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Retail Traffic

The Players

International expansion, mixed-use mania, innovative designs and massive mergers have dominated the retail real estate industry during the past year.

On the following pages you'll find profiles of some of the most influential figures and companies shaping those trends.

Mills Corp., for example, has been a leader in international expansion, which lately has become so fashionable. Simon Property Group is allocating $1 billion to “intensify” its assets through the addition of new uses on top of some its existing portfolio, a move that is widespread across the industry. General Growth Properties vaulted to the head of the class through its massive program of acquisitions, including the Rouse Co. And Giorgio Borruso is pushing the envelope on store design, having won two Retail Traffic SADI Awards (for Superior Achievement in Design and Imaging) this year.

And, taking a little liberty with the Players concept, one of our choices is not actually human. It's a phenomenon: Consolidation. Because it was too hard to choose between the Sears/Kmart marriage or the Federated/May deal as the biggest trend setter on the retailer front, we've done a roundup of all the deals.

Laurence Siegel

Chairman & CEO The Mills Corp.

Laurence Siegel might not wear a white lab coat and work with beakers, but he still calls himself a scientist. As CEO of The Mills Corp., he experiments with retailers and projects across the globe.

“Retailers are crossing borders and expanding into other countries with abandon,” says Siegel, a native of Philadelphia. His father — an executive at Wanamaker's when he was growing up — introduced him to the world of retail. Siegel, 52, left Philadelphia to attend Boston University, where he earned a degree in marketing and finance.

After spending 10 years with Mills predecessor, Western Development Corp., Siegel joined Mills, prior to its 1994 IPO, as executive vice president and vice chairman of the board. He was named chairman in August 1995.

Soon after he took on the chairman and CEO title, Siegel launched Mills international development program, which has followed retailers into new markets. He started thinking about building regional malls outside of the U.S. more than 20 years ago. Realizing that good development opportunities in the U.S. were becoming scarce, he thought international expansion would be a viable growth vehicle.

“It's not something that you can do very easily, and that's why most developers go overseas and acquire rather than develop,” Siegel notes. Unlike many U.S.-based retail real estate owners that have chosen to expand globally through acquisition, Mills has moved forward with development projects.

Under Siegel's leadership, the REIT has built an international development pipeline that is unrivaled in the industry. “My belief is that the only way we can build a franchise is to do development from the ground up,” Siegel says, adding that Mills does call on local partners to help the REIT get through local approval and entitlement processes.

“I think our formula has been very successful,” Siegel says. And few would disagree. The REIT's first international project, the 1.4-million-square-foot Madrid Xanadu (below) in Spain, opened in 2003 95 percent occupied. Mills brought together retailers from 18 countries.

“Before Xanadu, we were looked at very skeptically,” Siegel recalls. “But, we have proven that it can be done.”

Xanadu was such a success that Mills has brought the concept to the U.S.; to the Meadowlands in New Jersey, to be exact.

It has five separate sections appealing specifically to different shoppers: Children's education, Entertainment, Fashion, Food and Home and Sports.

Later this year, Mills will break ground on Mercati Generali, an 850,000-square-foot retail and entertainment center in Rome near the Roman Forum and the Coliseum. Another regional mall is set to break ground in Milan in the next six to eight months, in addition to a one-million-square-foot project in Glasgow, Scotland.

Now that Mills has made its mark in Europe, it's moving on to another continent. “We're now working on a new development opportunity in Asia, with a strong Asian department store as the anchor,” Siegel says.

John Bucksbaum

CEO General Growth Properties Inc.

Bright, shiny apples. That's how John Bucksbaum describes the acquisitions that his company, General Growth Properties Inc., has made over the years. “These companies with these great centers in good markets were like bright, shiny apples hanging on a tree,” says the REIT's CEO. “We saw the opportunity to fill our basket, so we picked them.”

During the past decade, General Growth has been one of the most prolific mall buyers, driving consolidation in an industry that was fragmented both by ownership and geography.

Bucksbaum, who became CEO in 1999, grew up as part of General Growth's family of companies. John's father, Matthew, co-founded the company with his brother, Martin.

The biggest “apple” General Growth has picked, Bucksbaum notes, was the Rouse Co. General Growth completed the $12 million acquisition of the Columbia, Md.-based company last year, putting the Chicago-based REIT on even footing with the industry's 500-pound gorilla, Simon Property Group Inc.

As the largest mall transaction ever, the Rouse acquisition set a precedent, Bucksbaum says. “There are not many opportunities left to acquire large portfolios, so I do think that there will be some company-to-company activity — there could be some public mergers,” he says, quickly noting that General Growth is more likely to be an acquirer than a target.

General Growth has a long history of harvesting quality assets. Realizing that a lot of quality mall properties were owned by smaller developers or institutions, Bucksbaum pursued low-hanging fruit initially, beginning with its 1994 acquisition of CenterMark Properties, the former shopping center arm of May Co. The acquisition added 16 regional malls and three power centers to General Growth's portfolio.

John Bucksbaum, 48, is a 25-year veteran of the company. He served as president of General Growth of California and executive vice president and chief administrative officer for General Growth Properties. Bucksbaum, who received his Bachelor in economics from the University of Denver, has helped the company grow from a $1.2 billion market cap when it went public to $36 billion.

“It was apparent that there was going to be limited new development going forward because most of the malls that were needed had already been built and there was not a lot of demand or a lot of opportunity for new product,” Bucksbaum says.

Under Bucksbaum's direction, the REIT followed with the acquisition of Homart Development Co. from Sears, Roebuck and Co. for $1.8 billion and U.S. Prime Property Inc. for $625 million.

“I am not afraid to grow,” Bucksbaum says, “but it's important to have the ability to say ‘no’ and not try to buy everything that we had an opportunity to buy.”

Giorgio Borruso

Principal Giorgio Borruso Design

Italian-born architect Giorgio Borruso prefers to communicate without words, choosing instead to “speak” through design. With the acclaim that he's won, his designs say “chic.”

Borruso, who moved to the United States from his hometown of Palermo seven years ago, recently won two Retail Traffic SADI awards (for Superior Achievement in Design and Imaging) for Italian apparel retailer Fornarina in Mandalay Place in Las Vegas and for Miss Sixty in Aventura mall, near Miami.

“We're communicating a lot of things with the design of the space,” he says. Believing that retail design has a huge impact on people's lives. “People don't go to the museums, they go shopping.”

Borruso, who received his doctorate in Europe, was teaching in Palermo when he was invited to teach at the University of California at Los Angeles. His transition from professor to award-winning designer was driven by his understanding of his clients and their products. “We try to understand who they are and the product they are presenting,” he says. “Then we can build a language with the space.”

The key, Borruso says, is to never forget that the product is the star. “My goal is to take the normal boring space and make it communicate the importance of the product,” he says. In the Fornarina store, for example, he says that the design for the dressing room communicates privacy to shoppers. In Miss Sixty, the dressing rooms are like cocoons. “These innovative spaces reinforce the unique experience,” said Jennifer Johanson, CEO and design director, Engstrom Design Group, when judging the SADI awards

Borruso's approach has won him high-profile clients His Marina Del Rey, Calif.-based firm has been tapped by Snaidero USA, the North American arm of Snaidero Italia, an Italian manufacturer of high-end designer kitchen cabinetry (see photo on page 168) and Fila, an Italian sportswear manufacturer. Both retailers were looking for a designer to reinvent their brands in the United States.

“Giorgio Borruso has an extraordinary reputation — a gift really — for capturing that experiential quality,” says Sheryl Bloom, vice president of retail for Fila. “Borruso's Italian heritage, his fond memories of Fila growing up and his avant garde understanding of motion all culminated into a graceful and beautiful tribute to both the brand's history and its future,” Bloom says.

Fila's new New York City store will open in September. Snaidero's showroom in L.A. opened in January. Borruso says that designing Snaidero's space was challenging, simply because of the product. “It is interesting because we're dealing with very large products that make up a kitchen,” he notes.

Richard Sokolov

President and COO Simon Property Group Inc.

Asset Intensification: These have become the bywords of the Simon Property Group Inc. as it expands into mixed-use with plans to build high-rises on unused space; even rent storage space in underused parking lots.

“We're really focused on taking advantage of our assets and making them all that they can be,” says Simon's president and Chief Operating Officer Richard Sokolov. The 55-year-old executive heads up the initiative, which focuses on creating mixed uses for Simon's assets including multifamily, hotel and office space.

Sokolov joined Simon in 1996 when the firm merged with DeBartolo Realty Corp. Previously, Sokolov was president and CEO of DeBartolo.

He joined its predecessor company, The Edward J. DeBartolo Corp., in 1982 as vice president and general counsel and was named senior vice president of development and general counsel in 1986.

Nowadays, Sokolov spends his day managing development activities and making sure that Simon's new and redevelopment projects are moving beyond the existing regional mall footprint to incorporate non-retail uses.

“We believe the addition of these uses makes our properties more attractive to retailers and shoppers,” says Sokolov, who has a Juris Doctorate degree from Georgetown University and a Bachelor of Arts degree from Penn State University

“The first goal is to maximize the retail space, then find incremental uses for the air above the retail,” Sokolov explains.

Simon's newly opened project in Jacksonville, Fla., St. John's Town Center, for example, includes a variety of uses. In addition to the 1.5 million-square-foot retail component, apartment and condominiums are under development.

But, it's not just Simon's new projects that will incorporate mixed uses. “Asset intensification is something that can be implemented within our existing portfolio, as well as incorporating it in virtually every new development,” Sokolov says.

Previously, Simon sold off 100 percent of its interest in non-retail uses. However, under Sokolov's direction, the REIT is searching for partners for others uses. For example, Simon is collaborating with The Hanover Group and Metropolitan Life Insurance Co. to develop lofts on top of SouthPark Mall in Charlotte.

Sokolov says the REIT, having already achieved positive returns from the initiative, is accelerating the process to find associates. In Austin, Tex., for example, Simon is searching for a partner to develop residential, office and hotel for its Domain project. Similarly, in Garland, Tex,, the REIT is pursuing a development partner to build 70,000 square feet of office space at Firewheel Mall.

Retailer Consolidation and M&A

Our fifth “player” is not an individual; it's a trend that has this year reshaped retail forever: Consolidation.

There has been more merger & acquisition activity in the U.S. retail industry during the past 18 months than in the last five years, and it's not going to stop anytime soon, according to industry experts.

Nearly $56 billion worth of retail transactions were completed from June 2004 to June 2005, compared to $51 million for the four years from January 2000 to May 2004, according to a recent report, “Riding the Wave: a New Era in Retail M&A,” by McKinsey & Co.

Just 10 years ago, there were nearly 500 public retail companies in North America; today, there are fewer than 300, according to Carl Steidtmann, chief economist and director of Deloitte Research. “Over the past thirty years, from department stores to discounters to big-box retailers the industry has gone through a dramatic process of consolidation,” Steidtmann says. “In virtually every mass merchandise category we are left with just a handful of large, extremely efficient players.”

The huge wave of activity kicked off last summer with May Department Stores Inc.'s $3.2 million acquisition of Marshall Field's from Target Corp. It was quickly followed by the $400-million deal between Jones Apparel Groups Inc. and Barneys New York.

Among other major deals closing this year such was the $11.5-billion merger between Federated Department Stores Inc. and the $11-billion merger between Sears and K-Mart, along with smaller deals such as GameStop Corp.'s $1.1-billion takeover of EB Games and Dress Barn Inc.'s $320 million acquisition of Maurice's Inc.

“Frankly, we believe this wave of M&A is overdue,” McKinsey's report says. “The retail industry has long been characterized by a persistent underbelly of low-performing retailers. In fact, 35 percent of the industry has survived despite returns that are consistently near or below their cost of capital.”

Increasing Efficiencies

The recent consolidation has been driven by increasing efficiencies and benefting from economies of scale. “The thought process is that having a lot of scale and a lot of sameness in terms of merchandise would gain advantages in buying, staffing and administration that would allow them to compete more effectively,” says Nancy Koehn, a professor at Harvard Business School.

Moreover, much of the consolidation helps retailers quickly establish a larger geographic foothold. For example, the Federated-May deal allows Federated to enter 15 new states. Similarly, Charlotte, N.C.-based department store operator Belk Inc. expanded its reach into 11 Southern states through its $622-million acquisition of Saks Inc.'s Proffitt's and McRae's chains.

“M&A could help companies quickly acquire and strengthen the capabilities required to compete in today's retail landscape,” McKinsey's report claims. “Going forward, we expect these efficiency-based transactions to continue at least for a while. Some retail sectors have further consolidation potential (e.g., grocery and apparel manufacturing), and lingering retailers with mediocre to underperforming returns will remain potential targets for private investors.”

For its part, Saks isn't done selling off its department store assets. The chain is “exploring strategic options” for its Northern mid-price department store division, which includes 143 stores under the banners of Carson Pirie Scott, Bergner's, Boston Store, Younkers and Herberger's. Saks is also looking to sell aits Club Libby Lu division, which operates almost 50 mall specialty stores aimed at the young teenage girl demographic.

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