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Front And Center: Entertainment Is Retail's Hottest Ticket

The industry has high expectations for entertainment, and regional mall owners, in particular, are looking for a strong performance.

Anyone who doubts the value of the entertainment-retail combination should visit The Forum Shops in Las Vegas, where an ever-changing, colored sky and talking statues add up to sales that reach, or exceed, $1,000 per sq. ft. With numbers like these, shopping center owners and developers, as well as investors, are taking a close look at the growth of entertainment retail, including current trends and outlooks.

An entertaining history Retail's current love affair with entertainment is the logical outgrowth of the specialty center and owes a debt to the amusement park, as well as places like Disneyland and the Six Flags parks. The nation has come a long way since the 1950s, when leisure spending meant saving money all year and then spending it on a two-week vacation or a few glorious days over a long weekend. Those who weren't too adept at saving always had the movies or some other local attraction to keep them amused. Those were the days when a trip to the local mall was an adventure in itself.

By the 1980s consumers had started to invest in leisure differently, spending more on activities rich in amusement or diversion value but requiring little time to enjoy. Instead of the former seven- to 14-day trips, overnight trips, long weekends at nearby hotels and resorts, and three-day cruises all became popular as disposable income and time became scarcer.

These changes in leisure spending, driven by concerns over job security and the time constraints imposed by an increasing number of two-income families, made traditional avenues of entertainment more difficult to schedule. (Interestingly, this time-short perception does not stem from working longer hours. According to the Bureau of Labor Statistics, Americans in 1996 are working 4.4 fewer hours per week than in 1960.)

The entertainment industry and retailers soon began to cater to the consumer's desire for instant amusement experiences, and leisure spending began to embrace things that could be done at home. Video games, video rentals, home entertainment centers and the like all made staying home and enjoying quality entertainment easier and more pleasant than ever before. Americans also exhibited a greater concern with their health, and jogging, walking and in-home exercise became popular activities.

While these trends were germinating, the amount of retail space in the United States outgrew its effective demand. For years, the quality of the shopping experience drove shopping center patronage. However, the discounting movement gradually evolved, and price supplanted almost all other considerations.

As price competition emerged, new forms of retail centers drew millions of customers away from "traditional" retailers, especially those in regional malls. With entertainment components, retailers hope to restore the totality of the shopping experience and rebuild the definition of value.

Is that entertainment? Even though there is no generally accepted definition of what constitutes entertainment in a retail setting, one can sneak up on an understanding of it by looking at some of the things people generally agree are entertaining. These can be a permanent part of a retail project or may be brought in for just a few days, weeks or months to build traffic. There is more to an entertainment center, however, than spotting a few attractions throughout the project.

The most frequently encountered version of the "pure" entertainment center consists of a multi-screen cinema; two or three high-atmosphere, "brand-name" restaurants; perhaps a night club or two; and an eclectic mix of tenants. Tenants are of local, regional and/or national repute and offer unique goods and services, or they present ordinary goods in a unique and entertaining way.

Virtually no expense is spared to create an architecturally compelling street scene for the entertainment center. Ambiance through imaginative architecture, sensitive site planning, and a liberal use of street performers, carts and kiosks completes a "value-added" environment.

Billions of dollars are being spent building new screens and better theaters, even as box office receipts remain flat. Money to build multi-screen theaters is there, thanks to Wall Street, and theater owners, compelled by the actions of their competitors, are in a mad rush to protect market share.

In addition to the outgrowth of cinemas, retailers themselves are becoming entertaining. Music and video stores have added listening stations where customers can try the product before they buy or rent it. Sports retailers have added demonstration areas so customers can "play before they pay." Even toy stores are adding areas where children can play with toys while parents shop.

Regional malls have not been on the sidelines. In fact, the combination of regional malls and entertainment has produced a movement so strong that it has all the earmarks of a new age in American retailing.

It is no secret that anchor tenants have been leaving malls in significant numbers, but it is not just a mad rush to fill space that is fueling the entertainment frenzy. There is a need to create a new definition of value that will permit profit-making pricing to return to retail.

A value-packed shopping experience includes the anticipation felt as the customer thinks of visiting the entertainment-spiked retail center. It also includes the customer's heightened experience as he moves happily around a shopping world laced with visual, auditory, and other sensory and emotional delights. Finally, the customer remembers the shopping experience and expands that memory into anticipation of the next visit.

Exploitation of entertainment promises to redefine how the consumer perceives value. As a result, retailing is going through massive format changes that will alter the shopping experience, perhaps permanently.

Even casual observers have noted that movie theaters, once relegated to some remote corner of the parking lot, are now part of the mall. And it is impossible to miss the upscale restaurants and occasional night clubs that are now located in the heart of many malls.

In addition to all these changes, one can see giant amusement arcades occupying the spaces in which favorite department stores used to do business. That's entertainment, and that's retailing today.

Fun for all? It is relatively easy to find entertainment for the mall. Affordable, exciting experiences are being packaged by dozens of entertainment providers.

Attractions are not a problem. The trick is to create an entertainment mix and integrate it into the mall in a way that increases traffic and lengthens the average shopper's stay. The right combination of attractions can measurably increase the mall's trading area.

Although entertainment can boost traffic at a mall, can it increase the sales volume of existing tenants? Undoubtedly, entertainment brings new people to the mall. Theoretically, once these potential shoppers experience the ambiance, they will return again and again and will soon start buying things other than entertainment.

Is it likely that entertainment will work for all the malls that try it? The Mall of America, which was built from scratch as entertainment retail, has certainly shown that entertainment on a grand scale brings shoppers by the millions.

The Forum Shops were developed in part to stimulate traffic and gaming at Caesar's Palace. According to reports, gaming tables near the entrance to The Forum Shops have experienced an increase in play, but the tables farther from the entrance have seen little increase in activity.

A healthy outlook There are some basic demographic and economic forces behind the current popularity of entertainment. For example, the aging baby boomer population will be the dominant demographic force for the rest of this century and well into the next. As the boomers mature, they are likely to be more concerned with "going out" than with "staying in."

Certainly this 20 percent share of the U.S. population will be at the peak of its earning power for years to come. The boomers can afford to amuse themselves. But the way in which they spend is going to change.

As the baby boomers age and gain affluence, entertainment locales are going to shift, and the type of entertainment demanded will change. For example, theme park attendance is likely to decline as boomers go through the "empty nest" stage. As a result, parks will expand and upgrade their attractions in an attempt to maintain patronage and to set the stage for the next wave of customers.

Restaurants offering good food in a high atmosphere are going to prosper. Night clubs and dinner theaters will proliferate. Participation retail, such as bookstores with reading and socializing centers, will become the order of the day.

Because the boomers will have additional concerns, such as providing a college education for their children and setting aside funds for their own retirement, they are going to continue to be value-conscious consumers. The hope of retailers placing their bets on entertainment is that an exciting marketing package will redefine "value" and coax more sales at a higher profit out of consumers weaned on discount pricing.

Behind the baby boomers are the generation Xers, who are working their way toward adulthood. Right now they may be a widely diverse group of teenagers, but they will turn out to be the best informed consumers the retail industry has ever seen.

The true economic power of this group will not be felt until after 2000. In the interim, the sector will fuel the success of filmed entertainment, concerts, recorded music, amusement parks, electronics, and many other consumer goods and services.

Funding is available There is no shortage of capital for entertainment retail. Investors are eager, but they demand that the merits of the project be clear. Which sources are retail friendly?

Venture capital funds. To interest a venture fund, the proposed project should be capable of generating $20 million to $100 million or more in gross revenues. The fund will always want to see a way out, generally via an initial public offering, within two to three years of its investment.

Hedge funds and LBO funds. These capital providers are value-added investors who want to get in at wholesale and out at retail. They look for an internal rate of return in excess of 30 percent, and they are not generally a great source of funds for an industry that is just getting started. Hedge funds and LBOs are best suited to distress situations; they clean up after the market's mistakes.

Public sector partnerships. It is a rare entertainment center that has not gotten some public money for infrastructure, street and traffic improvements; parking; improved security; lighting; etc. The usual source of public money is federal block grants, revenue bonds, room taxes, ticket taxes or tax increment financing.

Getting a public partner is like winning the lottery, except the payoff is bigger. Over the 10 years it took to make the West End Historic District in Dallas viable, the city of Dallas provided funds, municipal law changes, infrastructure improvement, additional police service and needed zoning changes.

Urban entertainment districts have attracted hundreds of municipal, county and state government followers. Cities seem especially anxious to support these projects, as they see entertainment as the savior of their most neglected commercial areas.

When such projects are built, they are often on a massive scale involving many city blocks and huge acreage. The hope is that shoppers and businesses will be drawn back to what had been a struggling, decaying area.

Movies, special purpose live-entertainment theaters, interesting restaurants, game arcades and mini theme parks are incorporated into the revitalization efforts. Given the state of many of our cities, the future of this type of development seems assured.

Individual investors. Individual investors represent a relationship-driven source. Occasionally, the former land owner stays in the deal as an investor by contributing the land to the venture for an ownership position. Technology companies, whose products will be a major draw, often are big investors. The project's construction contractor and entertainment providers, as well as major corporations in the area, also are possible capital sources.

Other sources. Traditional investors, such as banks, pension funds and other institutions, are frequent participants in entertainment retail projects. Internally generated funds and foreign capital (European bonds helped finance the $312 million Circle Centre project in Indianapolis) make up the balance of the capital sources.

Reinventing value Entertainment centers and retailing will prosper, but entertainment will not kill America's love affair with low prices. Retailers, regardless of format, will be asked to match the prices of any one of thousands of competitors as price information on the Internet and from widely advertised promotions continues to improve.

The most successful centers will go beyond the bounds of "cookie cutter" entertainment center design and reinvent "value" for the consumer. Projects will be characterized by imaginative architecture, brand-name restaurants and participation (try before you buy) retail.

Ultimately, the regional mall will be reinvented around entertainment, and many malls will have to change their format, downsize or fail. However, for the owners and developers that execute the entertainment formula imaginatively, dollar volumes and profits will be impressive.

John B. Allen is a Villa Park, Calif., consultant to Chicago-based Grubb & Ellis. This article is excerpted with permission from "Shopping Centers And Entertainment," published originally in Investment Outlook, a real estate investment report published quarterly by Grubb & Ellis.

* Entertainment centers with strong initial impact have these features in common: * They have two or three strong, exciting anchor tenants that generate repeat visits. * The location is well-known. * There is a large daytime population in the market area. * The primary market area has 3 to 4 million people. * The project has strong marketing and experienced, focused management. * The project is different, unique, and has an exciting atmosphere. A multiplex theater may be part of it, but that is not enough to sustain long-term success. Uniqueness has a way of fading quickly. * The project is kept focused on entertainment. * The restaurants and entertainment components are kept fresh. * A desirable experience is provided and maintained. Sheer size will not overwhelm the market over time.

The following are some of the developmental and operational elements that are essential to a successful center: * Sites must be accessible. * High crime areas should be avoided. * Local government must be committed to maintaining the uniqueness of the area. Zoning and other necessary legislative changes must be forthcoming. Sufficient police protection must be available. Owners should be in constant touch with local governments and document the contribution the project is making to the betterment of the community. * Owners should avoid creating any teen hangouts. * The center must provide enough parking. Shared parking means nighttime availability only. Customers should not be required to walk long distances from parking to the project. Center owners should have needed agreements with, and cooperation from, neighborhood property owners. * Adequate public transportation should provide access to the site. * The merchant's association should be active and on good terms with neighboring local merchants.

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