Threshold Resistance (8 page)

Did the Woodies experience kill my enthusiasm for the department store? No. As with everything, there are good department stores and department stores that don't deserve to survive. Well-run, properly financed companies will continue to thrive. And while extraordinary consolidation continues to take place in the industry, the organizations still standing are well positioned for growth and profitability. The customers in Taubman centers respond very positively to the merchandise and service provided by such powerful brands as Saks Fifth Avenue, Nordstrom, Neiman Marcus, Bloomingdale's, Macy's, Dillard's, and JCPenney. These retailers stand for something special, they stand out with promotional punch, and they consistently nurture customer confidence.

The most successful malls will continue to be anchored by these powerful people pumps. And creative developers will continue to combine a host of different major offerings to deliver traffic to their specialty store tenants. In several Taubman malls, for instance, the total sales of the center's restaurants equal the revenue of a traditional anchor. Large home furnishings and design centers are certainly good candidates for anchor locations in certain markets. Remember, in the days of the urban arcade, train stations and cathedrals functioned as very effective anchors for major retail destinations.

But the Woodies experience teaches a critical lesson for any entrepreneur considering an acquisition of any size: People run businesses. Great people run great businesses. Stanley Marcus ran a magnificent store. My good friend Marvin Traub made Bloomingdale's “like no other store in the world.” But Ed Hoffman lost his passion for Woodies, and Arnold Aronson never moved from New York to Washington to really get his nose into the business.

So if you are not absolutely sure that a great management team is in place or can be recruited quickly, don't buy the business unless you intend to run it yourself. And if you see yourself in that role, be sure you have the time to devote as much attention as you focused on your original business when it was first getting off the ground.

It's all about minding the store.

I
n the current retail climate, it's difficult for department stores and other large retailers to compete if they stake out the middle ground. One of the defining features of our economy in the past few decades has been the growth and expansion of luxury retailers. And for almost as long as we've been in business, we've focused on appealing to the luxury retailing customer. Again, this involved overcoming threshold resistance. Because while comparatively few people can afford to do all their shopping at high-end stores like Tiffany's or Neiman Marcus, a lot of people can afford to do
some
of their shopping at such stores. That's why the world of fashion has expanded so rapidly.

In the shopping center business, we classify certain anchor tenants as “fashion” department stores. For example, Neiman Marcus and Saks Fifth Avenue are fashion department stores. Sears and JCPenney, better known for housewares and hard goods, are not. Nor are Marshall Field's or Macy's, which are classified as “full-line” department stores. They sell all categories of department store-type merchandise, shorthanded in the retailing business as DSTM. Yes, they carry some moderate-to-medium fashion apparel, but a true fashion department store's merchandise mix focuses on medium-to-better goods and essentially no hard lines.

Mass merchandisers Wal-Mart or Kmart are not even close to being fashion contenders. Target wants very badly to be perceived as a fashion merchant, and is having some success (thanks in large measure to terrific advertising). Of course, these stores sell apparel, but customers look only to certain retailers for true fashion.

The term
fashion
is used loosely and is rarely well-defined. But the concept makes a big difference to the consumer and the merchant. The popularity, pricing, and promotion of fashion items can be very different from merchandise lacking this imprimatur. In essence, the fundamental quality that elevates anything into the fashion category is
design.
Not just any design: good design that appeals to your taste. Fashion is added-value through design. And we're not just talking about apparel.

For most of world history, fashion was the exclusive domain of the very rich. Style was driven by the royal families of Europe, and only the highest levels of landed gentry could hope to mimic their taste. This began to change in the late nineteenth and early twentieth centuries along with mass merchandising and the growth of the middle class in the United States and Europe. The shopping mall (Taubman properties included) helped strengthen this revolution in commerce. Marvin Traub in his terrific autobiography,
Like No Other Store…: The Bloomingdale's Legend and the Revolution in American Marketing,
focuses on this historic transition:

In recent decades, the fashion and design revolution has expanded into realms far beyond apparel. As consumer choice expanded, and as retailers and manufacturers aimed to build and serve new tastes and markets, design became an important consideration, not just for the growing of mass luxury products, but for all products.

Consider a wastebasket, an everyday item you can purchase in any number of retail venues. You're looking for a certain size or shape, or perhaps you want it to be waterproof, and you might want it to have a lid. For a few bucks, you can buy a terrific plastic wastebasket (in an array of colors) at Wal-Mart to satisfy all these functional criteria. For a few extra dollars, it can even be a brand-name wastebasket, like Rubbermaid, sure to last for years without any trouble.

But for most consumers, utility is not the only consideration—even when buying a wastebasket. In a den, library, or bedroom, plastic will not do. The choices now extend to wicker, brass, leather, wood. Given the decor in the room, maybe a hand-painted wastebasket purchased during a vacation at the seashore would be perfect. Such a wastebasket will command a higher price than the Rubbermaid alternative. You have a story to tell your friends about the purchase, and you expect something so different, perhaps even unique, to cost more. The wonderful world beyond utility is the world of fashion. Here, design makes the difference, and the customer will pay for this added value. In fact, the closer an item comes
to actually being unique, the more a merchant can justify a higher price tag (again, if the design is good).

When Karl Lagerfeld designs a one-of-a-kind evening gown for an individual customer, that's fashion at the highest level. The Lagerfeld couture dress wears and presses better than a more utilitarian garment. It is made to fit a particular person's proportions perfectly, and flatters her hair color as well as her station in life. That's the promise of couture. In a world of standardization and mass production, it makes what you might call a very personal fashion statement.

But one of the defining characteristics of our retailing age has been the democratization of fashion, the offering and creation of luxury products for a broad audience. After all, retailers at all price points are always striving for ways to differentiate themselves and offer customers something special. When Karl Lagerfeld designs for a popular merchant like H&M (a Swedish retailer known for very inexpensive but fashionable young people's apparel), a significant amount of fashion magic still comes through to the consumer. The H&M shopper feels great about herself, even if the blouse may fall apart after just a few washings.

Fashion can even be found in the kitchen or bathrooms of American homes. Chances are, you and your spouse have puzzled over just the right choice of faucets, dishware, towels, and pots and pans. Stores like Williams-Sonoma, Crate and Barrel, Pottery Barn, and Pier 1 Imports have created excitement around everyday utensils and products you may not have equated with fashion. Architect Michael Graves's iconic teakettle, designed exclusively for Target customers, is a perfect example of successful fashion merchandising at a moderate price point (more expensive than a standard-issue teakettle, but inexpensive nonetheless). Martha Stewart's sheets, towels, and pots and pans at Kmart are also examples of added-value through design. Customers feel confident in Martha's taste (as well as her commitment to quality) and will pay a bit more to bring her products into
their homes. They feel better about the purchase. And it is no coincidence that as a general rule, Martha's merchandise is by far the most successful of any offered by Kmart.

These trends have propelled the growth of our company. Most of our centers are located today in upscale areas, and are full of retailers who are engaged in selling luxury design and fashion products to a much larger customer base than they could have imagined.

But while consumers plainly see the value of the distinctive offerings, stock analysts don't. Now, so you don't think I'm always this rude, I should explain that one question stock analysts always ask me is, “How long will it take, Mr. Taubman, for Wal-Mart to kill every department store and fashion mall in the country?”

Before answering, I always turn the tables. I ask: “How many of you, men and women, are wearing an item of clothing purchased at Wal-Mart, raise your hands?” Over the last twenty years I must have asked my Wal-Mart question more than a hundred times to untold numbers of confident, well-dressed analysts. No one has ever raised a hand.

Then I ask my second question: “Raise your hand if a friend or anyone in your family has ever purchased an item of apparel at Wal-Mart?” Again, zero. Twenty years, not a single hand.

Hands down, Wal-Mart is the most powerful retailer in the world and the largest company of any kind on the planet. So why aren't they in the fashion and design business? Sure, the company has made deals with designers to create product lines that are sold exclusively at Wal-Mart. But that has not drawn shoppers. Beyond good design, there are other, more intangible aspects of fashion merchandising we can't overlook. As Marvin Traub pointed out, taste and image have a lot to do with it. Most consumers appreciate and trust the taste level of Michael Graves, Martha Stewart, and Karl Lagerfeld. Millions of dollars and years of proven success have defined such fashion brands as Polo, Coach, Louis Vuitton, and Gucci in the minds and hearts of shoppers around the world. That didn't happen overnight.

Wal-Mart is also a powerful brand. It stands for many important promises, most having to do with price—an attribute less critical to fashion. The down-home, mass-merchandiser, low-price-every-day image that makes Wal-Mart so successful at what it does runs counter to what shoppers expect from Neiman Marcus or Saks. Can you picture the typical senior citizen Wal-Mart greeter standing at the entrance to a Polo store asking if you've seen the latest newspaper sale circular? To a fashion-conscious shopper, that presents serious threshold resistance.

Stock analysts aren't the only ones who overestimate Wal-Mart's ability to eat into the business of department stores and specialty retailers. Several years ago I participated in a real estate industry panel with Sam Zell, a successful commercial real estate developer (and a fellow University of Michigan Wolverine). “There is no place left for the department store,” Sam confidently proclaimed, before going on to predict the absolute retail dominance of Wal-Mart in the United States. Now, Sam knows a lot more about office buildings than he does about retail properties. And the fundamentals of the two businesses are very different, as are the roles of the developer.

Major mall development is an
operating
business. The economics are based on a business opportunity—the ability of a merchant to produce sales volume by serving a specific market. The developer provides the environment—physical, locational, promotional, operational—to optimize the merchant's performance. It's a long-term commitment that, if all goes well, yields long-term rewards and continues to add value for both merchant and developer.

Office buildings, by contrast, are a
commodities
business. Price is usually more important in determining the success of a property than other factors such as location, design, and access. In fact, prestige, ego, civic responsibilities, or even personal quirks may drive the development decision. I once asked an executive with a national retailer why his company had chosen an out-of-the-way site for a
new headquarters building. He explained that the CEO had rejected multiple locations recommended by his real estate and marketing departments in favor of a site five miles from his home and ten minutes from his country club.

If you are an employee in a major corporation, chances are you will show up for work at the office Monday morning despite the highway gridlock, lousy parking, and uninspiring views. Try adding those inconveniences and turnoffs to a retail location, and you're looking at bankruptcy. They're fundamentally different businesses, and that's why most successful developers stick to one or the other.

In the 1980s, the Taubman Company became involved with some mixed-use projects. In Charleston we created Charleston Place, a hotel, conference, and shopping complex in the heart of one of America's most historic downtowns. And in Manhattan, we were partners with Solomon Equities in 712 Fifth Avenue, a Kohn Pedersen Fox–designed fifty-two-story luxury office tower in the heart of Midtown at 56th Street. At the base of the building, which opened in 1990, are three historic Fifth Avenue townhouses, which we preserved (with the help of the architectural restoration firm Beyer Blinder Belle) to the delight of the city's very demanding Municipal Arts Society (once headed by Jacqueline Kennedy Onassis). We renovated these structures, which were once home to such legendary retailers as Cartier and the Rizzoli bookstore, and leased them to my friend Les Wexner, who had just purchased Henri Bendel.

There are real estate developers who excel in multiple property formats. Donald Trump is one of the very few high-profile practitioners with success in the commercial, retail, residential, and recreational segments of our business. He's intelligent (he got a lot of his real estate smarts from his father, Fred, whom I knew pretty well) and has branded himself in a unique way. The Trump name adds interest, excitement, and most important of all, value. Donald's golf
course properties are planned and executed beautifully, as are his office towers and luxury residential projects. And he's a television star!

Sam Zell, who has enjoyed great success with office buildings, is not so multitalented. So when he made his uninformed pronouncement, I had to challenge his retail expertise. I looked at his shirt and asked my favorite question: “Sam, did you buy that shirt you're wearing at Wal-Mart?” Sam's shirt could have been purchased at Wal-Mart. I know double-needle stitching when I see it. Rather than raise his hand or counter my point, Sam simply glared at me for the rest of the session. I think if we weren't both Wolverines—and I weren't about a foot taller and a hundred pounds heavier than he is—he would have hit me.

Now, it's possible that Sam and other high-powered, well-paid Wall Street types just don't want us to know they shop at Wal-Mart, or are hesitant to admit that they know people who do. I would argue that such a defensive response is just as negative for any retailer hoping to be known for fashion merchandise. Embarrassment is not an enviable brand promise! Don't get me wrong—Wal-Mart has and will continue to kill certain retailers and certain malls, legitimately so. Malls featuring a mix of me-too stores carrying generic, lower-priced merchandise are directly in Wal-Mart's crosshairs.