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Crossing Atlantic challenging for temp tenants

By Debra Hazel

DENVER — Like other retailers, mall-format specialty leasing operators are looking to Europe for expansion. But they face challenges not known to their full-size, in-line brethren.

Retailers seeking cart and kiosk space will find a very lucrative market in Europe, according to the panelists discussing "International Specialty Leasing" at ICSC's Short-Term Specialty Retail Conference and Trade Expo, held here in February. Unlike the United States, there is plenty of room for growth there.

"Products like calendars have saturated the U.S. market; rents have escalated and space is tight," said Kevin Kern, real estate manager for Waldenbooks, which operates 30 calendar kiosks in the United Kingdom. While retail space per capita totals almost 20 square feet in the United States, Europe has just 1.4 square feet. "In some cases, Europe looks like the early days of the United States."

The prospect of crossing the Atlantic is becoming less daunting as North American developers expand throughout Europe, saving U.S. tenants the step of establishing relationships with new landlords.

"It's amazing how many U.S. companies are expanding into Europe, for the same reasons as the retailers," said Julia A. Langkraehr, vice president of specialty leasing for TrizecHahn Europe, London. TrizecHahn, she noted, has sold much of its North American retail and office portfolio to fund development in Europe.

The use of credit cards also is increasing in Europe, which traditionally has relied heavily on cash, she said.

The creation of the euro, the currency for the European Monetary Union, also is making it easier for foreign companies to do business in Europe.

Opportunities for specialty leasing can exist in a variety of retail projects, though not all. Hypermarkets, which already sell a vast variety of products, probably are not good locations for temporary tenants, Kern said. On the other hand, outlet centers provide a tremendous opportunity, he said. Main Streets, also, should be considered by temporary tenants looking abroad.

"I'm particularly interested in High Streets, which are kind of like our Main Streets, only more of a central district," he said, noting that even urban malls blend into the streetscape in Europe.

But the urban density does have a drawback: multiple landlords. Typically, the specialty tenant must negotiate with the owner of the adjacent store.

Other possible locations, Langkraehr said, include midmarket suburban centers, urban entertainment centers, privatized land in urban areas and mixed-use projects in major metro areas.

"We're doing that in Budapest. I don't think that traditional suburban markets will be as completely successful [in Europe] as in the United States," she said. Some European countries, including Britain and Germany, have all but banned out-of-town development.

Abundant opportunity doesn't mean that entering the European market has been, or will be, easy. Nearly every aspect of specialty leasing, from the deal structure, to the merchandise sold, to the construction of the cart or kiosk itself, is different from North America.

The first thing to remember is that the European Union has not created the United States of Europe.

"It's difficult to think about Europe as a whole," Langkraehr warned, reminding attendees that while the United States is large, with different accents and regional customs, it still has a common history, language and culture. "Europe is so diverse: different languages, different cultures, different ways of buying merchandise. Some villages still barter with eggs."

In fact, Europeans still need to be convinced that specialty leasing is more than a flea market, Kern said.

"They compare us to disadvantaged street markets," he said.

Deals usually are flat rates, because tenants will not report sales figures, making percentage rent impossible. And in some cases, the developer can't profit from the income generated by the temporary tenant. In Spain, such income must be used to offset CAM costs. As a result, developers are getting quick educations in law and diplomacy.

"In Spain, we have ownership of the common area, but not rights to it. We are now rewriting deeds to include specialty leasing," Langkraehr said. "And in Greece, specialty leasing is not legal at all. We're still working on that."

Shopping hours also vary from country to country. While centers in Britain, France and Spain keep hours closer to those found in North America, Germany's shopping centers close at 4 p.m. on Saturday and remain closed on Sunday.

Licensing, too, is regional in nature.

"Every location is different with local municipalities. And other tenants have a say in what you can sell. That's why it's so important for companies such as TrizecHahn to look for new tenants: Europeans don't see competition as healthy," Kern said. And practices a North American would perceive as corrupt often are just business as usual in some parts of the continent.

Products can be different from those in North America, with less trendy merchandise and much more in the way of food and beverages appearing on carts.

"We didn't know if people would buy calendars. And frankly, we've had mixed results," Kern reported.

Working with a local company is critical. TrizecHahn has built each of its seven European centers with local partners. Kern advocates franchising for retailers. Cart designer/maker T.L. Horton Design, Grapevine, Texas, has acquired a manufacturing facility in Düsseldorf, Germany, to simplify logistics.

European tenants have different needs, and a totally different mind-set when it comes to cart and kiosk retailing, noted Rob McCoy, vice president of sales for Horton. Temporary employment is practically unknown.

"Germany's unions are incredibly strong. If you want to lay off someone, you must pay them for a full year afterward," McCoy said. On the other hand, there is no European equivalent of the Americans with Disabilities Act or antidiscrimination regulations.

Security is much more of a concern than in North America; Europeans are stunned by the typical U.S./Canadian practice of covering the merchand ise with canvas after hours, and feel safe with nothing less than roll-down doors, Langkraehr said.

Dimensions also are different, with all of Europe using the metric system; carts are made of less expensive materials to improve profit margins that are slimmer than in the United States.

Despite the challenges, entering Europe can provide an opportunity last seen 15 years ago in North America, McCoy said.

"To be successful, you must analyze the market; evaluate your strategy; identify local business allies because municipalities can be frustrating; write a business plan, and be prepared to adapt it each time you learn something; and plan for your financial staying power."