The West Coast’s most sought after retailers revealed some of their secrets during a panel discussion titled "The Retail Dream Team" Wednesday at ICSC’s 2002 Western Division Conference in Palm Springs, Calif. Opinions on topics such as secondary markets, multi-level formats and mixed-use developments were addressed by the all-star panel, which included David Deason, vice president of development for Barnes & Noble; Jeff Nichols, real estate manager for The Home Depot; Bradley Syverson, director of real estate for Target Corp.; and Mark Walker, vice president of real estate for The TJX Cos. Inc.

Big retailers, small markets
While many developers are focusing on drawing retailers into smaller markets in lieu of overbuilt metro areas, the "dream team" panel expressed mixed emotions about penetrating secondary cities. "The small markets we’ve tested in our home state of Minnesota have not worked," Target’s Syverson said. "We have had some success in secondary North Carolina markets, but it’s hard to back down from our traditional large footprint."

TJX Cos.’ Walker agreed, saying secondary markets were not a huge part of his company’s expansion plans. "We only enter a handful of smaller markets," he said. "Specifically those tied to universities or resorts, or markets with exceptionally high numbers of college-educated consumers."

Barnes & Noble’s Deason and Home Depot’s Nichols expressed more interest in non-metro markets. " We like smaller markets," Deason said. "Many of them lack competing entertainment draws such as sports teams or concert venues, so when a Barnes & Noble opens in town it becomes an entertainment attraction unto itself." Deason added that Barnes & Noble’s small-market stores usually operate at more than 200% over plan for their first 90 days before leveling off. "Our main concern is whether we will attract additional competitors to that market. We make sure we can control the market from a location standpoint before entering it."

Nichols said Home Depot is actively pursuing smaller markets because big-boxer Wal-Mart has already proven it can succeed in them. "We sometimes have to go with smaller concepts to avoid conflict with anti-development groups in these markets," he said. "We maintain our usual 10-acre deal but keep overhead costs at levels that can be supported by smaller volume."

The vertical limit
While multi-level stores are becoming increasingly trendy for big-boxers penetrating crowded urban markets, the "dream team" retailers said they think twice before pursuing such an option. "We’re very open to multi-level stores but we always do better in a single level," said Target’s Syverson. "We built our first one in Pasadena, Calif., but we have learned that they are a lot more expensive from construction and operations standpoints."

Barnes & Noble’s Deason admitted his company’s two-level stores create more of a "wow" effect architecturally, but lead to increasing operational costs and higher shrink levels. Nichols said Home Depot’s multi-level stores in Brooklyn are performing well, but force the retailer to abandon a number of SKUs and rely heavily on neighboring traditional stores to offer heavy items such as building supplies that are impractical for display and storage in multi-level stores.

"You can’t go multi-level without a high real estate value and high-volume traffic projections," Nichols said. "We’ll do it, but we should have some compelling reason," added Walker, whose TJX Cos. has opened multi-level stores in Westchester, Calif., and San Jose, Calif.

Residential concerns
While these big boxers are willing to consider multiple-level stores, they are less enthusiastic about locating in mixed-use projects with residential components. "We’re concerned that building residential units over street-level stores overpowers the retail below," said Barnes & Noble’s Deason. "You have to be cautious that consumers don’t feel they’re visiting someone’s apartment complex when they go shopping."

"The residential combo comes up a lot," said Target’s Syverson. "But at the end of the day, it usually doesn’t happen." Walker disagreed, saying TJX Cos. is currently locating a TJ Maxx store in a Chicago mixed-use development and the integration of residential units has proven a non-issue.

Nonetheless, all of the retailers on the panel agreed that no location is out of the question, and they encouraged developers and brokers to approach them with any potential projects, no matter how far-fetched. "Don’t assume a Target deal won’t work in your center," Syverson said. "You might be surprised.

In closing, the panel discussed the effect an increased IRS focus on public companies’ accounting practices will have on the retail real estate industry. Home Depot’s Nichols said the tax benefits of owning stores rather than leasing them from landlords will motivate retailers, particularly big boxers, to buy and develop their own properties. "We have $6 billion in cash in the bank and we like to buy real estate. It currently costs us 15 to 20% more to lease than purchase," he said. "The way the IRS is treating leases vs. ownership will only encourage us to do that more."