U.S. Retail Trends. . . And Why They Matter

1

• U.S. Retail Trends. . . And Why They Matter
• Presentation to
• Property Council of Australia
• May 5, 2005
• Michael Baker
• National Retail Advisor
• UrbisJHD

2
Why Look to the U.S.?

• New ideasAmerica is a lab where its possible to
  make mistakes and hide them
• Investment opportunities
• Latest trends
• Learn from their mistakes
• Gives us a way of evaluating the price of our own
  achievements

3
Five U.S. Trends That Matter to Us

• Lifestyle centres are mode du journew
  developments and de-malling
• Format convergencedevelopers blur property types
  to deliver value
• Department stores circle the wagons
• Competition in the supermarket business
• has traditional supermarket operators on the
  ropes
• spawns innovation and consumer choice
• Retailers reconfigure stores to get a slice of
  real estate on the last mile

4
Lifestyle and Regional Centre Openings, 1987-2004
Source ICSC
5
Lifestyle centres

• Underlying factors
• Provide greater convenience
• Provide a pleasant outdoor shopping environment
• Accomodate nostalgia for suburban Main Street
• Favoured by new urbanistsmunicipalities have
  adopted principles and are applying them with a
  broad brush
• Provide medium for specialty chain growth
• Dont need a department store

6
Clarendon Commons
7
Clarendon Commons
8
Gardens on El Paseo
9
Fashion Island
10
Format Convergence

• Mills Corp. took factory outlet retail into the
  mall a long time ago
• Department store consolidation leads to
  experimentation with new anchor solutions
• Regional centre operators capture the popularity
  of lifestyle centres (and prevent lifestyle
  centre developers from swiping their tenants)
• incorporating lifestyle centre features into new
  regional centre projects
• redeveloping existing properties with lifestyle
  centre features
• Lifestyle centre operators experiment with big
  boxes and up-market grocery stores
• Growing realization across the board that
  previously untried cotenancies and hybrid
  shopping centre formats can work
• Shopping centre operators striving to create the
  one-stop shop

11
Victoria Gardens
12
Victoria Gardens
13
Victoria Gardens
14
Victoria Gardens
15
Waterfront Town Center in Pittsburgha lifestyle
and power center rolled into one
Waterfront Town Center
Waterfront Town Center in Pittsburgha lifestyle
and power center rolled into one
The lifestyle center
The lifestyle center
16
Why this matters to us

• It signals the breakdown of the formulaic
  shopping format. Consumers want
• value, convenience and pleasant surroundings in
  which to shop
• familiarity and uniqueness at the same time
• Cookie-cutter approaches to development wont do
  it anymorefocus needs to be on what brings value
• People are nostalgic and suburban Main
  Streetsnot shopping centrescater to that
• Our benchmarks for shopping centre investing are
  becoming outdatedyesterday we knew what a
  regional centre was, now we dont
• Public/private space becoming blurred, with
  potentially serious consequences

17
Twilight of the Great Department
StoresSame-store Sales Growth Jan. 01-Mar. 05
Source ICSC
18
Department Store Companies Circle the Wagons

• Cyclical swings no longer obscuring growing
  functional obsolescence
• Regional centre operators have found they can get
  by without department stores
• Department stores vote with their feet
• Mergers and acquisitions (Sears/Kmart,
  Federated/May, Belk/Saks)
• Going off-mall into value-oriented open-air
  centres
• Going up- or down-market
• Testing edited formats in lifestyle centres
• Increasing share of private-label merchandise
• Becoming more like discount stores or specialty
  stores

19
Bloomingdales Home
20
Bloomingdales Home
21
Traditional Supermarkets Are Under the Pump

• Alternative supermarket options at the low- end
• Wal-Mart
• Warehouse clubs
• Extreme discounters
• High-end/high-service business models taking
  market share from above (Whole Foods Market,
  Wegmans, Trader Joes)

22
Traditional Neighbourhood Centre
23
Traditional Supermarket
24
Wegmans
25
Wegmans
26
Wegmans
27
Traditional Supermarkets Are Under the Pump

• Wal-Mart undercut them on price
• Extreme discounters undercut Wal-Mart
• High-end/high-service business models taking
  market share from above (Whole Foods Market,
  Wegmans, Trader Joes)
• Same-store sales languish
• Operating margins implode
• Regional chains vanish

28
Same-store Sale Growth of Leading U.S.
Supermarket Operators, 2000-2004
Source ICSC
29
Whats a Supermarket to Do?

• Try going local
• Try going ethnic
• Try more ancillary businesses
• Try ramping up customer service
• Will it be enough?

30
Cap Rates Exhibit Large Variance Depending on
Grocery Anchor
Source Real Capital Analytics
31
Store Prototypes Go Out the Window

• Diminishing number of large parcels on the
  suburban periphery
• Nimbyism
• New urbanism
• Existing centers are gatekeepers to the last mile
• Large-format retailers adjust by experimenting
  with new configurations
• Who benefits? Shopping centre owners do

32
Dangers Lurking for Australian Investors

• Superabundance of capital driving price
  appreciation
• Heterogeneity of properties
• Format convergence makes benchmarking difficult
• Competition threatens both anchors and in-line
  tenants alike
• Misalignment of objectives between owner and
  manager

33
Opportunities for Investors

• Traditional grocers still have fortress stores in
  major markets
• New formats constantly arising to take the place
  of the old (e.g. new supermarkets)
• The need for locations in the last mile
• Decline of department stores no longer such a
  concern

34

• Thank you!