View From Within: Old Walls, New Life

In the wake of the transition towards a market economy and the emergence of new modern shopping malls, popular city department stores that used to make profits in Soviet times have found themselves in a bit of a predicament. One of the reasons for that was that Soviet-era retail centers failed to the meet requirements of modern retail operators in terms of the layout of the premises and the equipment of those with engineering systems. To adapt to the new conditions of trade departments stores were forced to reconstruct their facilities.

GUM and Petrovsky Passazh

Petrovsky Passazh was the first Soviet-era department store to undergo reconstruction in accordance with Western standards. In 1988 the famous Turkish developer Enka was awarded the contract for rebuilding it. The general concept of the building was preserved. The project envisaged minor changes in the layout of the premises aimed at expanding the retail space, and the building of zones for recreational use and public catering, and a high-quality renovation of the retail and office areas.

Initially it was planned that the renovated Passazh would house expensive boutiques selling goods from famous international brands. In the course of the reconstruction work the building underwent qualitative changes and has been successfully operating using the Western retail format ever since.

In the first half of 2004 Petrovsky Passazh’s receipts grew 9 per cent. The retail operator is OAO (JSC) Petrovsky Passazh; its core shareholder is Bin Bank. Petrovsky Passazh does not operate any retail outlets of its own but leases properties to expensive boutiques. Thus, as a result of reconstruction Petrovsky Passazh was transformed into a top-class shopping center.

Over the past 15 years GUM has undergone reconstruction twice. The first overhaul was timed for the 100th anniversary of the historic department store marked in 1993. The Moscow government issued a decree “On the reconstruction of the monument of architecture, history and culture – the Verkhnie Torgovye Ryady (Upper Trading Stalls) on Red Square”.

JSC Torgovy Dom GUM was instructed to oversee the reconstruction work and to develop a feasibility study for the project that was to be implemented at the expense of Russian and foreign investment, bank loans and the funds of Torgovy Dom GUM.

The Moscow city directorate for control over the protection and exploitation of historic and cultural monuments financed the restoration of the main building’s facades. GUM’s outward appearance improved but the interiors did not change much. The department store failed to meet new market requirements and sales began to decline.

To save the store from bankruptcy, the GUM management was forced to let tenants onto its premises, but this did not help much. If before 1998 less than 10 per cent of GUM’s space was leased out; following the 1998 financial crisis approximately half of GUM’s retail areas were leased out.

Reflecting on why GUM’s popularity was fading the administration of the department store concluded that customers were opting for modern retail centers because they more closely met their requirements, offering a convenient layout, public catering and entertainment facilities.

To change the situation and adjust GUM to modern retail requirements, it was decided to continue reconstruction of the store. In 2002 a sum of $10 million was allocated for the purpose. Most of it was used for renovating the third floor and transforming the showrooms and offices situated there into retail areas. GUM’s network of public catering outlets increased to include expensive restaurants, bars, and a fast-food restaurant. The 2-screen Kinomax movie theater and a children’s playroom were also added.

After the renovation, GUM was equipped with lifts and escalators. The retail areas grew by one-third to 30,000sqm. Business in GUM began to improve, with famous world brands actively opening their outlets on its premises. Success inspired GUM’s shareholders to continue investing in reconstruction. Furthermore, the annual shareholders’ meeting in April 2003 decided to inject the total net profit – some 410 million rubles – into development.

TsUM

1995 saw the first stage of reconstruction in another famous Moscow department store, TsUM. Planning a major overhaul, TsUM’s shareholders intended to expand the retail area by changing the layout. In late 1995–early 1996 TsUM held an open international tender to plan its reconstruction. The German firm ReDesign Einrichtung GmbH won the bid. The firm had earlier taken part in the reconstruction of several European shopping malls. The main condition was to carry out a modernization of the premises without a suspension of trade.

As a result, TsUM’s total retail space grew to 33,000sqm. The building was equipped with state-of-the-art lifts and escalators. The reconstruction was completed in 1997 and cost some $22 million. 50 per cent of the costs were covered at the expense of a third emission of TsUM shares, the other half was set off by profits, depreciation charges, investments and bank loans. Trade in TsUM became more active but time showed that the overhaul had not helped to solve all the problems.

Six years later TsUM again faces reconstruction. This time TsUM’s owners plan to expand the retail area to 60,000sqm, by building an annex. At the same time, it is planned to build an underground car park and to redevelop the public garden near the department store. Shareholders in OAO Torgovy Dom TsUM plan to spend approximately $32 million on the project. The new building is to be commissioned in April 2006. Construction will be financed by Torgovy Dom TsUM.

Detsky Mir and Voyentorg

Over recent years the Detsky Mir and Voyentorg department stores have been embroiled in numerous scandals. While the building of Detsky Mir is still where it has stood for decades – in Lubyanka Square – Voyentorg has not been so lucky – it was demolished. After the department store closed down in 1995 the Moscow government took over a 60 per cent stake in it.

In the same year a decree on the reconstruction of the Voyentorg complex of buildings was issued. As a result of the serious wear and tear of the department store facilities, the decree instructed the Department for Foreign Relations to prepare a feasibility study for the reconstruction and restoration of Voyentorg.

The Department and the newly established OAO Torgovy Dom Tsentralny Voenny Universalny Magazin (OAO TD TsVUM) were to invite bids from foreign investors and to enter into a contract with the winner. But those plans were never implemented and eventually the dilapidated building was demolished.

The project to develop a new building to replace the dismantled Voyentorg has still to be finalized. It is known that the new complex will house both retail areas and office space. The center will include three internal courtyards – atriums, covered with transparent material. The design is being prepared by a team from Mosproekt-2 headed by Vladimir Kolosnitsyn.

The new building will be six floors high; the old Voyentorg building had only five floors, and will have a 4-floor underground area. However, the height of the building will not change, as the ceilings will be lowered from the former 4 to 3.3 meters.

The total space of the old Voyentorg amounted to 18,000sqm; the new building will have a total area of 70,000sqm, with 10,000sqm of retail space and 30,000sqm of office space. The project includes the development of a 760-space parking lot, storage areas, public catering and recreation facilities.

The main entrance to the buildings will face Vozdvizhenka and Bolshoi Kislovsky Lane, while the parking area and warehouse facilities will be accessible only from Kislovsky Lane. The project is to be overseen and implemented by AST-Kapstroi and financed from the city budget and with borrowed funds.

Meanwhile, the plans for reconstruction of the Detsky Mir department store are still being undermined by heated disputes. The main reason is that AFK Sistema which includes the company Sistema-Gals – the de-facto owner of the building – has still not finalized its plans concerning Detsky Mir’s future. Since 2002 the building’s owners have been informing the public of its concept of the imminent reconstruction of the famous department store.

The initial plan stipulated that the external perimeter of the building would remain unchanged, while the interiors would change beyond recognition. The central zone would include an atrium with a glass roof at the level of the 7th floor. The building would have an underground parking area, restaurants and a viewing platform on the roof, as well as a 10-screen cinema theater.

As a result, the retail area will expand by 17,000sqm – from 21,000sqm. to 38,000sqm. Soon after the plan was presented rumor spread that the Mosproekt-2 project had failed to fully satisfy the owners. Furthermore, in March 2004 Moscow Mayor Yuri Luzhkov issued a decree “On the development of the underground area beneath Lubyanskaya Square for the Detsky Mir retail center”, which meant that the developer – Sistema-Gals – was automatically given the green light for building additional facilities.

In November the future of Detsky Mir still remained vague. “As yet, no decision on the method of reconstruction has been taken,” says Andrei Zakrevsky, vice-president of Sistema-Gals. “The project still has not been officially presented, which is why it is too early to speak of the [future] characteristics of the building. Detsky Mir will preserve its status as a children’s store. The reconstruction is aimed at adapting it to international retail standards and modern consumer requirements.

“After the redevelopment is completed Detsky Mir will have underground parking, a multi-screen movie theater, restaurants and cafes, and family-oriented entertainment facilities. Detsky Mir, which is righteously considered one of Moscow’s landmarks, will be transformed into a modern retail and entertainment center of European level, preserving its outward appearance and family-oriented format.”

According to Sistema-Gals, the project is evaluated at $157 million, with construction work and construction-related costs of some $100 million plus lease rights, financing and consultancy services. The European Bank for Reconstruction and Development (EBRD) is currently considering a loan of $90 million, $50 million of which may be extended by the EDRD itself while the rest will be provided by a syndicate of commercial banks.

Reconstruction Under the Microscope

Experts differ in their opinion on the reconstruction of Moscow’s old department stores. Some disapprove of the demolition and redevelopment of historic buildings in line with modern know-how; others welcome such an approach as effective. For example, Yelena Florinskaya, executive director of Leeds Property Group, treated the dismantling of Voyentorg quite calmly.

In her opinion, the reconstruction of the department store will require much more funds than anticipated. Besides, building a department store in Vozdvizhenka only proved effective in Soviet times. Today customers pass by the area, because it is situated between two popular retail districts – Okhotny Ryad and Novy Arbat.

Yulia Dalnova, a leading expert at the retail real estate department of Knight Frank, believes that reconstruction always enables landlords to make retail areas more attractive for tenants and more convenient for customers. She notes that being represented at a shopping center of such a class as GUM, for example, is a must for any brand that enjoys influence on the market.

“Such changes are necessary because reconstruction makes it possible to preserve those facilities – in the design and format in which they were once built – as profit-making retail properties,” says Yelena Florinskaya. “At the same time, redeveloping those kinds of facilities is more complicated, because the building must meet modern requirements, on the one hand, and on the other – its historic appearance must be preserved. Before setting about rebuilding an old department store one has to determine its future functions, to develop its concept. The goal of reconstruction is to ensure the maximum value of the property.”

Olga Yasko, retail real estate analyst at Colliers International, says that the concept of modern retail centers provides for the formation and correct distribution of customer flows. Quite often this implies a complete re-planning of the interior, improving vertical and horizontal communication facilities.

Redecoration alone is not enough to considerably increase the value of the property. Practice shows that all the historic department stores have at least three floors. Customers spoilt by modern shopping malls are no longer willing to climb stairs to get to the desired shop. Another serious problem is the lack of parking space. It is no secret that many respectable customers avoid once-popular retail outlets simply because there is no place to leave their cars in the city center.

Knight Frank experts believe that the retail industry has turned shopping into a sort of entertainment, while a century ago trade meant trade alone. Cafes and restaurants are an inseparable feature of a shopping mall, but they scarcely blend into the old design of Soviet-era complexes. The classic example is fast-food restaurants in GUM, which fail to meet modern requirements completely.

Another aspect highlighted by realty experts is the transition of department stores to a new retail format. Some experts believe that a department store as a business is more stable than a shopping mall. But at the same time running a department store requires huge expenses, immaculate logistics and a personnel policy.

That kind of retail format is more difficult to maintain, and today there are virtually no operators in Moscow capable of developing it. Most management companies working on the premises of central department stores prefer to lease out their retail areas.