This past holiday season, mall common areas were, as usual, filled with the carts and kiosks of local retailers — the mom-and-pop t-shirt, hair accessory and sunglass vendors who have always dominated specialty leasing. But there was something new in their neighborhood: national brand-name products.
In an effort to connect more directly with shoppers, consumer goods manufacturers took to the common areas and vacant inline stores in record numbers. LEGO, for example, had 150 kiosks, triple the number it had the previous season. Neutrogena skin care products were sold via kiosk for the first time, and Dell Computer introduced kiosks to showcase its PCs. Bose, meanwhile, offered its audio gear at seasonal inline stores, and Le Creuset did the same with its cookware.
Some, like LEGO, were there just for the holidays. Others were testing the waters for a possible year-round presence.
“More manufacturers than ever want to do specialty retailing,” says Deborah Kravitz, a principal in the Sherman Oaks, Calif., retail consulting firm of Provenzano Resources. “I think you'll be seeing bigger and bigger brands coming to the common areas in the future.”
That would augur well for specialty leasing, which already has grown into an important revenue source for mall operators. Patricia Norins, publisher of Specialty Retail Report in Norwell, Mass., says specialty leasing now generates about $10 billion in sales — not bad for a business whose contribution was negligible a decade ago. Also not bad coming as it does when traditional store retail sales are sluggish.
“Many of the better malls are doing well over $1 million a year in specialty leasing,” says Salomon Smith Barney analyst Ross Nussbaum.
Indeed, when Chicago-based General Growth Properties reported that its same-store net operating income rose 3.9 percent in the third quarter from a year earlier, it attributed the gain in part to strong specialty leasing results. “Our temporary tenant leasing program and income continues to grow at double- digit rates, and 2002 will certainly be our best year ever for this segment of our business,” General Growth's chief operating officer, Bob Michaels, told analysts in November.
The rising interest in specialty retailing among manufacturers is driven by several factors, says Kravitz. In some cases, she says, they “are not really happy with how they're being represented in the retail environment” and want to have more control, he says.
In other instances, manufacturers see a temporary mall presence as a perfect way to test a product or a new market. And in others, the effort is driven by a desire to raise brand recognition.
Among the biggest of the seasonal specialty leasing programs was that of LEGO, which partnered with Waldenbooks.
Waldenbooks ran and staffed most of the 150 LEGO kiosks. The bookseller separately operated about 700 kiosks this season, most of them its Day By Day calendar stores. Kevin Kern, real estate manager for Borders Group, Waldenbooks' parent, says that although no decision has yet been made on the companywide specialty leasing program for 2003, “I think we will expand a little bit in pure numbers. We haven't reached the point of diminishing returns yet.”
Dell, too, took a high-profile approach, opening 71 kiosks in 19 markets to give customers a chance to see and use its PCs and peripherals, which they could then order online. Most of the Dell Direct kiosks, which carried no inventory, opened in the fourth quarter.
Some analysts see the program as a way for Dell to test the potential for branded retail stores, similar to those of competitors Apple and Gateway. Dell spokesman Venancio Figueroa declined to say if that was a possibility, adding that the program was still being evaluated. The kiosks, meanwhile, remain open.
Not everyone sees a clear direction in the presence of national manufacturers. “It's too soon to tell if it's a trend,” says Melinda Holland, senior vice president of business development for General Growth. Although General Growth continues to look at specialty leasing as a growth vehicle, she says, “We still find that a majority of our business is with the small mom-and-pop and local retailers.”
Even so, the presence of well-known national names is clearly welcomed by mall operators. “Local retailers are very important to us, but the nationals really add to the excitement,” says Anita Saleh, vice president of specialty leasing for Taubman Centers.
National companies of all types increasingly see specialty leasing “as a smart business move” that allows them greater merchandising flexibility, Saleh says. Among the manufacturers leasing space in Taubman properties last year were Le Creuset, KB Toys and Bose. Of course, big retailers were players as well. At Taubman's Cherry Creek in Denver, for instance, Neiman-Marcus took 5,000 square feet of temporary inline space for a second store that offered epicure and holiday trim items.
Bose, the Framingham, Mass.-based audio manufacturer and retailer, opened six seasonal inline stores. David Wood, the company's vice president for American sales, says that aside from targeting holiday shoppers, the effort was intended to help Bose test new markets for possible expansion; it already operates 110 year-round stores.
Increased demand means more variety. Neutrogena's innovative kiosks were created just for the company by Grapevine, Texas-based fixture maker TL Horton Design.
Neutrogena wanted to increase brand recognition for its skin-care products and bolster its retail presence at malls. Also, by offering free computerized skin analysis in exchange for basic personal information, Neutrogena has developed a database of potential customers. The analysis is provides a selling tool that salesclerks can use to recommend specific products to kiosk visitors.
Mall developers increasingly realize that manufacturers represent the next move forward for specialty leasing, says Heidi A. Maybruck of the Maybruck Group, a Reynoldsburg, Ohio, firm that advises retailers and developers. “It's just in the last year that we're starting to see it,” says Maybruck, formerly the director of specialty leasing for Glimcher Realty Trust.
But developing the business takes work, Maybruck says. “You need to go to the manufacturers and work with them,” she says. “A lot of people don't want to stick their toe in. You need to explain to them that this is another way to the customer.”
Kravitz says she believes three product areas represent the best opportunities for specialty leasing by manufacturers: Cosmetics and skin care, high-end electronics and gadgetry and companies with “narrow and deep” product lines such as LEGO that would like those products to be represented better than is possible in a conventional retail setting. “They can show consumers all of the products available to them,” she says.
To Maybruck, manufacturers represent not just a good revenue source for mall owners but a benefit to customers, since they can bring a new and eclectic mix of goods to the lineup. There are, she noted, plenty of interesting products that could be showcased in specialty leasing venues.
“This is the way to go right now,” she says. “You've got to keep the industry exciting.”