View From Within: Storm Warning

A mall’s success depends on a variety of factors, Anna Shiryayeva, general director of Magazin Magazinov realty, says. If a developer makes a mistake somewhere, his mall will fail to bring the expected returns.

Just one grave error is likely to undermine all the advantages. Besides, these days developers often venture on such projects just because mall construction is fashionable, and their plans are not based on serious calculations or market research data.

“The retail property market is growing fast; new properties and formats are emerging; Western operators and developers are arriving on the market,” says Mikhail Gets, head of commercial property at Blackwood. “Old formats are growing obsolete and losing their appeal both for shoppers and tenants.”

Besides, says Shiryayeva, as the social and demographic structure of the population is changing, consumers are developing new habits and preferences.

“We forecast extensive development of the shopping and leisure facilities market within the next 3 to 5 years, in other words, the number of properties will grow further,” Anna Shiryayeva says. “But after the market potential of extensive growth is exhausted, the time will come for strong competition between the malls resulting in the removal and closure of weaker properties designed in violation of the rules for retail space structuring.”

“The market of retail centers is a market in transition,” says Yelena Florinskaya, general director at Leeds Property Group. “The competition between shopping centers is undergoing a transition from quantity into quality. The number of building plots suitable for the development of large retail centers is shrinking in Moscow. And although, in terms of stock of retail space per person, the capital still falls behind most European cities the competition between operating centers is becoming stronger.

“In some parts of Moscow this is becoming a real problem for the malls, for example, in the area around Rublyovskoye Shosse, the district of Krylatskoye. For the business to keep afloat, certain measures need to be taken – to adapt to the changing environment, revise the principles of business management, adjust or fully revise the concept of the retail center.”

The Five Main “Re-s”

Re-conception is a set of measures aimed at boosting returns in an operating shopping center. Those measures may include re-brokerage (forming a new pool of tenants), re-engineering (installing new engineering systems), re-development (internal rebuilding or demolition of property with a view to raising a new building), re-branding (revising the image of the mall) and re-management (hiring a new property management company to run the property), says Yelena Lavrentieva, head of retail real estate at the Becar. Commercial Property company.

Marty Whelan, development director at Astera, believes that re-conception is aimed at boosting the property’s value either with a view to selling or letting it. Landlords resort to this measure in a bid to enhance the mall’s image, making it more attractive for would-be tenants and visitors.

On the basis of marketing analysis, developers or mall owners re-plan the retail space, invite tenants operating in different retail formats, arrange customer flows more effectively and change the anchor tenants. “The purpose of re-conception is to breathe new life into the shopping center, even its name can be changed,” says Yelena Florinskaya. “The developer or the landlord launches a new business with a different composition of operators, customers.”

Yelena Lavrientieva believes that the first signs that re-conception is necessary are complaints from tenants that the rent fails to correspond to their sales. That alone should put the landlord on his guard.

“Re-conception is vital for shopping centers situated in neighborhoods where new retail properties of comparable size or larger are being opened by competitors who have more advantages as their facilities are larger, the composition of tenants is more balanced, they offer more creature comforts to buyers, are easier to access, have better parking and entertainment facilities,” Florinskaya adds.

Ilya Shershnev, development director of Swiss Realty Group, says one of the reasons it may be necessary to revise the concept is the initially erroneous approach towards the design of the facility, the result of which means it has failed to attract customers and proved loss-making. Another reason is the natural course of development of the area where the shopping center is located – construction of new housing, transport routes, etc.

“If we are to be guided by Western experience, it shows that the average life span of a retail center there is 5 to 10 years, whereupon the concept undergoes radical changes,” says Mikhail Gets. “This is done so the facility remains attractive for the shoppers.”

Andrei Patrushev, head of public relations at Knight Frank, reports that tenancy deals abroad provide that once every 10 to 15 years the mall is closed for re-conception and re-positioning for a period of one to six months. The property undergoes a complete overhaul of equipment, communication lines, renovation and re-planning of the shopping arcades; the composition of tenants changes, too. “Following re-conception the shopping center gets a new look, which allows it to boost attendance and buying activity,” Patrushev says.

The retail property market in Russia still falls short of Western standards, although nowadays it is growing even more rapidly, trying to reach a level the Europeans took decades to achieve within 5-7 years.

Yelena Florinskaya says the so-called check measurement, or the analysis of changes in consumer behavior and competitive environment, should be carried out 6-12 months after the shopping center opens, whereupon such measurements should be repeated once every 24 months.

No Guarantees

Location is one of the key preconditions of a shopping center’s success, all analysts agree. In the case of every retail property, location is a constant that cannot be changed. Buildings raised in central locations, next to metro stations and along major transport routes, have more chance of succeeding than those built on the city outskirts.

Anna Shiryayeva notes that a favorable location is the main factor that helps certain shopping centers to stay afloat despite all the drawbacks in their design and concept.

But a favorable location alone cannot fully guarantee success. Before re-conception of the city’s landmark department stores, such as GUM, TsUM, Okhotny Ryad, Voyentorg, Detsky Mir and others, their properties were used ineffectively and failed to achieve the expected returns.

Practically every shopping center has certain technical and structural drawbacks caused by poor planning, faulty organization of vertical ties, lack of parking spaces, etc, says Anna Shiryayeva. But while the location of the property cannot be changed, most of these flaws can be eliminated.

One of the components of renovation is redevelopment – the rebuilding of internal space to meet the tenants’ needs. That becomes necessary because shopping centers are often built solely on the basis of an architectural concept, without enlisting the services of professional retail property consultants, though planning of retail space is a joint task, says Yelena Florinskaya. “Being versed in the specifics of the major retail business, consultants are able to define precisely the special requirements included by designers in their projects,” she says.

“Already today old retail centers with poor layouts are being forced to reconsider their concept,” Marty Whelan says. “They do not conform to the principles in line with which modern shopping centers operate because they fail to take into account international standards and local specifics.”

For example, the department stores Vesna on Novy Arbat, Krasnopresnensky on Krasnaya Presnya Street and Druzhba near the Novoslobodskaya metro station have changed beyond recognition in the course of re-conception.

Each year the number of shoppers who travel to malls in their cars is growing in the capital. Customers prefer shopping centers where parking facilities are available. But, even though consultants stress the importance of a spacious car park, fulfilling the requirement proves to be extremely difficult in practice.

For example, Magazin Magazinov’s experts reported that plans to increase the parking area at Druzhba failed due to the structural characteristics of the building.

At the same time, there are examples where mall owners have managed to find a solution. A guarded car park for customers was built on territory adjacent to the Gimenei shopping center (22 Bolshaya Yakimanka); the center also features an underground facility for customers and tenants.

Developing an underground parking area beneath the old building of the GUM department store was impossible, that is why the facility was built next to the store, on Ilyinka Street. Construction of underground parking lots is underway at Voyentorg and Semyonovsky shopping and leisure center where the multi-level parking lot will have 450-500 spaces.

Compared to redevelopment, measures such as re-branding and re-brokerage do not seem to be very complicated. Over the past 5-7 years many major Moscow shopping centers have seen changes in the composition of tenants.

The retail center DOMiK at the intersection of the Moscow outer ring road and Mozhaiskoye Shosse, initially positioned as a household goods store, now sells cars, Swiss Realty Group reports. The main reason for the change of profile lies in DOMiK’s location which suits target-oriented shopping while the size of the property is only 8,000sqm, which is clearly not enough to attract enough customers, Ilya Shershnev explains.

“Besides, a variety of specialized household goods stores, which are considerably larger than DOMiK and offer a much wider range of goods, have already been opened along the Moscow ring road (MKAD) by foreign operators, such as IKEA, OBI and Leroy Merlin,” he adds.

The mall’s success also hinges on the professionalism of a management company whose task is to ensure the highest possible capitalization of the project. Most centers set up their own management companies, but professional property managers (the Torgovy Kvartal – Region (Retail Quarter) group, Property Management Company and others) experienced in operating retail properties and handling crisis situations have begun to arrive in the sector.

Awakening From Slumbers

The history of retail centers developed in the 1990s shows that even if some tenants were moving out others came in to take their place. Perhaps, that period of lethargy would have continued for years had it not been for the arrival of international chain operators and Russian retail firms who adopted Western practices.

Those newcomers needed retail space that would meet international standards. Retail centers whose owners were reluctant to enter into constructive dialogue faced the risk of being downgraded to the status of stalls on Moscow’s rundown consumer goods markets with tenancies held by shuttle traders selling cheap goods made in Turkey or China.

Mall owners welcome new retail operators and are ready to offer them preferential terms, Yelena Lavrentieva says. The shortage of “fresh” brands is quite acute. “Landlords are interested in popular brand stores, capable of attracting as many buyers as possible and boosting the mall’s image: the more famous the brands, the better the result is,” adds Anna Shiryayeva.

At the same time, if the shopping center is successful, re-conception makes no sense, regardless of whether there are new players on the market or not, analysts say.

“It has to be remembered that a retail center is a living organism and adjusting its concept is necessary throughout its life,” notes Yelena Lavrentieva. “Re-conception is a surgical procedure and it is better not to neglect problems and to take regular preventive measures.”

As competition grows stronger shoppers can choose from a variety of retail centers and, of course, they prefer stores that are more convenient and well thought-out. As a result, attendance at other department stores drops and tenants move into more successful malls.

An example is the Moskvichka retail center on Novy Arbat that used to be one of the most popular clothes stores in the city in the years when competition was not as strong as it is today. But the center lost customers after new retail properties featuring leisure facilities opened up across the capital. As a consequence, even the most promising tenants vacated their properties in Moskvichka.

Advantages of Re-Conception

The number of stores that have undergone re-conception is growing. A recent example is Druzhba at 4 Novoslobodskaya (the investor is the Chinese government). The center opened in October 2000. McDonald’s, Perekryostok, Ecco, Alba, Rico-Ponti, Bustier and other operators held leases at the mall. Such a composition of tenants was quite strong and all parties were satisfied with their takings for a while, Magazin Magazinov says.

However, by 2003 it became clear that the retail center had failed to meet modern standards in a variety of parameters, in particular, in terms of internal planning of space and the composition of tenants. By late 2003 the owners agreed that the mall required re-conception and re-positioning.

A marketing survey carried out by Magazin Magazinov has shed light on the priority target audiences, attendance, the size of consumers’ incomes and structure of spending, as well as the key motives for visiting the center and any unsatisfied demand in the area. Maximum and stable revenue from rent was viewed as a priority. The survey also examined the mall’s image, buyers’ preferences regarding clothes and shoe brands, consumer habits and requirements for the range of goods and services.

On March 1, 2005 Druzhba was re-born. The mall had been re-planned to make it more convenient for visitors. A third floor with a space of 1,600sqm was built and new tenants moved in. Today Druzhba’s anchor tenants are Perekryostok, SportMaster, Soyuz, and L’Etoile. Other tenants are CityObuv, Chester, Bustier, Domani, Oggi, Krasny Kub, Dlya Dusha i Dlya Dushi, ION, McDonald’s, Elki-Palki, Mia Dolce Julia, and the Chinese restaurant Druzhba.

The Gimenei shopping center re-opened with a new format in September 2005. Dominion-M acted as a developer for the project. Following rebuilding the size of the property grew by 35% to 14,000sqm, featuring office properties on the third floor and an underground car park.

Gimenei’s shopping arcade houses fashionable clothes stores represented by leading international brands, jeweler’s stores, souvenir shops and beauty product stores. Incidentally, certain exclusive brands can only be found in Gimenei. The first floor houses a premium class supermarket.

“Gimenei is likely to succeed because the pool of tenants combined with a favorable location, design and historically established image will attract high-income consumers,” says Marty Whelan. “The Globus Gourmet food store is a good choice for an anchor. Moscow is short of upmarket food stores and Globus Gourmet is popular. Another center of attraction is Tea Restaurant, remarkable for its original design and a large selection of teas.”

Re-conception envisaging redevelopment, re-engineering, re-brokerage and re-branding has been launched at Semyonovsky. The 9,000-square-meter department store opened in October 1997. Though the center was believed to be successful, the developer – Sanjei Moscow – decided that it needed to undergo renovation. Special emphasis was placed on redevelopment, including the reconstruction of existing facilities and new construction work.

Construction, to be carried out in two phases, began in May 2005. The first building (26,000sqm) is slated to be commissioned in 2006. The total space of the complex will be 41,000sqm. In line with the plan of re-conception, Semyonovsky is to become a shopping and leisure center with 15,000sqm of retail space including a 3,200sqm anchor supermarket. The store will run a variety of catering outlets (3,600sqm of restaurants and cafes).

A 3,000-square-meter leisure center will include a 6-screen movie theater and a large restaurant. The renovated mall will also have a multi-level parking lot. High-end engineering equipment, six escalators and four passenger lifts will be installed. The owners plan to reopen the mall on its 10th anniversary.

Provincial retail centers, too, are experiencing re-conception measures. Before joining the company, Igor Golitsyn, the present general director of Becar. Commercial Property carried out a re-conception project at Vladimir Passazh in central St. Petersburg.

In line with the initial plan, the 2nd, 3rd and 4th floors of the extant historic part of the building were to be occupied with upscale boutiques, but the plan fell through due to the structural specifics of the property. The customer flow was insufficient, tenants moved out and the investors suffered losses. 18 months later the landlord realized that to remedy the situation Passazh needed a complete overhaul.

Consultants devised an original plan and suggested opening a fitness center on the premises. To meet the new tenant’s requirements the property underwent re-engineering; all the building’s structures were re-planned and the air supply system and engineering lines were changed. As a result, the fitness club became a magnet for visitors. Retail space was also re-planned and the composition of tenants changed. The renovated mall features a food court and a children’s play zone. “As a result of comprehensive re-conception, Vladimir Passazh can be considered a success, which is confirmed by its popularity among potential tenants,” notes Yelena Lavrentieva.

Quantity Transforming Into Quality

Re-conception is not a one-day affair. The time and effort required differs from one property to another. In some cases it is sufficient to merely change the composition of the tenants, while others may require a re-planning of the shopping areas, installation of new engineering systems, etc.

When the effort required is too great, consultants pass their verdict saying that the building needs to be dismantled to vacate space for a new development. The most widely publicized example is that of the Voyentorg department store.

“Re-conception requires the closure of the center for a number of months not just to carry out renovation but also to make customers forget the sad history of the store,” says Yelena Florinskaya. “When the landlord decides to launch the re-conception they should be prepared for the loss of time and money. The work may take six months to several years.”

For example, Gimenei needed almost two years. Semyonovsky’s owners plan to open their first building within a year, while the re-conception of the entire facility will take over 2.5 years. Druzhba re-opened a year after its owners decided to overhaul the center.

Marty Whelan says the cost of re-conception depends directly on the scope of the work. Investors are not keen to disclose their expenses. Yelena Florinskaya puts the cost of re-positioning and advertising at up to $500,000.

But the money is not spent in vain. Magazin Magazinov reports that while earlier attendance at Druzhba stood at 10,000 on workdays and 12,000 on weekends and holidays, today it has grown to 20,000 and 23,000 visitors respectively. Income from rent has grown by over 30%.

Moskvichka is still operating in its old format, but its owners are already thinking of its future. Blackwood has carried out an expert valuation and calculation of profit growth after the property undergoes re-conception. Consultants have concluded that once the center is overhauled, with internal space re-planned and new tenants invited in, profits could grow three-fold.