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LOCAL FLAVOR

Mom-and-pop tenants lend centers originality, but landlords eye the risk

By Rodger Brown and Jennifer Hopfinger

It isn’t easy for mom-and-pop retailers to succeed in today’s competitive shopping center industry. Unable to command the more favorable lease terms granted to national credit tenants, small local operators are finding the rising rents, insurance rates and maintenance fees a tough load to shoulder, observers say.

It’s also harder these days for mom-and-pops to score space in the newest retail properties. They often find themselves relegated to older, neighborhood centers, because the developers of new lifestyle and mixed-use properties are focused on getting bigger, more-lender-recognized tenants into their centers.

Though shopping center operating expenses keep climbing, “anchors will pay $8 to $9 per square foot, period,” said Joe B. Braver, vice president of JPMorgan Real Estate, at ICSC’s Southeast Conference, in Atlanta, in October. Mom-and-pops get no such breaks, he said. The problem has become particularly acute in Florida, observers say, because of escalating insurance costs there.

Still, none of this means that mom-and-pops can no longer find a place to call home. They are welcomed by landlords that value independent retailers, and such properties are increasingly essential to the success of small chains.

Jewelry Design is among those that are not only staying afloat, but thriving. This family operation is in its seventh year of business at La Plaza Grande, an open-air center located in The Villages, a retirement community in central Florida. The Villages contains over 2 million square feet of retail space, and La Plaza Grande itself comprises nearly 280,000 square feet of retail space. The Villages is the largest planned golf community in Florida. The project is about 50 percent completed and boasts about 60,000 residents.

Jewelry Design’s owner, Jay Gulati, says his store’s small size does not diminish its status in the sprawling property, despite the presence of anchors such as Bealls Outlet, Belk, Publix Super Market, Southern Lifestyles Furniture and Winn-Dixie. Applebee’s and CVS are among the other nationals. “Our business matters to the landlord,” he said. “I know my needs will be met promptly.”

Gulati’s father started Jewelry Design in Cleveland in 1974. The family moved the business to Florida in the mid-1980s while Gulati was attending the University of Central Florida. He and his brother eventually took over the store.

Before moving to the Villages, the store operated for five years in a mall in Leesburg, Fla., about 30 miles south of its current location. “A lot of our customers would tell us they wished there were a full-service family jeweler in the Villages,” Gulati said. “When we approached the Villages about moving, they were working on La Plaza Grande, so the timing was perfect. When our lease came up in Leesburg, we had concluded the deal at the Villages.”

Jewelry Design is not necessarily paying less at the Villages than it did at the mall. Mall rents tend to be higher, but Jewelry Design also has a larger space at La Plaza Grande. Gulati declined to name his rental rates. “I feel it’s a better deal overall, because I’m happier here,” Gulati said. “The Villages is big in terms of population, but it has a small-town feel. There’s a lot of word of mouth, and we developed a good reputation very quickly.”

These independent retailers face tougher cost pressures than their larger competitors, though, and they need to find landlords who are concerned about keeping their mom-and-pop tenants, says John Crossman, managing director of Crossman & Co., an Orlando, Fla.-based commercial real estate firm. “National chains definitely enjoy economies of scale. That’s one of the biggest challenges for mom-and-pops,” Crossman said. “Their volume growth has got to match rent growth in order for them to succeed.”

Crossman points to the pressures from rising construction costs. “That’s a push on everybody, but more so on the mom-and-pops, especially because they usually have lower credit ratings than the national chains, who can get a better rent deal,” he said.

Mom-and-pops have grown particularly scarce in the newer, high-end, high-density shopping centers. “The issue with mom-and-pops and shopping centers these days is that nobody wants failure,” said John Pharr, senior vice president of operations at Regency Centers. Regency boasts 50.8 million square feet in its portfolio, with 75 percent of it leased to national and regional retailers.

“Mom-and-pops are very much a part of the fabric included in our local neighborhood centers,” Pharr said. “They’re less so as the centers become more power centers because of the economics. In today’s environment, rents are getting way up there into the mid-to-high-20s [per square foot] in the areas I work in. It would be considered very risky on our part to lease a space to a mom-and-pop at that rent level. You wouldn’t want to do that as a leasing agent, because you’re setting them up to fail.”

Woolbright Development is one of the top 10 owners of retail real estate in Florida. About 50 percent of the tenants in the older shopping centers Woolbright has acquired for redevelopment are mom-and-pops. “What I’m finding in the development deals where we’re starting from the ground up,” said Mike Fimiani, the firm’s executive vice president of leasing and marketing, is that “they are being filled with predominantly national tenants, where we have maybe a mix of 95 percent national and 5 percent mom-and-pop stores.” And even those are local chains with four or five stores, he says, as opposed to one-offs.

By Pharr’s reckoning, with so many national and regional chains with deep pockets and long-term business plans available, why take the chance on a mom-and-pop? “If the tenant fails nine months down the road, the leasing agent loses face with his or her boss and has put a black eye on the center,” Pharr said. “Prospective tenants look and say, ‘Why did that guy fail? Was it operator error or was it center failure?’ That’s why everybody goes through an extra level of scrutiny with a mom-and-pop — because you don’t want to be viewed as a churn center.”

Regency does consider proven and accepted local brands that have already cut their teeth elsewhere. “If it’s a great local chain that’s been in business 15 years and has two or three locations, we’ll say sure,” said Pharr. “We treat them like gold. With our neighborhood centers, we want to sprinkle the mom-and-pops into them because it does give them genuineness.”

That “genuineness” is what lies at the heart of the mom-and-pop appeal, a human element that is perceived as a higher level of customer service and local flavor. This, according to conventional wisdom, the national chains cannot achieve. And it is what prompts local and state governments to try and preserve this endangered retailing species. The city of South Portland, Maine, implemented zoning ordinances in June in one neighborhood to “save a spot” for some mom-and-pops, according to published reports. Other press reports say that in February New York City Mayor Michael Bloomberg created a “retailing czar” at the Department of Small Business Services to help preserve mom-and-pop businesses and keep them competitive against big chains.

Not that mom-and-pops are always pushovers when it comes to rent negotiations. Design Details, an independent home furnishings store in Portage, Mich., has not experienced the same pressure to pay higher rents relative to anchors that many smaller retailers have. The store’s proprietor, Leslie Thomas, says being the second-largest tenant at her open-air center has given her a lot of leverage.

Design Details has been in business for seven years, all of them at its current location in the Woodbridge Shopping Village. The center is a 53,000-square-foot, single row of stores that serves a three-mile-radius population of 33,000, just south of Kalamazoo, in southwest Michigan. The center is anchored by a Harding’s Friendly Market.

“We’ve been able to maintain about the same level of rent since we started,” Thomas said. “We occupy a large space — about 6,000 square feet — and we have an easygoing relationship with the landlord. I think they want to keep us around.”

Design Details started out with a five-year lease that included built-in annual increases. When the store renewed with a three-year lease, Thomas was able to negotiate a rollback in the rent. She says that when the current lease runs out this summer, she hopes to start leasing on a year-to-year basis. Crossman says maintaining good relationships with independent retailers is simply good business that leads to higher profits for landlords. A balanced mix of national chains and independent retailers makes for a more attractive center. “Independents are extremely important because it gives the center a local flavor,” Crossman said. “You wouldn’t want all national chains, because then there would be nothing unique about the center.” Focusing on a specific niche and providing highly personal service can also help independent retailers differentiate themselves from the large national chains, sources say.

Jewelry Design is a full-service jewelry store with a full line of diamond and colored-stone merchandise. About half the merchandise is mass-produced items and the other half is custom jewelry, which has become the store’s specialty. “Jewelry Design provides a specialized product and personal service to a higher-end customer who has a lot of disposable income,” Crossman said. “Jewelry is a category where mom-and-pops can do quite well, because they provide that personal touch and create long-standing relationships with their customers.” Gulati says the store’s customer service and a relaxed sales culture help the business compete with national jewelry retailers. “We don’t try to push sales,” he said. “We don’t treat people like they’re on a car lot. Everyone here is on salary, not commission. Customers feel comfortable walking in and browsing and asking questions, and when they are ready to buy something, they already know how knowledgeable we are.”

Thomas says Design Details employs similar strategies, particularly because home furnishings stores like his face pressure from large rivals and cheap imports. The Internet is a rival too, as more and more people choose to buy their furniture online. Design Details offers a range of home furnishings, including fine furniture, custom upholstery, bedding and pillows, window treatments, wall coverings and accessories. The store also offers a professional design service with interior decorators providing in-home consultations. “Our success is due to the level of service we provide that a lot of the national home furnishings retailers don’t,” Thomas said. That, and the unique offerings shoppers can’t find elsewhere in the region, she says. “In a town like Portage, there aren’t other stores like us. If the national retailers don’t carry our items, and they generally don’t, shoppers can’t find them anywhere else.”

The store’s array of accessories keeps traffic high and leads to bigger purchases later, she says. “The accessories keep people coming in on a regular basis,” she said. “When they are ready to purchase furniture, they think of us.” Jewelry Design’s Gulati also stresses quality over the quantities that customers may find at the national chains. “I try to offer a higher quality of goods than the other guys,” Gulati said. “It’s my job to educate the customer on why my products are better.”

Gulati says mom-and-pops should find a location where they are well served by the landlord. “You have to find a base where you can build a long-term business, which is what I’ve done here,” Gulati said. “With the lease we have and the way this community is growing, I feel this location is going to be excellent for us for a long time to come.”

But can such strategies inoculate a retailer against Wal-Mart? Perhaps, say some. A 2006 study by economists at West Virginia University explored the question, “Has Wal-Mart Buried Mom and Pop?” The findings challenge the anecdotal evidence that the Arkansas giant sucks the life out of small business. The study concludes that though Wal-Mart undeniably undercuts and drives out small retailers competing with the same merchandise, the usual calculations ignore the businesses that grow up to fill the vacuum. Empty downtown storefronts “soon see new small businesses opening in these vacant locations,” the report says. What once was high-value downtown space is now devalued. New ventures move in as part of a complex “reallocation” of resources. Hardware, apparel and drugstores are replaced by galleries, restaurants, law firms, boutiques and coffee shops. But since these are not in direct competition with Wal-Mart, the study says, they are excluded from the usual analysis of the giant’s impact.

These new ventures are one new variation on the old mom-and-pop, observers say. “We get very few true startups that are mom-and-pops, typically because they can’t afford the kind of rents that you have to charge in a town center, high-density development,” said George Tullos, the vice president of marketing and sales at James Doran Co. The Charleston, S.C.-based development firm focuses on high-end, mixed-use, new-urban-village-style town centers designed to create retail environments that “look like they’re built over time, trying to create this perception of city blocks that were added on over time.”

Replacing the apron-and-coveralls image of the mom-and-pop, Tullos updates the concept to include the franchisees that run many national chain stores. “I have a slightly different twist on that,” he said. “These upscale kind of town center developments pull in the national names, but what people don’t often realize is that those are mom-and-pops behind those national chains. They’ve invested their savings to purchase a franchise and run a business. Just because it says Beef O’Brady’s or Quizno’s doesn’t mean there aren’t mom-and-pops behind those names.”

In these new, simulated downtowns, mom-and-pops are also reconstituted as branded national franchises, but their value to the developer remains the same: loyalty and commitment.

“When you get a mom-and-pop willing to go in there and risk it, that’s a pretty darn good tenant to have,” Tullos said. “They believe in it. They’re from that town. If you can help that business succeed, now you’re truly building a town of yesterday.”

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