Costco Goes to the Mall for Growth

Discussion
Aug 25, 2010
George Anderson

By George Anderson

In the past, Costco has opened the occasional club in a
mall. Now, however, the company is making a push to put its stores in shopping
center spaces that typically house department store anchors.

Jeff Brotman, co-founder
and chairman of Costco, recently told Dow Jones
Newswires
,
the warehouse club operate is looking "to accelerate" mall store
openings.

Recently, Costco signed an agreement with The Westfield Group to open
clubs at malls in Los Angeles, Sarasota, Florida, and Wheaton, Maryland.

Jim
Sinegal, CEO of Costco, said in a press release, "We are pleased to
partner with Westfield and look forward to providing great value and convenience
to current and future Costco members in three vibrant markets. It is especially
exciting to join new communities such as Sarasota and Wheaton, as well as to
join forces with Westfield in Los Angeles — right in the heart of the
San Fernando Valley’s Warner Center business district."

Costco’s move into
malls has been made easier because space has opened and lease terms have become
more attractive in recent years as other big box retailers have closed stores.

Still,
Mr. Brotman told Dow Jones, "Our preference is to never
be in a mall or by a mall. But in metro areas there just is not that much land,
and we still want to expand."

Randy Brant, executive vice president at
mall owner Macerich Co., said Costco is an attractive tenant for shopping center
operators.

"Their average store does over $100 million a year in sales and there
aren’t many department stores that can do that, especially in this environment," Mr.
Brant told Dow Jones. "The only downside is typically a customer
making large purchases at Costco will get in their car and head home."

Discussion Questions: What is your assessment of Costco’s move into mall
locations? Is this a healthy prospect for malls? Is this a strategy that
would work equally well for Costco’s rivals?

Please practice The RetailWire Golden Rule when submitting your comments.

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24 Comments on "Costco Goes to the Mall for Growth"


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Dick Seesel
Guest
10 years 8 months ago

Mall developers are smart to think outside the box by finding new tenants like Costco and Target. The traditional regional mall of twenty years ago–Sears, Penney and two department stores as anchors–simply isn’t a viable model anymore. There isn’t any doubt that big box retailers can be a significant traffic draw to the mall, even if they are “destination” stores. It certainly beats having an empty space.

The challenge for Costco is to make the regional mall model work: Is the footprint adequate in terms of interior space and parking? Does the project require demolition or retrofitting of an empty mall anchor? Do the occupancy expenses support Costco’s low-cost operating model? Plenty of opportunity for Costco, but also plenty of questions to be answered before this turns into a national growth strategy.

Susan Rider
Guest
Susan Rider
10 years 8 months ago

This is a very smart strategy, especially since there are a lot of these types of properties that can be leased for pennies on the dollar. It gives Costco an opportunity to test a community and it gives the community a vibrant retailer in a dead zone. Win/win for both.

Definitely with the amount of empty space across the nation in attractive communities, this would be a good financial decision.

Paula Rosenblum
Guest
10 years 8 months ago

I don’t think it matters much to Costco if it’s located at a mall or not, but if I was another mall tenant, I would not be happy. You pay higher rent, CAM, etc, at a mall because you expect to take advantage of the synergies of foot traffic.

With Costco, those synergies will approach zero, not to speak of competitive items.

Good for the mall operator short-term, fine enough for Costco, really bad for the longer term.

Bernice Hurst
Guest
10 years 8 months ago

My response is much like Paula’s. A possibly good opportunity for the mall owner and Costco, less good for other tenants. How many Costco shoppers are going to spend their time looking around at other stores? There may be a remote possibility of one-stop shopping, saving multiple outings, but I’m more inclined to think that someone looking for Costco products is not going to be in the mood to go looking for other, smaller, more individual purchases at the same time.

Anne Howe
Guest
10 years 8 months ago

I like the idea of Costco taking empty spaces in specific malls. It works for shoppers, making the club more accessible on a day-to-day basis. However, there are some obstacles they might consider solving, the most important being a more convenient check-out lane for those who may be eager to stop in more often for a quick pick up of meal items. The idea of stopping in for nice fillet or fresh crab legs and a well-priced bottle of wine is appealing, but not if there are scores of people with cartloads of stuff in every line.

The other downside is parking, and seeing a nice mall lot with all those carts hanging around. It’s never attractive and could hurt business for those retailers that are located close by within the mall.

Jonathan Marek
Guest
10 years 8 months ago

Malls used to be the prime, and therefore high-rent, real estate in a world where the mantra in real estate was location, location, location. It speaks to the desperation of mall operators that they are attracting a tenant whose overwhelming real estate requirement is cheap, cheap, cheap.

Steve Montgomery
Guest
10 years 8 months ago

I agree that there is a danger that the Costco shopper will complete their purchases and head home. However, that does not mean they will have avoided going into shop at other stores in the mall. It will depend on their primary reason for going to the mall. I can easily envision occasions where the trip driver was a mall purchase and, oh yeah, let’s see what’s going on at Costco.

Agree that this can be a viable part of Costco’s overall market penetration strategy, but don’t foresee them ever giving up their reliance on free-standing locations. Costco is building a new store about three miles up our street and I look forward to dropping in and seeing what they have on a more frequent basis.

Len Lewis
Guest
Len Lewis
10 years 8 months ago

First I must say that Costco was also smart to partner with Westfield. I’m familiar with some of their properties. They, unlike other mall owners, are making investments that will bring these locations back to life.

As to Costco, I agree that while they have preferred locations, it doesn’t matter where they are. However, I don’t think they are going to negatively impact mall traffic. Costco is a destination. Consumers go there in a shopping mood. I think this will spill over to the malls. But what might happen in many cases is that they will shop the mall first then finish up with a visit to Costco for perishables and other items.

Mel Kleiman
Guest
10 years 8 months ago

This should not affect the Costco model. They will only go where it is good for them to go and where there is space that fits their needs at a price they are willing to pay.

Good move for Costco and most likely good news for some mall owners who get to fill some empty space. Now the question is, what is the mall owner going to do for all of the other tenants to help them tap into the increased traffic flow. What kind of promotions can they do to turn a destination shopper into a shopper? Traffic is going to be there–the question is how do you capture it?

Herb Sorensen
Guest
10 years 8 months ago

On the individual shopper basis, my guess is that sales will be smaller than at a standalone store. The rule here is that the more difficult it is to get to a store (typical standalone Costco,) the more deeply the store will be shopped.

Mall stores of all types get more “drop-in” traffic from shoppers not necessarily committed to shopping this store. If you have to get in your car, and drive to an isolated location to shop a store, you are more likely to make it more worthwhile to yourself by shopping (and purchasing) more while you are there.

Offsetting this for the mall is that you clearly may get higher traffic–depending on how things are laid out for access.

Bill Emerson
Guest
Bill Emerson
10 years 8 months ago
The question of whether this is a good or bad move for Costco and the malls seems to presuppose that there is a potential to return to the mall model we’ve had in the past–2-3 big anchors and 100+ specialty stores. My view is that this model is no longer viable. The country is egregiously overstored. The main drivers of this reality were sustained cheap credit, high employment, and the explosion of excessive consumer debt. Of these, only cheap credit remains and even that seems unlikely to continue for long given the growth of the national debt. Add to this the continued growth in e-tail and what you get is an entirely new 4-wall reality. It’s not a matter of mall operators having a lot of choices on what to do with this space. In Costco they have a successful and growing retailer. They also have a lot of anchor space that is either unoccupied or will be soon. They have acres of open parking space. For Costco, this is an opportunity to extend their… Read more »
Mark Barnhouse
Guest
Mark Barnhouse
10 years 8 months ago

I’d love to see Costco in more locations, because I like shopping there. However, I doubt having them in my local mall would make me shop there any more often than I do currently, due to the hassle factor of getting into the parking lot, dealing with the huge crowds, and so on. If they were to develop a standalone grocery warehouse model it might be a better fit for both traditional malls and power centers than a full-size Costco with all of their current bells and whistles.

I don’t need to be exposed to the flat-screen televisions and piles of parkas and seasonal merchandise every time I shop, but I always need to pick up things like coffee and Fischer & Weiser Raspberry Chipotle Sauce.

Gene Detroyer
Guest
10 years 8 months ago

There is no reason for an increase in retail square footage in the U.S…EVER. The U.S. has 2X to 3X the retail square footage necessary to service the future retail economy with all its growth coming from the internet.

The department store model as we know it is a very poor business model and is incapable of competing long term with other retailers measuring their success in ROI and turns versus asserts employed.

The natural and only solution for the mall operator is to replace the old department store anchors with vibrant big-box alternatives. Randy Brant makes an understatement when saying, “Costco is an attractive tenant for the shopping center operators.” Costco and the other big, big-box retailers are the only possible tenants to fill these voids.

From Costco’s (and their brethren) point of view, it is a great way to get space at a fraction of the cost of building from scratch.

Doug Stephens
Guest
Doug Stephens
10 years 8 months ago

As some of the panelists have pointed out, the weakness of traditional department store tenants has opened the door to stronger non-traditional players like Costco taking mall space.

But I think this goes deeper than that. I think this has more to do with Costco’s anticipation of the decline of the power center model over the next 10 to 20 years. Trends in population, economics and environmentalism are all playing heavily against the power center and I believe Costco, Wal-Mart, and others are well aware of it.

Jack Pansegrau
Guest
Jack Pansegrau
10 years 8 months ago

If Reilly and his “Law of Retail Gravitation” are correct, then bringing $100M in sales to a regional shopping mall will EXPAND its Trade Area POPULATION and it’s a WIN-WIN situation. Also successful malls have not only location but an attractive Tenant Mix–it seems to me that there is very little overlap between Costco and the typical mall shop or department store–so this means the breadth of the Merchandise Array and the appeal of its Tenant Mix is enhanced. Perhaps not a good strategy for the Fashion Mall but for the ‘Traditional Mall’, this would appear to be a viable strategy.

Bill Hanifin
Guest
10 years 8 months ago

My instinct is that Costco will have to create a store design somewhat smaller than their norm and won’t be able to include all services such as fuel pumps and auto repair.

If consumers see the stores as less than complete offerings, then the customer base may patronize the store in two segments: one continuing to shop at standalone locations as they desire to make the bi-weekly big purchase run and fill the gas with gas and the other a more “opportunistic” shopper.

Anchoring a mall with Costco is good for mall owners as they are a big draw and might provide a new look and create interest. For Costco, it will create further market penetration and possibly attract new customers who would only shop at Costco if conveniently located.

Seems like a winner for both parties.

Craig Sundstrom
Guest
10 years 8 months ago

“Our preference is to never be in a mall or by a mall. But in metro areas there just is not that much land, and we still want to expand.”

Uhmmmmm, as with many forced affiliations I imagine the affection is returned to a like degree; but going to the prom with your younger sister may still be better than not going at all, and for all those mall owners and tenants who aren’t lucky enough to have a Macy’s, a Macy’s home and a Macy’s men’s filling the spaces once occupied by some fallen flags, the question is “would you rather have Costco as a neighbor or a vacant building?”

M. Jericho Banks PhD
Guest
M. Jericho Banks PhD
10 years 8 months ago

Floor space and parking lots. That’s all Costco needs. They used to require proper plumbing for a grocery operation, but even that can now be retrofitted. (Funny story: In Philadelphia as the Acme supermarket chain sold their stores while exiting the market, they poured concrete in the floor drains.)

Have you ever gotten a good parking spot in a Costco parking lot? I haven’t. Maybe I’m not looking hard enough. Still, it’s clear that Costco is a traffic generator that any mall would kill to have. And for those commentators today in this forum who are grousing about whether Costco shoppers will visit other stores in the mall, would you rather have the space remain empty?

Ed Rosenbaum
Guest
10 years 8 months ago

I am not a proponent of warehouse stores locating in malls. There is a limited amount of parking spaces and foot traffic indicates lower sales per transaction.

This is a godsend for mall operators having to fill space. But isn’t this a short lived remedy? I was traveling in southwest Florida this morning and noticed some closed auto dealerships. These sites might be better locations for a warehouse store. Lots of space inside and parking outside.

Jerry Gelsomino
Guest
10 years 8 months ago

The smartness of this move is dependent on many factors. For the warehouse club, the mall spaces are available and malls are probably offering great deals to fill these vacancies. But not all malls or site locations offer the convenience that shoppers appreciate with free-standing stores. It will be a site by site decision on whether this becomes a popular or fruitful decision.

Kai Clarke
Guest
10 years 8 months ago

Costco is in the consumer shopping business and so are malls. Everything else simply reflects preconceived notions about what should be instead of what is the best way for today’s consumer. As we quickly discard these preconceptions, we will rapidly discover that pure value, heightened customer service and no out of stocks will dominate the customer shopping experience, not whether the store is in a mall, or what type of store it is.

Joel Warady
Guest
Joel Warady
10 years 8 months ago

This move makes a tremendous amount of sense, both for Costco and the mall owner. For Costco, it provides a space that already exists, a parking lot with a tremendous number of spaces, and usually a great location in the city. For the mall owner, Costco will bring in much-needed foot traffic, a known brand, and most importantly, a tenant that seldom closes stores, and has enough money to pay their rent.

How can the mall owner go wrong!

Jerome Schindler
Guest
10 years 8 months ago

As it is now, I drop my spouse off at the department store and I then drive to the warehouse club–if I have time. It would be a lot more convenient if this were a one-stop shopping trip for us.

John Crossman
Guest
John Crossman
10 years 8 months ago

Look for malls to add grocers, gyms, medical, and office uses. This is the year of the comeback of the mall.

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