Strange Times Makes For Strange Bedfellows

Implications: This article can be read to mean  several different important things. First, it could mean that Costco is making a significant, but unannounced, change in their very successful expansion strategy.  Next it could mean that malls have made a significant, but unannounced change in their anchor store strategy.  Finally, it could be read to mean that "strange times makes for strange bedfellows". I will attempt to explain why I think this is the most logical and meaningful explanation.

Analysis: This article calls the 9 new Costco stores that have taken over vacant department store spaces plus the announced "four or five" additional stores, a "mall movement". The article gives several "politically correct" reasons a mall benefits from having a Costco take over a vacant department store space, but industry insiders know and understand that these are just so much whitewash.

The real reasons for these sudden and highly unusual retail real estate "hook ups" has more to do with desperation than infatuation.

To better understand who benefits from the strange hook ups, lets look at the realities from both sides. From the mall's perspective, having a Costco does very little to enhance the customer experience at the mall for several reasons.

First, most malls are multi-level affairs while Costco is strictly a single level operator. The department store that Costco replaced operated on multi-levels and provided life support to the smaller merchants on the second and third levels  of that wing of the mall. Without the drawing power of some type of anchor pulling traffic by their doors, they will surely die.

Next, the former department store was carefully planned to have several entrances that distributed the customer traffic evenly throughout the parking lots and mall entrances. Costco has only one main entrance the forces parking and traffic congestion around that entrance. Further, of necessity and desire on Costco's part, that entrance is a long walk away from the closest mall entrance. (This of course assumes that some type of secondary entrance to Costco is connected to the first level mall entrance. If it is not, it further reduces any possible advantage to the mall customer and to the mall tenants along the first floor of the wing serving the former department store)

Next, the Costco customer has been proven to make only one stop at Costco ( the same for Sam's, or BJ's) on their trip to a wholesale club. If that customer is going to the mall they will do it on a separate trip. 

Finally, it is well known that Costco wants to own their stores and are not in the habit of paying premium prices for their real estate. They are also known for their insistence not to conform to the architectural motif of any other neighboring building. 

So what how does the mall benefit from having this odd shaped, odd looking,cheapskate but monstrous shopper magnet in their parking lot? 

The simple answer is that something is better than nothing! The mall certainly would not allow a wholesale club as an anchor if there was ANY chance of attracting another department store, even a very weak one, because it does nothing for helping to direct customers to the all-important, high rent paying, mall shops.

However, it must be understood that the vacant department store costs the owner $6.00 or $7.00 a foot in real estate taxes, Common Area Maintenance (CAM), insurance, repairs, security, etc. This ongoing cost is a powerful incentive to the store's owner to find some other retailer to relieve it of that financial burden.

If the vacant store is owned by the mall owner and the mall is rapidly losing tenants along the wing of the vacant store, there is obviously a powerful incentive to do something to at least give some hope to the those tenants impacted by the closing and give themselves some relief from the heavy annual costs of maintaining a vacant anchor.

If the store is owned by the still solvent department store that has abandoned the mall, there is a tremendous incentive to try to convince the other anchors and mall owner to allow them to be relieved of the ongoing costs and liability of the vacant store. A smart department store, after it becomes obvious that there are no other department stores interested in assuming their position in that mall, will offer the mall owner the equivalent of several years real estate costs in order to try to relieve themselves of the liability of maintaining a vacant store. Even then the mall owner will be reluctant to accept the deal unless they can find someone like a Costco or Target to at least provide some semblance of added attraction.