From Bloomberg.com
Shopping Mall Developers See Internet as More Friend Than Foe
Shopping Mall Developers See Internet as More Friend Than Foe
New York, June 11 (Bloomberg) -- Shopping malls developers, given up for dead by some investors who figure the Internet will one day make their properties obsolete, are making plans they hope will ensure a profitable coexistence with e-commerce.
The strategies range from creating Web pages with coupons shoppers can download and use at their local mall to making direct investments in Internet retailers, like the one made by Bloomfield Hills, Michigan-based Taubman Centers Inc., owner of such glitzy properties as Los Angeles' Beverly Center and New Jersey's Short Hills Mall.
Though the Internet is in its infancy, and nobody really knows how much business it could ultimately take away from the malls, it has the potential to be the industry's biggest threat since Edward DeBartolo, Mel Simon and other mall pioneers built their first properties in the 1950s and early 1960s. ''The Internet is becoming a very important channel of distribution, and some properties will be hurt more than others, but it's really no different than we are -- an aggregator of products,'' said Robert Taubman, chief executive of Taubman Centers.
Even so, Taubman is hedging his bets. His real estate investment trust in April bought a 10 percent stake in Fashionmall.com LLC, which sells apparel, shoes and beauty products over the Internet, for $5.8 million. ''This gives us a seat at the table,'' he said.
Linking Malls
Chicago-based General Growth Properties has 36 of its 125 malls linked to CoolSavings.com, the largest distributor of coupons over the Internet. Macerich Co. of Santa Monica, California, is working with an ''e-tailer'' to create Web pages for each of its 46 malls that would allow shoppers to preview merchandise and see if the items they want are in inventory.
And Rouse Co., best known for developing New York's South Street Seaport and Boston's Faneuil Hall, recently bought a 7.5 percent stake in Aim Smart Corp. AIM Smart provides free Internet access to mall shoppers if they agree to receive advertising from malls through their computers and give information about their shopping habits. ''We are trying to use the Internet as a tool to reinforce the mall as the primary channel of retail distribution,'' said Robert Minutoli, senior vice president of new business at Rouse. ''We're not going to compete with the Internet on some obvious products like books and CDs, but we can use the information we get to fine-tune our retail offerings.''
Since launching a program with Aim Smart in September, Columbia, Maryland-based Rouse has signed up 450,000 members through some of its malls, said Minutoli.
Cloudy Future
For now, investors are worried that malls face a cloudy future, especially after studies showed that the number of consumers using the Internet to shop during 1998 Holiday sales season was much greater than expected.
From $8 billion last year, Merrill, Lynch & Co. estimates that online sales could reach $100 billion in 2003. That's much less than the about $1 trillion in sales that are done in malls each year.
Still, the growth of online commerce is a threat to landlords because they are typically entitled to a portion of their tenants' sales in addition to base rent. So the more retail sales the Internet can take away from malls, the lower the rents.
So far this year, the Bloomberg Regional Mall REIT Index, which tracks the stocks of mall owners, is down 2.3 percent, compared with a gain of 3.2 percent for the Bloomberg REIT Index, a broader index of real estate stocks. ''There is a feeling among many developers that the Internet will not stop people from going to the mall, but that's coming from people who have largely never been exposed to the Internet,'' said Stephen Finn, partner at consulting firm E&Y Kenneth Leventhal Real Estate Group. ''I have a 28-year-old son living in San Francisco and he and his wife do all of their shopping over the Internet.''
Boom Times
To be sure, the mall business has never been better. Occupancy rates are rising and retailers are expanding. Same- store retail sales rose a more-than-expected 6.8 percent in May, the eighth straight month sales topped expectations. ''You can just about auction space off to the highest bidder if you want,'' said David Simon, chief executive of Simon Property Group Inc., the country's largest mall developer with 242 properties, and son of co-chairman Mel Simon.
But that's not to say Simon is ignoring the Web. The company is testing a venture using Microsoft Corp. technology that allows shoppers to buy goods from some of its malls from home. ''Technology offers us a lot of opportunity to get information from our shoppers,'' said Simon.
In the end, retailers peddling commodity-type products such as books, CDs, computer equipment, electronics and toys are most likely to be vulnerable to e-commerce, according to investment bank BT Alex. Brown. ''It's too early to tell the Internet's impact but I know the Internet isn't going to put malls out of business and malls aren't going to stop the Internet from growing,'' said Peter Lowy, president of Los Angeles-based Westfield America Inc., California's largest mall owner.
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