Despite worries that the credit crunch could lead to a broad economic slowdown, New York’s retail scene continues to show strength. A number of retailers are looking to expand, both in Manhattan and the outer boroughs, but they are sounding notes of caution about their approaches. For this month’s special retail Q & A, The Real Deal spoke with officials at three companies about their strategies for 2008. Here’s what they had to say:
John Catsimatidis owner, Gristedes supermarkets
How do you choose new sites?
Location, location, location. Price, price, price. I rely on a combination of market research and gut instincts. Right now, we’re looking for areas with high densities and disposable incomes. The ideal size for our stores in Manhattan is between 10,000 and 12,000 square feet. We’re looking at locations on avenues, but also on some side streets.
Do you have an expansion strategy?
We’re only looking to expand in Manhattan, and maybe parts of Brooklyn. We’ve gone down by about 10 stores in the past three years, but our strategy is to add five to 10 in the next year. We sold nonperforming locations. Other locations, where we’ve thought about expanding, we were outbid by banks.
Whole Foods and Trader Joe’s seem to have a lot of momentum. What are you going to do to compete?
We’re looking at ways to change perceptions. One way could be to offer more organic food. Five years ago, organic food was only 2 percent of sales. These days, it’s about 5 percent of our sales. But I think the jury is still out on the success of stores like Whole Foods. Whole Foods does well in sales, but at the same time … they went after locations without regard for cost, and so when their profits disappointed Wall Street, their stock tanked.
Randy Plemel site selection consultant, American Apparel
What’s your expansion strategy?
Right now, we’re covering our bases. We have 16 stores in the city, and this year we’re opening three more: on 125th, on Ninth Avenue and on Broadway at 72nd. We’ve had stores on Broadway near NYU, which was our first store in New York City, in Williamsburg and on Smith Street in Brooklyn for a number of years. Now we’re looking to infill. We look for high traffic areas where we won’t cannibalize sales at our other stores. But it’s very tough for American Apparel because we need a certain size store, between 3,500 and 4,000 square feet.
How do you choose sites?
Everyone at American Apparel has the same approach, which is that we walk around a neighborhood and talk to other store owners and people walking by. Sometimes, we have more than one option for the same neighborhood. In that case, I’ll just stand in front of both potential locations for a whole day. I take notes on what each site is like at different times. I record answers to questions like: Who’s walking by? Which side of the street gets more people at different times of day? What kind of people walk by? How quickly are they walking? I do this because while it’s important to pore over the numbers, there’s always the chance that numbers lie.
Curt Huegel director of development, Lenny’s sandwich chain
What’s your expansion strategy?
Right now we have 10 stores, and we’d like to have 20 by 2010. At the same time, last year, we decided to hold off opening new stores for another year because we felt that rents were out of control. Now it’s starting to look like rents are becoming more sane. We’ve got four or five offers out to [Manhattan] landlords.
How do you choose locations?
We’re trying to set up the ability to cover all of Manhattan below 96th Street. Half of our business is delivery, so new stores have to fill in gaps. We have shops in prime locations on the avenues, but we also have some on side streets. Stores on side streets do the same amount of business, but we recognize we need both. The minimum lease we’ll look at is for 10 years with an option to renew for five. We’ve never taken a lease for more than $25,000 per month. Other stores are spending more on rent, but we’re feeling out this market.
What kind of space are you looking for?
We look to be in spaces with about 2,000 square feet. It’s daunting to find this kind of space in Manhattan because the fast casual food market is intensely competitive, and everyone is looking for the same thing. When we look at locations, we always run into our competitors.
A roll call of landlord preferences:
Just what are landlords looking for in a tenant?
When picking tenants for ground-floor retail spaces, landlords can be choosy — evaluating credit, cleanliness, image and amenity value. “There are landlords who will just take the most rent and not care much about image, but those landlords are farther and fewer between,” said Jeffrey Roseman of the real estate advisory firm Newmark Knight Frank.
Checks of references (yes, landlords will do their homework) can make or break a tenant’s chances of getting a space. “What you did in a previous space is going to be held against you forever,” said Roseman.
Based on interviews with commercial brokers who represent tenants and landlords, here’s the basic pecking order of tenants, in order of preference:
1. Banks
If finding an ideal tenant for a retail space is like playing poker, “a bank, from a credit standpoint, is a full house,” said Roseman. Leases are backed by corporate guarantees (as opposed to security deposits). “You can go to bed at night knowing you’re going to get a check every month,” said Joanne Podell, executive director for the retail services group at Cushman & Wakefield. Also, banks are neutral from an image perspective, and have an overriding plus: no vermin.
2. National brand stores
As with banks, leases are often backed by corporate
guarantees, and bankruptcies are rare. “With local tenants, they walk away. With public companies who’ve decided a location doesn’t work anymore, they would look to the retail community to put someone else in the space,” said Podell.
3. Delis/bodegas
Some landlords view them as amenities, but these food-based businesses pay slightly higher rents to account for possible vermin and unattractive storefronts. Despite being iconic New York retail, “Bodegas are pushed out [of neighborhoods] slowly if the retail climate is really strong right there,” said Jonathan Anapol, president of Prime Manhattan Realty.
4. Restaurants
With high turnover and the possibility of food odor and vermin, restaurants are sometimes charged more than “dry goods” outlets. While some brokers say restaurants are “the last choice,” owners who install kitchen equipment improve the value of a retail space. Because of this investment, restaurant tenants who go out of business are more likely to sublease to another restaurateur, offering the landlord some downside protection.
5. Bars
“They go into neighborhoods where there is high turnover,” said Podell. “The landlords expect that.” There’s the prospect of smokers congregating outside and crowd noise, which invite complaints. Like restaurants, bars can be risky, but high profit margins can also fund higher lease payments.