Market Know-how: Change is Inevitable

Then there comes a time when someone for the first time says the magic word "re-concept". Re-conception is necessary when there are problems with buyers or the developer realizes that they are about to begin. Or the new owner of a shopping center is more advanced," says Maxim Gasiev, head of the retail real estate department at Colliers International.

However the expert also thinks that altering a shopping center even if everything is ok, in order to make more profit, has sense. Moreover, re-concepting, re-branding, re-naming, etc, has become fashionable among developers in Russia, which is good for consultants.

The first anniversary

Shopping centers as a format appeared in Russia 10 years ago. Ramstore (no joke!) could accept congratulations on its anniversary. Ultimately Ramstore is the unconditional pioneer of civilized retail in Russia.

Trade is the last to die and is brought back to life by foreigners easily. One look, and shops are already full, and everyone is buying something. The growth of consumer ability noted at the beginning of the 21st century has provoked the growth of development projects. First the number of shopping centers and shopping and entertainment complexes was estimated in their tens, then in their hundreds. Now, according to analytical company RRG, the number of premises has exceeded 1,200.

According to Jones Lang LaSalle, Russian retail is steady in second place in Europe by volume of investments, after Germany. Experts at Penny Lane Realty believe that in 2007 the volume of western investment in retail real estate in Russia was approximately $3-$3.5 billion. American consulting company A.T. Kearney puts Russia in second place in the world after India in terms of attracting investment in retail trade. Other indicators are quite good too.

According to Cushman & Wakefield/Stiles & Riabokobylko, in 2007 alone, 16 new premises came into operation in Moscow. But not everything planned was realized. According to the calculations of the deputy director of the consulting department at Penny Lane Realty, Andrei Dmitriev, of the 760,000 sq.m of premises announced, only 580,000 sq.m were put into operation. But in general the results inspires optimism. And with such clemency it is possible to hear the ominous words "re-concept" and even "re-development" from advisers, managing directors and even proprietors.

The same again

About two years ago in the background of the development boom the first conversations about overstocking began. Especially in the regions. For example, Kazan or Novosibirsk, with all due respect to their status as multi-million populated cities, will not be able to take many more shopping centers. If the consumer ability of the population was decreasing, then yes, of course...but income are continuing to grow! And here the profitability of some shopping centers and shopping and entertainment complexes are quickly falling. And not only in the regions, but also, it is terrible to say, in Moscow. This has caused a shock among proprietors who have reacted quite in the spirit of Chernomirdin’s immortal phrase “it never was like that, but now it’s happening again". And only the most sophisticated have had the courage to recognize that the problem is in the number of premises. As soon as there was real competition, it seemed that some have been able to compete, while others have needed help. "If a premises starts to show negative performance, i.е. A decrease in the operator’s turnover, in the quantity of visitors and as a consequence, the profitability of the shopping center - it is a crisis that can only be resolved by re-concept,” considers Tatyana Skok, a leading analyst at RRG. "Re-conception is necessary for premises which do not satisfy the expectations of the proprietor, tenant, consumer or all of them simultaneously," agrees Yuri Mereminsky, director of the consulting department at Penny Lane Realty. "And in cases when the profit of tenants does not cover their rent," adds Yuri Borisov, vice president of the Guild of Developers and Managing Directors and managing partner of IB Group.

The situation is assessed more rigidly by Olga Kondaurova, an analyst in the research of retail real estate department at CB Richard Ellis/Noble Gibbons, who believes that the main problems were established in the "pre-delivery" period.

"An unprofitable shopping center, normally means that the premises has no steady concept focused on the long-term future, and doesn’t correspond to the location of the premises and its target audience." Andrei Vasyutkin, head of retail real estate in the consulting department at GVA Sawyer, connects the necessity of re-concepting with the following reasons: "a complete absence of the main concepts of work in the retail real estate market by proprietors; the lack of an architectural project; and miscalculations connected with researching the location."

Whether low profitability is a "hereditary" feature or an "acquired" feature is not so important. What is more important is that something needs to be done with it.

Until the last +

Owners treat the problem of a poorly performing shopping center in the same way as toothache: right up to the last minute they hope it will become all right. Oksana Krymina, general director of marketing group Besh, says that she once went to a shopping center in Novosibirsk whose owners had asked her for help. It was on a Friday evening, but the only people she found in the huge building were bored security guards and a group of saleswomen smoking outside.

Mark Afrimovich, managing partner of Ross Group, remembers that in Tolyatti the owners of a shopping center had called him not even when they were in huge debt, but after refusal to pay rent had been made by a third of all tenants.

To correct the situation, it was necessary to put in a lot of effort. It is understandable. "It is difficult to make a decision to re-concept, and it is even more difficult to carry it out without losing an essential stream of income,” says Borisov. “Therefore even unsuccessful projects delay starting this complex process for as long as possible."

"Sometimes a supermarket works well, but the shopping gallery doesn’t, the general parameters are ok and the owners miss the moment when it’s necessary to do something," explains Dmitry Khechumov, chief of the retail real estate department at DTZ. But a crisis in shopping centers develops gradually: one tenant leaves and there is a "hole" and tomorrow five more will leave. It is dangerous to stick your head in the sand in such a situation. "The proprietors will say its necessary to think, maybe change a little bit of marketing...in general, as a rule, they hope to rescue the situation through local action," notes Andrei Kuznetsov, general director of Matorin.

Meanwhile the worst that can happen with a shopping center is a loss of reputation. To get rid of a looser brand, it is necessary to spend much more money than on duly correcting a shopping center’s activity.

Eternal questions

Two points of view exist concerning the reasons for the crisis. Some experts think that a child (shopping center) suffers from the sins of its parents (developers). Others are sure that the problem is an inability to manage the premises and an inability to react to changes in the market situation.

A bad location, bad traffic, poor architectural decision - all these are significant reasons, but it is possible to see them before coming to a land plot. As for the concept, quite often it is possible to judge its quality prior to starting work on the shopping center, at the stage of filling it with tenants. Although, of course, where there is a conceptual defect it appears during operation. Developers realizing a project are not obliged to possess the gift of predicting the future. They have other problems. For example, employing qualified advisers who will develop a competent concept.

Afrimovich remembers a case in a Volga region city in an area with a lot of youths, where they filled a shopping center with brands attractive to middle aged people. The result was much worse than expected. But this only happens if preliminary marketing research has been carried out extremely carelessly or not at all, the expert believes.

Oleg Voitsekhovsky, managing director of the Russian Committee of Shopping Complexes talks about one curious situation: a shopping center that had a good pool of tenants met difficulties. Analysis showed that the reason was a combination of two circumstances: on the 3rd floor of the shopping center there was a bowling alley, and a car park with a limited number of spaces. Young people who would come to the bowling would leave their cars for a long time, and as a result, shoppers could not park and would simply leave. The proprietors tried to solve the parking problems although it would have been better to close the bowling alley.

Russian retail develops intensively, there are new formats and new operators appearing on the market. Ruben Alchudzhyan, managing director of Praedium, is sure that a proprietor should react to fluctuations of the market - both global and local. "Re-concepting a shopping canter becomes necessary, if next to the center new retail premises open that are direct competitors and possess competitive advantages,” the expert approves. If a "neighbor" is bigger, has a better balanced structure of operators, is more convenient for buyers, has the best transport accessibility, more convenient car parking, or an entertainment component, this means that it is actually a "black mark" against you.

The human factor plays a big role in the development of a project. For example, a shopping center has focused on the middle class, but then the proprietor changes and it wishes to work in the luxury category. Of course, changes in such a situation are inevitable. Khechumov reminds us that the Russian industry of shopping and shopping and entertainment complexes is still very young, and therefore “all re-conception projects turn out with mistakes." But this is normal, as it testifies to evolution of the market, he considers. However, Sergey Kolegov, general director of Prime City Properties, says we should not exaggerate the value of miscalculations. Demand exceeds supply, the share of vacant premises remains at a level of 0-0.5 per cent, and in such conditions defects in concepts and mistakes at development do not become critical for shopping centers, the expert approves.

However mistakes happen not only in Russia. Afrimovich tells one more story. In Chicago a successful shopping center started to perform poorly. Experts came to the conclusion that the reason was the policy of the managing director. Mainly elderly people lived in the area where the center was located, however the managing director, who was an ex-sports coach, started to arrange sports events, and invited music bands that played loud music. And as a result the loyalty of the target audience was lost. But a new manager started to develop social programs for the elderly and founded a pensioners club. He also decided to open the shopping center an hour before the arrival of the tenants and close an hour later. And people started to come to the club to talk to each other and rest in the recreational zones. Experts are unanimous: there is no certain technique to removing a shopping center from a crisis. In the opinion of Mikhail Gets, managing partner of Novoye Kachestvo, sometimes it is enough to change several tenants, but at times "it is necessary to reconsider everything, down to the zoning of the premises."

"There is no standard technique, there is a task to make a premises attractive, but how you do that depends on each specific case," agrees Mereminsky. Perhaps it is necessary to increase the share of anchors within the structure of a premises or strengthen the entertainment segment, or perhaps it is necessary to change the design with subsequent re-positioning and at times it may be necessary to change the name. To re-concept it is necessary to be prepared to go as far as re-development and re-branding.

Son of mistakes

A doctor for shopping centers is a professional joke. It means that sometimes the concept is undertaken not by professionals. But re-conception cannot be entrusted to just anybody. And it costs big money. Evading providing specific sums, market participants note that it is a question of deadlines and cost, and the corresponding services for the development of the concept.

"Analysis and testing alone takes about three months," notes Khechumov. "It takes about one month to carry out market research,” adds Vasyutkin, “Then approvals, the conclusion of contracts, painting and decorating by new tenants takes about four months. If more cardinal changes are made to the premises then re-conception takes longer,” Kolegov considers. “And we’re talking about 0.5-1.5 years."

The average cost of re-conception is $50,000-$60,000 but without exact figures this figure, is of course, a guide. In some cases (especially in the regions) there is a tariff: $1 per sq.m. Owners moan and groan about it, but in the end pay it. They pay, understanding that $50,000 is just the beginning. As Mereminsky notes, "in addition to consulting work the cost of re-concepting also includes building expenses, the fee for the agent in attracting tenants, marketing charges." At Praedium, they estimate the sum of expenses for the proprietor on re-positioning and advertising of the premises at $0.5 million.

Experience gained from re-concepting in this segment of the market in the last decade has not been enough. And successful experience is even less. For example, Oleg Spivak from Becar Commercial Property SPb considers that "there are no classical cases of successful re-conception yet." Opinions on the re-concept of shopping centers Gimenei, Druzhba, Gvozd, and Okhotny Ryad more or less coincide. Work on such shopping centers as Dobryninsky, Atrium, 3D, Uzhny Polus (St. Petersburg) is sympathetically mentioned. It is necessary to mention Voentorg. However, experts emphasize that here it is a question of significant changes. Voentorg was actually reconstructed," considers Mereminsky. "This example of re-development is the most profound method of re-conception," Kondaurova adds.

"Only now, after global changes, has the concept been formed,” says Dmitry Khechumov. "Voentorg will be an office-shopping center." And ahead is also the grandiose reconstruction (and, of course, re-concept) of Detsky Mir.

It should be said that at times it is possible to change the situation absolutely insignificant funds. For example, in the Stolitsa shopping center, Krymina reminds us that they only increased the volume of premises rented and changed the anchors and received quite decent result (according to one adviser they increased the capitalization of the premises by almost 3 times).

Not Moscow

Re-concepting in the regions deserves separate attention. Sergey Khramov, chief executive director of Finstar Properties notes, "Where there is a deficit of quality retail premises there is no need to carry out re-conception." However in conditions of rapid growth of the regional market of shopping centers many proprietors have simply been compelled to think about the re-conception of premises, the expert approves. With the growth of competition, poor quality premises may be pushed out the market by more successful ones, Elena Aleksandrova, director of marketing at Midland Development, adds.

Lacking experience, builders (investors) at times try to solve many problems independently, which result in an increase in the operating costs after the premises is put into operation, Dmitry Zotov, general director of Torgovy Kvartal, specifies.

The installation of expensive ventilation equipment can increase charges on electric power that will be reflected in the rental rate, and, quite opposite, excessive saving on water supply systems can lead to faults with water. Often it also happens that due to a mistake in the concept of a shopping center, there are so-called dead zones with a minimum number of visitors, says Dmitry Zotov.

Re-concept in the regions is carried out in a number ways. For example, the quite successful Etazhi shopping center in Nizhny Novgorod began to lose its position because of the appearance of competitors on the market that offered more expensive brands. The proprietors then carried out re-conception and re-positioned the complex in the top price segment. To improve the situation in the Astor shopping center in Astrakhan it was necessary to increase the trading premises by 23,000 sq.m (!) and to optimize consumer streams. A second phase with an atrium and panoramic lift has been put into operation. In the Voroshilovsky shopping center in Volgograd they have re-planned the 3rd floor, entirely allocating it for entertainment: a multiplex, children's entertainment center, Internet cafe, and food court.

The Deming law

Until now re-conception has been perceived by proprietors as a disaster (not a fire, of course, but something close to that). Meanwhile development of the market is inevitably leading to premises, even the most successful, being forced to change. Nobody argues any more that falling profitability should be accompanied by the undertaking of special measures even if they cost hundreds of thousands of dollars. But experts say that a proprietor should work on foreseeing tomorrow's problems. Here it will be pertinent to recollect a well-known expert in the field of quality management, Edward Deming, who in his classical work "escaping from crisis" wrote: "it is not enough for us to have a consumer who is simply satisfied.

An unsatisfied consumer, of course, will leave us. But, unfortunately, a satisfied consumer may also leave, believing, that it will lose a little, but can get something better." Therefore the proprietor of a shopping center should, like a theatrical director, ask: what shall we do to be different?

Some people think that to re-concept a shopping center takes five years. Aleksandrova says 10-15 years. Spivak suggests we be guided by western experience and "after a building’s operative life (25-30 years) we should simply take it down and build a new one in its place, which corresponds to modern market requirements." But Russian proprietors aren’t ready for such radical measures yet.

"The problem is that a proprietor cannot separate its investment and operational costs, it does not understand that it is again entering a stage of investment expenses," approves Kuznetsov. Therefore, in his opinion, those who are ready to start the life of a shopping center from a blank page, who simply open an investment account and tell itself that $50,000 will be just the first expenditure, win.