Manhattan -- Where Discounters Fear to Tread

Only Kmart has stores on the island, home of 1.5 million people. If they close, who can bargain-starved Gothamites turn to?

By Amy Tsao

Ah, Manhattan, heart of the Big Apple. Whatever you want you can find here, right? The finest restaurants, shopping, and entertainment in the world. But then there's discount retailing -- and here a sad truth reveals itself. For better or worse, the only big discounter daring enough to venture onto this teeming island has been Kmart (KM ). It has two stores, one downtown at Astor Place and one in the midtown Penn Station area.

With the Blue Light in danger of sputtering out, a terrible reality confronts this faithful Kmart shopper. If the company can't restructure and work its way out of the Chapter 11 bankruptcy it declared today, 1.5 million Manhattanites (that includes me) face a bleak future: No bargain-filled aisles, no one-stop convenience. The very idea makes me shiver.

Sure, discount retailers exist in New York City's more spacious boroughs, in nearby towns across the Hudson River in New Jersey, or in Westchester county to the north. But believe me, these places are hard to get to when you live in the City. The inconvenience makes a trip to the suburbs to buy discount goods a major expedition.


  So where's Wal-Mart (WMT ) in my hour of need? Target (TGT ), will you not aim for Manhattan? My heart yearns, but my head knows otherwise. I know that other major discounters have stayed away for good reason. Like most everything else you try to do in Manhattan, it costs a pretty penny to set up shop here.

"We have no plans for stores in the New York City area for a variety of reasons," says Wal-Mart spokesperson Keith Morris. Among them, he cites lack of available land and the cost of development. Mass merchandisers typically need a lot of store space to accommodate the boatloads of wares they sell, and that's hard to come by on this skinny finger of land. Manhattan's expensive retail rents and the logistics of delivery are also major challenges.

Of course, a discounter could raise prices somewhat to offset the higher cost of having a store on a tiny, densely populated island. But Bentonville (Ark.)-based Wal-Mart, which prides itself on pricing its products the same across the country, likely won't stray from its tried-and-true strategy. "It wants to be known nationwide as cheap all the time. That might put a dent in that image," says Morningstar analyst Mike Porter. "They have pretty high targets for return on investment. There's no way they could meet [those targets] in the City."


  The financial reporter in me is certainly sympathetic. The good people at Target and Wal-Mart have done the risk-reward equation -- and come out on the minus side. And after all, the economy is in recession. "It would be a huge boon to the people of Manhattan. But it's an equation that breaks down to offsetting the higher cost of operating with foot traffic," says Kindra Devaney of Fulcrum Global Partners, a New York-based analytical firm. "I don't think [discount retailers] could handle it."

Troy (Mich.)-based Kmart ventured into Manhattan in 1996, and while the company has come on hard times, it made some smart moves here. "Kmart has a long-term lease on their property [in Manhattan], which is probably well below market [rates]," says Emme Kozloff, a retail analyst with Bernstein Research.

But Kozloff sees the same challenges for starting up anew -- too much effort for not enough reward. "There's more low-hanging fruit around the outside of dense urban areas that [Wal Mart and Target] can grab," she says, without tackling 42nd Street, Wall Street, Harlem, the Upper West Side, and the Battery.


  Take Costco (COST ). For years, speculation was rife that the warehouse-style retailer was trying to open a store in Manhattan, but it has yet to get off the ground. "Those plans have been delayed so long, I don't ask about them any longer," says Linda Kristiansen, a UBS Warburg analyst. Costco didn't return calls asking for comment.

Kmart basically has a captive audience here -- and while I love to shop in the store, the captive-audience syndrome can be off-putting sometimes. Here's a typical Kmart episode: A friend, who shops at Kmart's Astor Place store, says he recently went there to pick up a couple of packs of undershirts. Easy, right? Not at all. Kmart had in stock just one size in undershirts -- XXXL. He left empty-handed.

So do all my hopes ride on Kmart? Maybe not. Target spokesperson Douglas Kline acknowledges that "a large portion of our online guests live in Manhattan." A-ha, his statement just points up how high the demand is here. Just imagine the booming business an actual store could do. But then, he dashes my hopes when he says a store isn't planned in the immediate future.


  Still, some analysts think Target may be playing its cards close to its vest. For all its flaws, Kmart has proved that it's possible for a major discounter to operate here. "Were the Kmart spaces to become available, we would expect Target to very seriously consider them," says Robertson Stephens analyst Bill Dreher. He notes that Target recently opened a new store in downtown Minneapolis, where the company is headquartered. This store is split-level to compensate for less ground space.

Dreher suspects that Target is using the Minneapolis shop as a city-store prototype. "They're going to refine and perfect that format," he predicts. But the analyst cautions that it took many years for the company to feel ready to roll out its SuperTarget format, a grocery store inside a Target store, more aggressively.

I'll wait. What choice do I have? And let's get something straight: It's not that major retail chain stores can't make it here. One company that never lacks shoppers is Bed Bath & Beyond (BBY ). The home goods offered in the company's two Manhattan stores aren't priced at discount levels, but "they're doing well in New York because of the perception of discount," Devaney says. Same goes for chains like TJ Maxx (TJX ), Pier 1 Imports (PIR ), and Burlington Coat Factory (BCF ) -- all getting good foot traffic in the borough.

I know I can always trek out to Jersey to buy some sheets and stock up on light bulbs. But that's for hard-core bargain hunters. My point is simple: Manhattanites, too, demand the cheap stuff. Have these city-shy retailers ever seen the throngs of shoppers hailing cabs to cart their bargains home? So Wal-Mart, Target, Costco, hear my plea -- even if it's just a pipe dream.

Tsao covers markets for BusinessWeek Online

Edited by Douglas Harbrecht

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