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Santa's Christmas Wish: More Discounters at Malls

After disappointing holiday sales last year, Wal-Mart decided that, at whatever cost, it would boost sales and traffic this year by discounting early and aggressively. Apparently, the plan is working.

The world's biggest retailer reported that more than 2 million customers passed through the front doors of its U.S. stores between 5 a.m. and 7 a.m. the morning of Black Friday, as shoppers raced for limited quantities of super-sale items, such as Hewlett-Packard desktop computers for $398.

Conquering Christmas is the latest stage of Wal-Mart's juggernaut and has important implications for mall operators. While Wal-Mart and fellow discounters were handling overflow crowds, specialty chains and some department stores were seeing lower-than-expected traffic. Gap was quoted as reporting disappointing sales, and analysts indicated Aeropostale and TJ Maxx could be feeling pressure. A Maritz Poll found that that one in two people it surveyed planned to shop at Wal-Mart this holiday season. Target was second, with 38 percent; JC Penney third, with 32 percent; and Sears was fourth, with 29 percent. The poll didn't rank specialty store interest.

That signals a new dimension in the discounter phenomenon, says Stan Eichelbaum, president of Marketing Developments in Cincinnati. "Everyone expected Wal-Mart to challenge Target," he says. Instead, it took on department stores and specialty retailers by, for example, advertising in Vogue -- and won converts. Nordstrom loyalists may not actually be snapping up smart frocks at Wal-Mart, but they are drawn by the deals on food, electronics and household goods.

What does this portend for retail real estate? The taboo against upscale stores cohabitating with deep discounters is falling. The message for the new year? Cross-shopping is here to stay and you will see more Wal-Marts sharing real estate with the likes of Nordstrom's, especially as department stores consolidate and leave empty spaces behind. "It's already happened across Canada; it's surprising it's taken so long to bring the discounter in the mainstream of retailing in the U.S.," says Eichelbaum.

Westfield, which has Wal-Marts at two of its malls (Westfield Sunrise and Westfield Parkway) is looking for more places to add Wal-Marts. It is also in talks with Costco about locating in its developments, Westfield America President Ken Wong said at the Urban Land Institute fall meeting earlier this month. "It's an opportune occasion to become more relevant to our customers," Wong said.

Urban Retail Properties Co., too, is courting discounters. A Costco opened at Randhurst, a Chicago-area mall it manages, after a JC Penney closed. The Costco coexists with a Carson Pirie Scott department store, Victoria's Secret, Bombay Co. and other specialty stores. "With department store consolidation, you have to look at all options," says Lisa Bell, Urban Retail regional marketing manager.

And The Irvine Cos. paired a Target and a Nordstrom at its Irvine Spectrum Center in Orange County, Calif.

The mix-and-match trend will likely accelerate, says Gloria Park Bartolone, vice president of the Maritz Research Retail Group. She figures more malls and lifestyle centers will reach out to discounters as consumers seek one-stop-shopping centers for convenience and to save on gas. She points out that it's not a zero-sum game: While consumers are spending more at discounters, they're not ready to give up shopping for luxury items and brand names at better stores.

For other retailers, learning to live with discounters will indeed be a challenge. Obviously, they can't go head-to-head on price, though some mistakenly still try, says Kevin Coupe, editor of MorningNewsBeat.com, a Web site providing retail news. Instead, Coupe says, specialty stores must play an entirely different game, perhaps by excelling at customer service or product selection. Eichelbaum agrees: "They have to show a unique quality," he says. "They are a challenged breed and can't rest on their laurels." Gap is a prime example, he says.

With mixed messages on housing, consumer confidence and post-Thanksgiving sales, few were willing to predict the outcome of the 2005 holiday season. But many did go down on record as seeing it as the start of a new retail paradigm. -- Beth Karlin

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