View From Within: Formatted Department Store

Over the past decade the Moscow retail sector has made significant progress. The range of goods has widened and retail outlets have undergone drastic changes. The Soviet-era department and self-service stores have passed into history, to be replaced with modern shopping centers and supermarkets. And this is hardly surprising, as Soviet-style retail outlets have failed to withstand the competition of recent years.

In the 1990s centralized deliveries stopped and shops could no longer ensure the necessary supply of goods to shop floors. Shop counters became empty, turnover fell. Most major retail outlets were privatized. To stay afloat shop managers were forced to lease retail space to smaller tenants.

“The placement of merchandise became chaotic, determined only by the layout of leased sections,” says Ilya Shershnev, development director of Swiss Realty Group (Moscow). “Each of the specialized sections had its own cashier’s desk and own security system. It is needless to say how inconvenient the service in such shops was.

“The second half of the 1990s saw the arrival of major retail centers built according to world standards, which include a single concept of the store, well-thought-out placement of goods, parking areas for customers, customer service. It was clear that customers prefer quality and convenient service, even though most of the new retail centers emerged near MKAD (the Moscow Ring Road on the outer limits of the city).”

The ever-increasing competition and commercial success of shopping centers built in line with the new standards forced owners of the old Soviet-era department stores to think about their future. One of the solutions was the reconstruction of their buildings and the adoption of a new retail format.

Reconstruction Resuscitation

“The demand for reconstructed retail space on the commercial real estate market is very high,” says Elina Zanina, head of the commercial real estate and development department at Miel-Nedvizhimost realty. “As a rule, such shops are situated in historically established trading areas that have always been visited by people with the purpose of purchasing some particular item. Also, such shops are situated close to busy thoroughfares.

“Operating reconstructed shopping centers may bring high profits in the future, and this is why companies involved in retail willingly rent such properties or buy them, even making prepayments at the reconstruction stage.”

For the building to be in demand on the market it should meet several conditions. At best, the shopping area should be square or rectangular, say Miel-Nedvizhimost’s experts. It can be elongated as long as the shelves are placed along its full length. The ceilings should be at least 4 meters high, so that, if they are needed, suspended ceilings can be installed for wiring and cables to be hidden above them.

In line with modern requirements the retail area should occupy no less than 70 per cent of the total area of the building. Most modern shops operate on a self-service basis, which requires vast open space, considerable power supplies to provide sufficient illumination, as well as air conditioning systems, refrigerators, etc. Such areas are mostly sought by major retail chains that sell foodstuffs, household appliances, clothing, etc.

The location of a shopping center plays a vital role in the fate of any project. That is why retailers initially used to show an interest mainly in retail areas situated in the city center, along the central streets and main roads, says Elena Enarieva, head of the marketing department with JSC Sistema-Gals.

Practice has shown that the owners of smaller shops moved to launch reconstruction of their retail areas much faster than shareholders of major city department stores, who took years to decide on such issues. Only in 2002 the decision to reconstruct the country’s main department store was approved.

Initially GUM, Moscow’s landmark department store, was divided into small sections 25 to 30sqm each; later sections were expanded to 80-300sqm each and interior partitions were removed and pass-through shops were built. Those changes were brought about by altering consumer requirements. Most of the $10 million allocated for the reconstruction was used for rebuilding the third floor, earlier used for showrooms and technical facilities.

As a result GUM’s retail areas grew by one-third, new cafes and restaurants were opened, as well as a two-screen movie theatre and a children’s playground. Furthermore, the building was equipped with elevators and escalators, and new glazing was installed over the atrium. The reconstructed GUM attracted famous retail operators representing leading international brands.

Shareholders in OAO Torgovy Dom TsUM, that owns another famous Moscow department store – the Central Department Store, or TsUM, approved a $32 million deal for the design and construction of a new retail center, to be built as an annex to the existing store, and an underground parking area. In terms of architectural design, layout and equipment the new building will fully meet the generally accepted requirements for shops selling deluxe merchandise.

Once the new building is commissioned in 2006, TsUM’s total retail area will expand to 60,000sqm. In the future the Detsky Mir department store is to be demolished and rebuilt in line with the old design. Several years ago the retail areas of the old department stores Moskvichka, Vesna, and Podarki on Novy Arbat underwent renovation

Following the qualitative changes that included expansion of retail areas, the installation of air conditioning systems and new escalators, etc., old tenants were replaced by retail operators representing well-known brands, such as Sasch, ESPRIT, Benetton, etc.

Retailers take a special interest in the detached buildings of Soviet-built district department stores. For example, the Arbat-Prestizh perfumery chain has opened an outlet in the reconstructed building of a former department store near the Proletarskaya metro station. Most of these kinds of shops have been re-profiled by new owners.

Several department stores occupying annexes or semi-detached buildings next to residential or administrative buildings lost their department store format as a result of renovation. Today, the upper floor of the former Sokolniki department store is occupied by the M.Video home appliances store; a department store in Bolshaya Cherkizovskaya Street (the Preobrazhenskaya Ploshchad metro station) has been transformed into another outlet of Arbat-Prestizh; the Bogatyr department store on Seleznyovskaya Street houses an outlet selling famous Italian clothing brands.

The fate of department stores occupying detached buildings varies, as those of them in a good location undergo reconstruction and are sold to new owners, as, for example, in the case of the department store at the end of the Yaroslavskoye motorway, where a Sedmoi Kontinent supermarket was opened, while others – like the large department store in Saburovo – still lease premises to smaller vendors, due to limited numbers of customers.

‘Historic’ Disadvantages

While the prime locations of old retail centers are beneficial, the specific layout of the buildings they occupy represent a serious disadvantage.

“The specific layout of Soviet-built department stores is based on the retail format widespread in those times. Shops used to represent a long counter with a shop assistant behind it,” says Alyona Rebarbar, head of the commercial real estate department at Penny Lane Realty.

“Self service in Soviet-era shops was rare. Hence, the most widespread disadvantages: the shopping area is elongated, its layout failing to meet modern requirements; heavy supporting structures and a retail space hardly exceeding 1,500 to 2,000sqm.”

Many Soviet-built shops occupy either annexes or the first floors in residential houses – the department stores Vesna and Podarki on Novy Arbat, and Podarki on Tverskaya. Quite often such a proximity to residential areas caused various problems such as adding ventilation, installing air conditioners, as well as noise and illumination. Worn-out communication cables, inconvenient delivery points and insufficient power supplies should also be mentioned.

“Turning an old store into a modern supermarket does not require much effort,” says Sergei Makin, head of the commercial real estate department with Domostroi realty. “The payback period of such projects is 4 to 5 years on average, at times even shorter. One of the main disadvantages of the old shops is the extensive useless space, like in the case of one of the projects that we are implementing.

“It is the former Promtovary department store on Grishina Street near the Mozhaiskoye motorway. The basement, earlier used as a warehouse, occupies 400 square meters of the entire area of 1,000 square meters. Today operating large warehouses is not profitable as retailers work directly with suppliers who have their own warehouse facilities. That is why we have to look for a solution, namely – to invest money and transform old warehouses into retail areas.”

Owners of old department stores, too, encounter certain problems. “Considering that earlier department stores were built at locations chosen at random, not all retailers take an interest in them,” notes Maksim Gasiyev, head of the commercial real estate department at Colliers International.

“Reconstruction of such buildings is almost always fraught with restrictions, both of a construction nature – supporting walls, and of a technical nature – power supply facilities. Nonetheless, many major retailers address exactly these kinds of formats and those shops remain of interest. This concerns, first and foremost, food retail networks and home appliance chains.”

Colliers International specialists note that that only a handful of old department stores are undergoing renovation today, as most of those still available are not very attractive to investors in terms of their location, or their owners demand too high a price.

Old department stores that used to be very popular during the Soviet era nowadays tend to suffer serious disadvantages. The buildings are often 4 to 5 stories high, with no elevators and the interior layout fails to meet the standards set by modern retail operators.

Even after reconstruction and the installation of air conditioning systems and elevators these retail areas fail to attract tenants. This is because tenants are unwilling to rent the upper floors where the number of customers is usually low.

In the opinion of Anna Shiryayeva, general director of Magazin Magazinov, for a building to bring the highest profits it should be operated by a single retailer who can level out proceeds between the first and the upper floor retail space, between popular goods and slow-moving articles.

Renovation Brings Benefits

Swiss Realty Group experts cite the Moskva department store on Leninsky Prospekt as a good example of a successful reconstruction project. Post-renovation Moskva offers a wider range of merchandise to customers with above average incomes.

The Bucharest department store on Kakhovka Street and Leipzig on Akademika Vargi were purchased by the company Holding-Tsentr and reconstructed in line with western standards. Supermarkets occupy the first floors, while the second floors are used by clothing and accessories departments; the retail areas have an open-plan layout, and both stores have parking areas for customers.

Being situated quite far from the city center, those stores target customers with average incomes. According to Miel-Nedvizhimost experts, the most successful reconstruction projects include the retail outlets of the Arbat-Prestizh chain at 8, Kutuzovsky Prospekt, 26, 1st Tverskaya-Yamskaya, and the Dobryninsky department store – currently under reconstruction – where all the properties available for lease have already been reserved by tenants in advance.

At the same time, according to Mikhail Gets, the head of the commercial real estate department at Blackwood, in order to determine whether a project is successful or not, one should track the history of its operation, to see how many times it was re-profiled, how often major tenants come and go, how many times the layout was changed.

For instance, despite a great deal of effort Detsky Mir at Lubyanka still fails to satisfy modern-day requirements. Its current owner, AFK Sistema, believes that the project will only be successful if the building is demolished and rebuilt again, because communication cables are worn out and the retail areas do not conform with modern standards.

At present, only 50 per cent of the available area is used as retail space, while in line with the modern requirements the retail area should occupy at least 60 to 70 per cent of the total area of the building. Besides, calculations show that the cost of reconstruction of the existing building will only be 20 per cent less than the cost of building a new one from scratch.

Experts believe the future lies with the renovation of old stores, which is proved by the growing trade in renovated buildings. Blackwood reports that in 2002 Arbat-Prestizh opened an outlet in Sokol in the reconstructed building of the Smena department store of the Detsky Mir chain. The layout of the old building was changed; retail space expanded to 2,100sqm and is now used with maximum efficiency.

The old retail format, whereby considerable retail areas were leased to small tenants, cannot be compared with a new single-owner format.

Practice shows that renovation brings about commercial success and turnover can more than double as a result. When the Sokol outlet of Arbat-Prestizh opened, the company anticipated that its goods turnover would amount to approximately one-third of the total turnover of all the outlets of the chain, i.e. $35 million.

While the majority of Soviet-era stores are still used by their new owners for retail purposes, some department stores have been re-profiled. Anna Shiryayeva believes that such buildings may again be transformed into retail centers only with the arrival of foreign retail chains.