That all helps to generate traffic for the entire mall.

General Growth Properties, a Chicago-based REIT that owns or operates 170 malls in 41 states, was one of the earliest owners to embrace discounters. In 1978, the company introduced a Target to one of its malls, and now hosts 15 of the stores. Today the REIT's malls include Wal-Mart, T.J. Maxx and other discounters. “It might not be appropriate to put a Wal-Mart in an upscale mall where you have Neiman Marcus and Saks,” says John Bucksbaum, CEO of the Chicago-based REIT. “But we are mainly in middle markets, and we wanted to be all things to all people.”

The definition of an anchor tenant has broadened today, Bucksbaum says. Instead of being limited to department stores, now any store or restaurant can be considered an anchor if it brings in a lot of traffic and is important for establishing the mall's identity.

Bucksbaum recently introduced the first Harley-Davidson dealer to a mall when he located one at White Mountain Mall in Rock Springs, Wyo. He considers the motorcycle powerhouse to be an important anchor. “The dealership attracts all sorts of people who would never visit the mall otherwise,” he says.

The Wyoming mall is located near Route 80 in an area of spectacular plains and mountains that attracts Harley riders from all over the country. Many of those enthusiasts make a pilgrimage to the motorcycle dealership and browse the mall. The idea for the outlet came from a dealer who appreciated the importance of Wyoming to Harley riders. “There was somebody who understood the market and saw the potential for the dealership,” Bucksbaum says.

Don't Expect a Mad Rush to Malls

Despite the increase in non-traditional anchors, big-box stores aren't likely to focus exclusively on malls any time soon, says Bucksbaum. The successful chains select sites on a case-by-case basis. While Wal-Mart is putting a few stores in malls, the discount giant is still mainly building freestanding units. Why? Sometimes it is faster for Wal-Mart to buy its own piece of land instead of waiting for someone to develop a mall, says Bucksbaum.

General Growth Properties tried to attract a Target to a new mall that will open this summer in Des Moines, Iowa, but the discounter decided to build its own unit one intersection away from the shopping center. “They [Target] felt that the stand-alone unit would open more quickly and generate business,” says Bucksbaum.

Still, Bucksbaum and other developers believe that discounters will soon play a broader role in malls. Customers have a need for stores that emphasize value and offer a large selection of merchandise. In the future, traditional department stores will remain important anchors, but they will compete against an increasing variety of retailers in the malls.

“Many mall owners used to think that certain kinds of stores did not belong in their properties,” says Bucksbaum. “But we aim to put in what is going to be best for the market.”

Stan Luxenberg is a New York-based writer.