U.S.: More malls add supermarkets to the mix

An afternoon at the mall once meant digging through a pile of sweaters at the Gap, trying on shoes at Nordstrom and slurping an Orange Julius at the food court.

Now, at a growing number of malls, shoppers can pick up a pound of sliced turkey and gallon of milk as well.

Food stores from upscale Whole Foods to discounter Aldi are starting to appear at regional shopping malls.

It is a nascent movement. Experts disagree on whether it will become commonplace, but the grocery stores' arrival punctuates what many mall operators have known for years: The temple of American shopping needs a 21st-century makeover.

"If you go back to the early days, the department stores were the draw," said John Rulli, president of the mall management arm at Simon Property Group Inc., the nation's largest shopping center operator. "The department store owned the fashion business and the mall became the fashion center."

Now, the mall is morphing into something else: a place of commerce and convenience centered around community, he said. Mall operators are filling spaces left behind by vacant department stores with post offices, public libraries, vocational schools, drugstores and day care centers.

Aldi, the bare-bones supermarket chain, plans to open its first store inside a mall at Westfield Group's Chicago Ridge Mall in May, operating alongside Carson Pirie Scott, Sears and Kohl's.

The German grocery company, which also owns Trader Joe's, has kept overhead historically low by opening stores in off-the-beaten path places where rents are cheap. But since the recession, Aldi has become one of the fastest growing U.S. retailers, attracting a growing number of frugal consumers.

The store is taking over a space formerly occupied by Steve & Barry's, a defunct discount fashion clothing chain.

When the American mall took root in the 1950s and 1960s, department stores anchored malls. Developers counted on department stores to draw the shoppers to feed the smaller stores in the mall.

With department stores from Sears to Saks shutting unprofitable stores and others including Mervyn's and Gottschalks wiped out in the recession, mall operators have had to find new retailers to draw the crowds needed to support the rest of the mall.

Grocery stores are appealing because shoppers typically visit them once a week. Consumers visit regional malls, on average, less than once a month.

Indeed, when asked what kind of store they would like at their local mall in an October 2009 survey from the International Council of Shopping Centers, 31 percent of respondents said a grocery store. Only two types of stores rated higher: restaurants, at 33 percent, and discounters, at 49 percent.

That may explain why Big Lots Inc., the closeout retailer, is now on mall operators' radar. Big Lots, which carries a wide selection of food, among other merchandise, has been on an expansion tear, opening 52 stores last year and planning another 80 this year.

"It used to be that landlords thought of Big Lots as only being interested in inexpensive locations or cheap rents," Joe Cooper, Big Lots' chief financial officer, said at a Piper Jaffray conference in June. "And that couldn't be further from the truth today.''

Last year, Big Lots opened a freestanding store at the Polaris Fashion Place mall in Columbus, Ohio. Operating at the upscale mall home to Saks Fifth Avenue, Von Maur, J.C. Penney, Sears and Macy's exposed Big Lots to new customers, Cooper said.

Unconventional tenants such as Wal-Mart, Lowe's and Best Buy have been moving into malls for years. When Montgomery Ward went bankrupt a decade ago, mall operators had scores of big-box stores to fill and few department stores were expanding. That trend has accelerated.

The vacancy rate at regional and super-regional malls reached 9 percent in the second quarter of 2010, according to Reis Inc., the highest level on record since the New York-based commercial real estate research firm began tracking the data in 2000.

Meanwhile, the average asking rent for nonanchor tenants, excluding food courts, fell 0.2 percent to $38.72 a square foot, the lowest level since the first quarter of 2006.

Target Corp., one of the first big-box stores to pick up where department stores left off, has scores of mall stores. But the purveyor of cheap chic has been expanding food offerings to include full-fledged grocery departments.

At Simon Property's malls alone, Target has 13 locations, outnumbering Neiman Marcus at 10 and Saks at 9.

"Everybody's looking for growth opportunities," said Bill Bishop, chairman of Willard Bishop, a supermarket consulting firm. "If these regional malls give grocery stores exposure to geographic market segments they can't reach another way, that's a good reason for doing it."

Consumers may cut back the number of jeans they buy, but they will always shop for food.

Like most mall developers, Westfield Group has been hunting for retailers that are expanding to take the place of department stores that have closed or gone out of business. Westfield's Southcenter mall in Seattle opened a Seafood City Supermarket at a former Mervyn's, joining a mall anchored by Macy's, Nordstrom, J.C. Penney and Sears.

And in August, Westfield unveiled an agreement with Costco Wholesale Corp. to open three warehouse clubs at Westfield shopping malls in Florida, Maryland and California. Costco is taking over a former Hecht's Department store and a Dillard's. The clubs are slated to open in 2011 and 2012.

The Costco stores will have entrances into the malls, rather than operate as standalone sites on the periphery of the mall. That decision provides "significant potential for cross-shopping, particularly given the repeat visitation associated with food that will benefit the sales of the entire mall," Steven Lowy, group managing director for Australia-based Westfield, said in an August earnings teleconference.

The Costco deal is the start of a new wave of mall redevelopment, predicts an August report from Credit Suisse retail analyst Michael Exstein.

"As consumers' needs change and department stores continue to lose share," he said in the report, "shopping centers will look to Costco and other high-traffic formats as valuable anchors going forward."