Apple’s Success May Lead to Cheaper Leases
A piece in The Wall Street Journal suggests Apple should be paying less for space it occupies in malls around the country.
Here’s the argument in three easy bullets:
- Mall anchors, usually department stores, often pay very little for space, and sometimes pay nothing at all as facility operators want them as a draw.
- Apple produces equal or better numbers in terms of traffic and sales dollars as current anchors.
- Apple is paying thousands of dollars more for its small space than department stores are for locations up to 20 times the size.
Malls have been losing share of consumer traffic dating back to the 1980s. A minor 0.1 percent increase in market share for malls last year was seen as an encouraging sign. While department stores were often given credit for the uptick, it’s clear from any trip to a mall with an Apple Store that it deserves credit, as well.
In February of this year, Anne Howe, founder of Anne Howe Associates and a RetailWire BrainTrust member, observed, "If I were a mall operator, I’d look to get an Apple store. I’ve never been in an Apple store that wasn’t teeming with people exploring. There’s a secret sauce that more operators need to try to replicate across the various corners of the mall."
The Journal piece says it’s doubtful that mall operators are suddenly going to be reworking contracts for either Apple or department stores. It’s also not likely that Apple would want to tinker with a proven store model and suddenly start to look for much larger spaces in malls. But how long before Apple begins to threaten to pick up its iPads and go elsewhere if it doesn’t get a better deal?
Discussion Questions
Discussion Questions: Will Apple’s success change the way mall operators negotiate space rates? What would you be doing now if you were Apple or a mall owner?
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We’re playing here with the age-old blackmail cycle of ‘if you don’t give us lower rent than these other poor schmucks we’ll go somewhere else.’ That either generates permeating negative energy throughout the mall or Apple does go somewhere else and everyone suffers.
We need to keep in mind that it’s not Apple suggesting this. I’d like to think that because of their success they’d be more than happy to pay their share in the communities that gave them that success. It’s a Karma thing.
Not only does Apple become a draw and add to the overall status of a mall, but the Apple demographic is key to the success of other retailers trying to get “face time” with these consumers who are anxious to leave their homes and web sites to make an actual live-time visit.
Also…having the Apple experience as a benchmark may help some retailers evaluate their own customer interactions and deliverables.
The article doesn’t state anything about the shopping habits of the customers of either the current anchor tenants or those of the Apple store. One reason that the department stores got the rent breaks is that they draw traffic to the mall. The theory being that those same customers will shop the smaller specialty stores in other locations within mall. In exchange for this the department stores got a break on their rent.
The Apple store definitely draws customers to its location. The question is can Apple demonstrate that traffic benefits the other tenants? On the other hand, can the department stores? If both can, it will be difficult to deny Apple a better rent. If not, will the department stores face increased rents at the end of their lease? Since they have twenty years to go, will anyone care what their rent is?
You know, the WSJ is a very frustrating pub for me these days. It has taken yet another complex situation and made it appear oh-so-simple.
Nowhere in the article does it even say Apple is looking for lower rents. Do we know?
The numbers are also a bit deceptive. I would also argue that an anchor store’s average sales per square foot (especially a JCP, which was used as an example in the article) is far lower than Apple’s, which is likely another reason Apple pays a higher percentage rent. Unless the world has changed in the past few years, “percentage rent” is a big part of the calculated cost to be in a mall.
I’m also not sure that traffic generated by Apple stores is going to benefit the rest of the mall. It’s a destination, while anchor tenants tend to drive more shoppers into the body of the mall.
Finally, these anchor stores have been around a long time, while Apple’s explosion has been in the past five-seven years. So it’s not surprising the anchors have better rent deals.
Does that mean Apple should get a better deal? Probably. But mall operators have been romancing unique and different store formats for a long time. They are as aware as the customers that generally, all malls targeted to a specific demographic have the same stores in them.
I never was fond of the WSJ’s politics, but its reportage was spot on. Today, the reportage has gotten very…imprecise.
This is a two-way street: Yes, Apple has more negotiating power today than in the past, and is a powerful attraction for any mall. On the other hand, it focuses on premium locations (not just “any mall”) because scarcity and higher-end brand imagery is part of the Apple marketing formula. So Apple has mixed leverage negotiating the best deals as long as it continues to be highly selective about its location choices.
Mall operators are like so many retailers; they never change what works, even if the world has changed. Supermarkets have been the anchor for strip centers and department stores for malls. But as mall traffic has declined, the business model has not. Yes, if I was a mall operator I would consider Apple as a traffic generator, but not necessarily an anchor. Apple has been hot of late and is likely to be for the next few years. Technology changes so fast, that what is hot today is cold tomorrow. For this reason, I would not automatically assume Apple will have the drawing power 10 years from now. What I would do is look at others that also draw consumers and modify the business model.
Apple stores are “destination” points and I think shopping malls should probably pay Apple to put their stores inside their malls!
David Biernbaum is right. Apple is a destination and there aren’t too many destinations out there anymore. (The Microsoft Store doesn’t count.) Shopping is no longer entertainment as it was in the golden days of the malls. Shopping now has a purpose. Apple stores offer unique experiences that are hard to find in any mall.
Yes, as David said, the mall should pay them. The perfect comment on this subject!
A Tangent: Paula’s comment on the WSJ is interesting. I thought it was just me. Thank you for confirming my frustration with my former go-to source.
Lots of people in an Apple Store don’t equal any where near the numbers a large retailer is going to pull. The store will be crowded but the store is small.
I have to second (or third or fourth or…nth) everyone else’s remarks about Apple, malls and–yes–the WSJ as well: it’s true that Apple stores are high traffic draws; but it’s also true that the kind of malls they would want to be in are high traffic draws as well…so it seems like pretty much a tie (and does either party really care that much, whether it’s Apple, whose rent is probably 5% of (store) revenue, or the landlord, whose Apple space is 5-15K out of 300-500K GSF?).
Anne is spot on. Apple is a retail magnet. They don’t need to occupy large space to be successful. I would not be surprised to see them negotiate tougher deals with mall owners.
There is a few ideas missing from the discussion:
1) Why is everyone assuming that Apple is not already paying department store rates–or lower?
2) The important concept of information asymmetry–landlords that control the malls that Apple operates in have the information and the ability to do statistical analysis. They know the impact of an Apple store on other mall tenants–and more than that–they know the impact of Apple on other mall tenants by product category (and by chain). Apple knows it is having an impact, but they can’t quantify the impact.
Mall leases are a negotiation. The WSJ is providing a commentary on a situation, without any insight into what is, or may be, occurring in the actual situation.
Why does anybody think they didn’t already negotiate pretty tough leases? It isn’t like they are a newbie at this. Nor do they ever just give in, they negotiate tough on everything and they are well aware of their value to their malls and will make the mall pay for that. I think this article is probably way off, like most reporting on Apple is.
This is an obvious decision for any mall operator. Apple is a destination store. They should get the best pricing on their space. The presence of an Apple store at any mall location will attract hundreds of new customers every day. Apple should use this as the crux of their argument to get better and lower costs for their space, regardless of the size.