Call It Mall-Mart

As anchor department stores fail, big discounters move in

In a world where too many shops are chasing too few shoppers, retailers are always hunting for ways to tap new customers. Just ask Wal-Mart Stores (WMT ) Inc. While it's staking most of its growth on massive, stand-alone supercenters, Wal-Mart recently opened a two-story store in a Massapequa (N.Y.) mall, about 20 miles from New York City. And in January, it opened a three-story unit in a Los Angeles mall where a Macy's department store once operated. For the first time, Wal-Mart is even building its own addition to a regional mall, this one near San Diego.

Wal-Mart at the mall -- once the province of department stores and specialty shops? Those days are long gone, and Wal-Mart isn't the only discounter that sees opportunity where much of America shops. Target (TGT ) Corp. has been experimenting with discount stores in malls for 25 years. Now, it has more than 30 such units, most of which it picked up from Montgomery Ward in 2001. And Minneapolis-based Target appears poised to pick up the pace. Goldman, Sachs & Co. analyst George Strachan figures Target could have 150 mall stores by 2012.

Why the sudden rush to the mall? Mostly the discounters see it as a way to enter densely populated urban and suburban markets with minimal hassle. Strachan estimates that as many as 800 anchor spots in malls could turn over in the next decade -- with discounters snapping up 300 of them. "This is an incremental, opportunistic strategy to continue to fill in markets," says Lois Huff, senior vice-president at Retail Forward Inc., a Columbus (Ohio) consultancy.

While the shopping mall doesn't fit the discounters' traditional mold -- single-story units with acres of parking -- it's easy to see the allure. In some cases, it's the only way these retailers can find enough space in the cities. "Most often, what's available in an affordable price range is something that someone else left behind," says Robert S. McAdam, a Wal-Mart vice-president who's in charge of winning local government approval for new stores.

And these well-established retail sites, with parking, lighting, and other infrastructure, can help the big-box stores avoid the neighborhood outcry and zoning battles that often accompany their expansion. While healthy sales are the ultimate goal, it's a nice plus for Wal-Mart to be welcomed as an economic savior in places such as Portland, Ore., and Los Angeles, where its presence is helping to revive once-terminal malls that serve primarily minority shoppers.

It's impossible to assess the profitability of discounters' mall-based stores, because they don't break out those numbers. But analyst Strachan figures real estate costs are about equal to what they would pay for free-standing stores. Logistics cost more, because unloading and moving in the merchandise is less efficient than at stand-alone stores. But analysts say those costs are probably offset by higher store traffic and better sales per square foot.

Of course, there are some tricky operational challenges. Retailers accustomed to one-level stores have to reconfigure the layout to move shoppers through the multi-floor locations. That can mean transporting shopping carts on special escalators; in its Baldwin Hills store in Los Angeles, Wal-Mart also installed a special elevator to move dog food to the right section of the store. But the company is quickly learning how to handle nontraditional store formats, thanks in part to its experience with multistory units overseas.

Mall retailers and owners generally welcome the discount lions into their dens. As department stores have shed customers in recent years, many malls have suffered financially. "If Target is going to locate [nearby]," says Richard S. Sokolov, president of mall developer Simon Property Group (SPG ) Inc., "we might as well get the advantage of their market share and sales and advertising within our property, as opposed to across the street."

As with Sears (S ) Roebuck and J.C. Penney (JCP ), Federated Department Stores (FD ) Inc. says it's not afraid of discount interlopers. Indeed, Federated sold Wal-Mart the lease in the Massapequa mall. It continues to operate a Macy's at that shopping center. The department stores like the extra traffic too -- and the discounters also offer commodities and hard goods that they don't.

At the very least, the newcomers might "slow down" the death rates of some department stores, predicts retail consultant Burt P. Flickinger III of Strategic Resource Group. In the brutal world of retailing, that's as close as you get to a win-win proposition.

By Wendy Zellner in Dallas

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