WAL-MART MAY SEE MALLS AS AVENUE OF GROWTH

Amy S. Choi / Meredith Derby

BENTONVILLE, Ark. -- Opposition to the growth of Wal-Mart Stores here might be missing the mark.

The New Jersey Legislature, for example, is examining a bill to halt the construction of all diversified big-box retailers within the state, except for category killers like Home Depot and Best Buy. In sales-tax-free Montana, lawmakers have proposed a bill dubbed the "Wal-Mart tax," which would impose gross-receipts tax on the state's largest retailers for their consumption of natural and labor resources. In New York City, politicians battled the world's largest retailer over a proposed store in Rego Park, Queens, a project that was recently abandoned by the developer (see story below).

Yet in these attempts to slow the development of massive Wal-Mart supercenters, politicians and advocacy groups are ignoring what might really be the retailer's key expansion play: malls.

"Our preference is to be one-level and stand-alone because it's much more cost-effective and easier to operate," said Peter Kanelos, a Wal-Mart regional director of community affairs in California. "But if we can't develop for lack of available land, then in order to meet the needs of consumers, we figure out how to adapt our stores."

This is music to the ears of mall owners, who are thirsting for growth opportunities and looking for new anchor tenants as department store chains consolidate. So they are eager for Wal-Marts and Targets to move in.

"We have to keep [our malls] relevant," said Peter Lowy, managing director of Westfield Group. "We have to keep up with retailers that are expanding, and they happen to be the Wal-Marts, Costcos and Best Buys of the world. We have to adapt our malls to fit them in."

Last October, Wal-Mart opened its first multilevel store designed specifically for a mall in the Westfield Shoppingtown Parkway in El Cajon, Calif. The retailer has a few other mall locations, sites where it took over vacant department stores, such as a two-level, former Sterns store in the Sunrise Mall in Massapequa, N.Y.

The Westfield site in El Cajon is a monster at 167,000 square feet, which is close to the size of a Wal-Mart supercenter, and well above the 98,000-square-foot format of its regular discount store. The Westfield store is the largest Wal-Mart anywhere in San Diego County. It anchors the mall, along with Robinsons-May, JCPenney, Mervyn's and Sears.

Though sharing its customers with other retailers seems antithetical to its approach, the relationship of Wal-Mart to a mall has proved mutually beneficial.

"Somebody out to buy a new outfit for the prom that night may go to the mall, and while they're there, they can stop and get film for the prom pictures," said Wal-Mart's Kanelos. "It's about convenience."

A mall-based strategy for Wal-Mart also makes business sense. According to analysts, there is plenty of retail real estate in the market, but it's not good real estate. Expanding into key markets clustered with consumers holding higher discretionary income levels may be the type of growth strategy Wall Street applauds. Shares of Wal-Mart, although trading at valuations above most indexes, have been stalled at between $50 and $60 for the past year.

Growth is imperative for Wal-Mart, and is more difficult the larger the retailer becomes. Wal-Mart is experimenting with a variety of formats in the United States, from Neighborhood Markets to city-center units to mall-based units, as it attempts to maintain its momentum. The retailer plans to open 480 stores this year across all its formats, including Sam's Club. Several years ago, Lee Scott, Wal-Mart's chairman and chief executive officer, said in an interview with the Financial Times that he saw no reason why the chain could not continue to grow by 10% a year for the foreseeable future by adding more stores to markets where it already had several.

The opportunities for mall-based growth seem viable.

According to retail design firm FRCH Design Worldwide, mall stores give retailers like Wal-Mart a chance to experiment with new merchandising plays. The mall stores have smaller floors -- though they are often bigger than stand-alone stores by 30% to 40% -- allowing for shallower departments. This makes shopping in the aisles less daunting and more comfortable when walking in from the perimeter of a store, said Andrew McQuilkin, design director at FRCH.

For Australian-based Westfield, which owns Shoppingtown Parkway and plans to build a Target store in its property at San Fernando Valley in California, the benefits of adding discounters to malls is clear. For some of the smaller mall-based retailers, having a Wal-Mart or Target nearby is convenient and can draw traffic to their stores.

To capitalize on the traffic Wal-Mart would bring to the mall in El Cajon, Lowy built additional entrances and required that all of the retailer's checkout stations faced the interior of the mall to encourage customers to cross-shop the mall rather than go from Wal-Mart directly back to the parking lot.

Ultimately, the addition of Wal-Mart to the property is expected to bring the center's annual revenue to $400 million. Based on its success, Wal-Mart and Westfield are also working on adding a store to the developer's mall in downtown Sacramento, Calif.

"European malls are based on hypermarkets," said Lowy. "To us, this is just the natural order of things, and the U.S. market is moving toward it."