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Extracting Retail Dollars

Chico’s bases its same-market store openings on a sales model that factors in co-tenancy, demographics and cannibalization.

American Eagle Outfitters operates 833 stores in 50 states. With 925 women’s specialty U.S. stores under the Chico’s, White House/Black Market, Soma by Chico’s and Fitigues names, Chico’s has more stores than American Eagle. Pacific Sunwear has even more stores than that: 852 Pac Suns, plus 116 Pac Sun outlets. Then there is Gap with 1,199 U.S. stores. Corporate Gap also operates 949 Old Navy stores and 495 Banana Republics.

How many stores can a premier lifestyle retailer open in the same or overlapping markets without cannibalizing itself? How do retailers that have tapped all or at least the lion’s share of the retail markets in the country continue growing?

“Theoretically, once an upscale, lifestyle retailer opens 600 to 650 stores, it may begin to consider its mall market mature,” said one VP of real estate for a growing soft-goods specialty retailer with several hundred U.S. stores. “At that point, a retailer may begin to look at other formats—like lifestyle centers—for growth. Often, the retailer’s trade areas will begin to overlap with its existing mall stores,” said the retailer, who asked not to be identified.

Other options, of course, include inventing new store concepts that can market a new position.

Even though retailers such as Chico’s and Gap have developed additional store names, all of their brands seem perilously close to, if not wildly beyond, the 600- to 650-store limit theorized by the retail real estate executive.

How can some retailers get away with this? Who can? Who can’t?

“It depends on the retailer,” said Robert Draizen, managing director with Robert K. Futterman [RKF] & Associates, a New York City-based broker specializing in retail. “One of my clients, a furniture retailer, looks for the critical junction in a trade area. Then it’s one store and done.”

Another RKF client—Solstice, a high-end sunglasses retailer—might do multiple locations within a 10-mile ring, continued Draizen. “For Solstice, it is all about people seeing the brand and the sunglass concepts in the store,” he said.

Chief among the deciding factors for Solstice is the availability of a high-end mall or lifestyle center in the market with co-tenants such as Ann Taylor and Chico’s. “It’s a case-by-case decision, but I can see doing two centers like this within one trade area,” Draizen said.

As senior VP of retail services with the Bannockburn, Ill., offices of CB Richard Ellis, Jim Sakanich represents both Chico’s and White House/Black Market and knows their approach to markets.

When presented with a new store opportunity, said Sakanich, both Chico’s and White House/Black Market will evaluate the stores they already have in the market or nearby. Next, they will develop a sales model that takes into account other tenants going into the project and the market demographics. Then they factor in cannibalization: how much business a new store here would take from existing stores in the area. Using that estimate, the model computes net new sales for the new store. Finally, the retailers judge whether or not the net new sales number justifies the expense of the new store.

“Suppose the average annual sales for a store in the chain totals $2 million,” Sakanich said. “Say the research estimate comes in at $3 million. The cannibalization estimate might reduce that to $2.5 million. You would open that store. If the number comes back a little under the chain average, you would have to think about it. If the estimate is well below the average sales figure, you won’t do it.”

In other words, retailers will sometimes double up in markets if their market models indicate that another store can extract additional dollars from the market at a reasonable cost.

© 2014