Almost everyone feels a bit overwhelmed when they experience a Costco (NASDAQ: COST) store for the first time. The size, the crush of people, the bizarre variety of items.
And that’s just the view from the parking lot.
Well if Costco has its way, the mob scene taking place at its cavernous stores will soon be on the move – ideally to the oversized mall spaces known as “anchor” positions, which have long been the turf of big box retailers and department stores.
It’s an intriguing move, and the timing may be perfect as the retail environment continues to suffer amid weak consumer spending. That has really hurt department stores, and has even driven some of the big players out of long-held anchor spots at malls around the nation.
Take Sears (NASDAQ: SHLD), which closed eight Sears locations and 13 Kmart stores in April and May. Macy’s (NYSE: M) also announced this year it will shutter five locations. And then there’s the big dog JC Penney (NYSE:
JCP), which announced plans at the beginning of the year to cut 75 of its 1,100 stores.
But as retail sales have been on the decline and department stores have been held back, discounters like Costco have been thriving. Part of that is because of the business run-off as shoppers look for cheaper places to get clothing and home goods, and part of that is because consumer staples like food and toiletries are about the only products seeing consistently strong sales these days.
What’s more, commercial real estate continues to suffer as smaller retailers pull out of malls – leaving vacant storefronts and forcing operators to be creative with rents if they want to keep properties profitable. In the first quarter of 2010, foreclosures on commercial real estate (which for the record includes office buildings as well as storefronts) totaled $3.6 billion, the most since 2001 and 48% higher than in the fourth quarter of last year.
That makes the time ripe for Costco to pounce on the mall scene.
But whether that’s a wise move remains to be seen. Costco’s stores, which can be as large as 205,000 square feet, may be too big even for mall anchor locations. For the record, that’s enough space to contain 3 ½ football fields. And though conventional wisdom would hold that Costco would benefit from mall traffic, it may in fact prove that Costco is the bigger draw – and that malls will be the ones seeing a bump in shoppers.
Credit Suisse analyst Michael Exstein told the Wall Street Journal that the move “is representative of a longer term trend that is developing…As consumers’ needs change and department stores continue to lose share, shopping centers will look to Costco and other high-traffic formats as valuable anchors.”
In short, Coscto is holding all the cards as conventional retailers suffer. If it can lowball commercial real estate operators for good rates on a mall anchor position, it has nothing to lose.
As for consumers, they may look forward to a Costco coming to a mall nearby. Just make sure you leave plenty of time for parking, though.
As of this writing, Jeff Reeves did not own a position in any of the stocks named here.
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