Retail sales this year might not be as impressive as they were in 2004, but retailers are expanding more aggressively than they have since the late 1990s. “We haven't seen any slowdown in retailer expansion across the nation,” says Clay Smith, president of Staubach Retail, the national retail arm of The Staubach Co. “In general, across all segments, retailers have a stronger appetite than last year.”
While the National Retail Federation (NRF) says that retail sales this year will increase only 4.8 percent compared with the 7 percent increase last year, new store openings in the United States are expected to exceed 2004's by more than 20 percent, according to Steve Sakwa, a first vice president with Merrill Lynch
Merrill Lynch, which surveyed 35 retail tenants regarding projected new store openings, says demand for new stores in 2005 should increase nearly 23 percent to 3,149 versus 2,570 new store openings in 2004. The forecasted expansion represents the highest number of new stores added since 1999 when these 35 retailers added more than 4,200 stores, Sakwa notes.
“The reality is that there's no slowdown in the retail expansion because the big boxes are still trying to get sites and the smaller users are always redefining themselves and coming up with new concepts,” Smith says.
Dressing Up
Apparel and home improvement retailers and discounters are leading the growth, according to industry experts. These retailers are driven by an attractive combination of population and housing growth and changing demographics.
“With the increase in housing, retailers are expanding because they want to be closer to where their customers are; they want to be strategically based,” says Richard Hollander, president of Buxton Co., a Fort Worth, Texas-based retail research firm.
Such aggressive expansion is good news for retail developers and landlords including those who focus on open-air centers, as well as regional malls. Demand from open-air tenants such as Dollar General, T.J. Maxx and Lowe's remains robust, while mall-based specialty stores are continuing to grow. More than 2,535 new open-air stores are planned this year, up from 1,995 stores in 2004, according to Merrill Lynch.
Similarly, 588 new mall-based specialty stores will likely open in 2005 versus 505 in 2004. “This is the second year in a row that mall-based specialty tenants increased their new store openings versus a decline over the prior four years,” Sakwa says.
From a demographic standpoint, Baby Boomers and their offspring, often referred to as Generation Y or Echo Boomers, are the most important segments of the shopping population, according to Will Ander, a senior partner with McMillan|Doolittle LLP, a Chicago-based retail consulting firm. “We've seen a lot of retailers targeting their expansions based on generations,” he says.
Baby Boomers, currently between the ages of 45 and 60, account for 28 percent of the nation's population, according to the U.S. Census Bureau. That means there are roughly 79 million Boomers looking for products and services to make them look and feel better.
The Gen Y segment is almost as large as the Baby Boomer population with 72.7 million people between 11 and 25 years old. And, since this group is bankrolled by mommy and daddy, it has plenty of discretionary income.
Last year, Boomers and their children spent a lot of their money on apparel. In 2004, apparel sales totaled $173 billion, a 4 percent increase from $166 billion in 2003, according to Port Washington, N.Y.-based research firm NPD Group. “For a while there, apparel wasn't growing at all,” Hollander says. “Over the past 12 to 18 months, there's almost been a move from electronics to clothing. Americans are dressing up more.”
Since June 2004, Boomer women have spent $30.8 billion on apparel, according to NPD. And retailers are following the money. Currently, women over 35 only have 0.7-square-feet per capita of stores focused on their needs, but spend more per person than teenagers, who have 3.6-square-feet of retail per capita, according to Retail Forward. “The mature Boomer woman has been so lucrative that a lot of retailers are expanding their offerings to this group,” Ander says.
San Francisco-based Gap Inc. announced in April that it plans to open more than 30 new stores targeted to women 35 years old and up by 2007. The new concept, dubbed Forth & Towne, launches in four test stores in the Chicago market and one in New York this fall. More than five stores are planned in 2006 and 20-plus stores will be rolled out in 2007, according to the chain. Forth & Towne's first stores are in regional malls, but Gap hasn't ruled out lifestyle centers.
Similarly, American Eagle Outfitters is betting on the Boomer population. It recently hired two executives from Abercrombie & Fitch to launch a new concept focused on older apparel shoppers. The Warrendale, Pa.-based chain is keeping the name of the concept under wraps and has yet to announce its exact expansion plans, but analysts are forecasting 300 to 400 stores will be opened in malls over the next five years.
Forth & Towne and American Eagle's new chain for women will compete head-to-head with Abercrombie & Fitch's just-launched Ruehl concept. The New Albany, Ohio-based retailer has already rolled out four stores in New Jersey, Illinois, Florida and Michigan and will open five to eight more stores next year.
The most aggressive apparel retailer targeting female Boomers is Fort Myers, Fla.-based Chico's FAS. Recognized in the industry for its appeal to mature women, the upscale chain plans to add between 110 and 120 new stores this year. Last year, it added 100 new stores — a 23 percent increase in square footage — and broke into the intimate apparel market with its new brand, Soma by Chico's. Currently, there are 10 Soma stores in six states, and the retailer will open another six Soma stores this year.
“We're going to see a lot of Chico's copies,” Ander says, adding that targeting Baby Boomers can be tricky, almost as tricky as marketing to teens and young adults, who aren't burdened by a great amount of brand loyalty.
“Overall, retailers are responding to basic demographics,” says Annette McEvoy, president of A. McEvoy & Associates, a New York-based consulting firm that specializes in softlines. “The teen and young adult segment is a very vibrant segment since they are such dedicated shoppers.”
Ander adds: “We've seen a lot of the teen retailers expanding and even rolling out new concepts as this group gets ready to move into new adulthood.” Pacific Sunwear, for example, is one such apparel retailer that is aggressively expanding.
PacSun, which has stores in malls and lifestyle centers, plans to open 120 new stores this year. Additionally, the chain will expand or relocate 35 stores to larger locations, increasing its square footage by about 15 percent. Last year, it opened 113 new stores — a 15 percent increase in square footage.
Abercrombie & Fitch and Gap aren't too far behind. According to Merrill Lynch, both chains plan to open more than 100 stores. However, Gap's growth vehicle isn't its namesake brand; instead, discount apparel chain, Old Navy is taking the lead.
Gap expects to open 175 new stores this year, more than 40 percent of which will be Old Navy stores. Moreover, most of Old Navy's existing locations will boast new products such as Old Navy Maternity, which will be in more than 300 stores, and Old Navy Plus Size, which will be in 177. The chain will close 135 stores, primarily Gap units.
Fewer Home-Runs
Since 2001, home improvement and home decor retailers have been riding a wave of strong sales and impressive expansion. “The fastest-growing segment has been the home improvement sector with 11 percent to 12 percent increases in the number of stores annually,” says Craig Johnson, president of Customer Growth Partners.
Lowe's and Bed Bath and Beyond continue to grow, but some are not expanding as aggressively. “Home was very hot two years ago, and home retailers had outstanding performance,” McEvoy notes. “Housing is still strong, but there's not quite the frenzy there was.” The NRF has warned that home furnishings stores could suffer as the housing market suffers.
And, according to research firm Global Insight, home improvement sales will increase only 3.5 percent this year, compared with 12.1 percent last year, reaching $280.9 billion. Next year's forecast is even less positive, with the firm predicting only 2.6 percent growth to $288.1 billion.
Regardless, Lowe's is moving ahead with its plans. The Mooresville, N.C.-based retailer will open 170 stores this year, a new record if it succeeds. Last year, the retailer opened the most stores in its history — 140 — and now operates in 48 states. The chain currently operates 1,087 stores across the nation totaling 123.7 million square feet — roughly 14 percent more than it had last year.
Lowe's isn't the only home retailer unfazed by the warnings. TJX Cos., operating the HomeGoods brand, is on a fast-growth trajectory. The retailer plans to boost the number of HomeGoods stores this year by 19 percent, adding 40 stores to the existing portfolio of 216. HomeGoods could grow to more than 500 stores, according to TJX.
Home decor retailer Kirkland's Inc. also isn't cutting back on expansion plans. This year, the chain expects to open 55 to 60 new stores and to close 14 non-performers, most of them in malls. The new stores, representing an 11 percent increase in square footage, will be situated in sites including lifestyle centers, power centers, freestanding strip centers and outlet centers.
Other home decor retailers such as the Bombay Co. Inc. and Pier I Imports Inc. are struggling to overcome poor earnings. To that end, both chains have put most of the expansion plans on hold. Bombay, for example, saw its comp-store sales tank 12 percent in 2004 compared with 2003, prompting the chain to open 45 to 50 new stores and shutter 42.
Fort Worth, Texas-based Pier I is in much the same boat, as poor earnings have forced the chain to scale back its expansion plans by more than 20 percent. This year, Pier I is set to open 85 new stores and close 25; last year, it opened 104 stores and closed 37.
Along with the home improvement and furnishings sector, the NRF says discounters could be hit the hardest by the lack of sales growth. Such dire warning hasn't had an impact on discount retailers, though.
Discount giant Wal-Mart Corp. will hit the ground with 455 new stores in 2005, up from 439 last year, according to Merrill Lynch. No. 1 competitor, Target Corp., is less than half the size of Wal-Mart and is expected to double its store base from roughly 1,400 over 10 years. Industry experts have forecast an annual square footage growth of 8 percent to 10 percent.
And, landlords can't overlook the dollar stores, which are hoping to take a chunk out of Wal-Mart's sales. Currently, more than two-thirds of all American households shop at such dollar stores as Dollar General and Family Dollar. Both of these chains hope to grow their market share by adding more stores and being closer and more convenient to customers.
Goodlettsville, Tenn.-based Dollar General will open 730 new stores this year, including at least 30 Dollar General Markets. Family Dollar plans to open 500 to 560 stores, and close 60 to 70. Both chains are striving to break records with their expansions.
“Most retailers are smart and strategic about their store openings, but as long as there's residential growth and job growth, retail expansion will not stop,” Smith says.
And, although the robust number of openings this year may not impact the retail segment for several years, Sakwa suspects that overbuilding may become a problem. “Longer-term, we are concerned about the high levels of new store openings,” he says.
Shrinking markets
Consolidation in the retail industry has concentrated more stores into fewer hands. Some sectors have consolidated more than others, but all of them have become more top-heavy in recent years as measured by the combined market share of the top three retailers in each category.
| Category | 1986 | 1996 | 2003 |
|---|---|---|---|
| Department Stores | 39% | 60% | 80% |
| Discount Stores | 61 | 77 | 93 |
| Building Materials | 11 | 31 | 34 |
| Consumer Electronics | 15 | 34 | 41 |
| Drug Stores | 18 | 33 | 46 |
| Supermarkets | 18 | 14 | 26 |
| Source: McMillan/Doolittle | |||
Battle of the bulge
New store openings in 2005 should exceed those opened in 2004, according to Merrill Lynch, which surveys 35 retail tenants regarding their openings and uses this a barometer for the overall industry. Over the past five years, Merrill Lynch's estimates have typically been within 5 percent of the actual number of openings each year. New store openings for “open-air” tenants remains robust, while mall-based specialty stores are slowing down.
| Openings 2004 | 2005 (est.) | |
|---|---|---|
| American Eagle | 45 | 40 |
| Ann Taylor | 92 | 100 |
| Bombay Co. | 29 | 20 |
| Buckle | 11 | 15 |
| Claire's Stores | 52 | 95 |
| Gap | -28 | 20 |
| Abercrombie & Fitch | 90 | 110 |
| Pacific Sunwear | 113 | 110 |
| Sharper Image | 28 | 28 |
| Talbots | 73 | 50 |
| Mall Specialty Stores | 505 | 588 |
| Dillard's | 3 | 4 |
| Federated | 2 | 3 |
| May Dept. Stores | 57 | 4 |
| JCPenney | 2 | 10 |
| Neiman Marcus | -2 | 2 |
| Saks Fifth Avenue | 8 | 3 |
| Mall Anchor Stores | 70 | 26 |
| Cost Plus | 33 | 33 |
| Dollar General | 620 | 730 |
| Dress Barn | 4 | 14 |
| Family Dollar | 439 | 484 |
| Men's Warehouse | 12 | 10 |
| Michaels | 55 | 45 |
| Office Depot | 75 | 75 |
| Pier 1 | 81 | 70 |
| Ross Stores | 81 | 76 |
| TJX Companies | 163 | 170 |
| Community Center Stores | 1563 | 1707 |
| Wal-Mart | 439 | 455 |
| Kmart | -41 | -33 |
| Target | -240 | 87 |
| Shopko | 4 | 7 |
| Community Center Anchors | 162 | 516 |
| Bed Bath & Beyond | 90 | 85 |
| Circuit City | 32 | 19 |
| Costco | 20 | 23 |
| Lowe's | 118 | 170 |
| BJ's Wholesale | 10 | 15 |
| Power Center Anchors | 270 | 312 |
| Total | 2570 | 3149 |
| Source: Company Data and Merrill Lynch estimates | ||