Retailing in a smaller world

Real Estate Weekly, Sept 1, 1999 by Richard A. Seligman

As American retailers such as DKNY, Tommy Hilfiger and The Gap begin to establish a foothold in Europe, Max Mara, Virgin, The Body Shop, Louis Vuitton and Bang & Olufsen continue to open stores throughout the United States. But why is the grass suddenly greener on the other side of the Atlantic?

For American retailers who have experienced a strong market in recent years, geographic diversification provides an insurance policy against a possible downturn in the future. What's more, it enables retailers to sell their products to a market that is less saturated than the United States.

In recent years, retail has grown at a meteoric pace in America. According to the International Council of Shopping Centers (ICSC), the United States boasted a total of 42,953 shopping centers in 1997, and an estimated 5.33 billion square feet of retail space - an average of 20 square feet of retail space per person in the U.S. In fact, there are more shopping centers in the diminutive state of Delaware than there are in the countries of Greece, Turkey and Luxembourg.

Domestic retailers are also being drawn overseas by changes in the zoning laws of many European cities. For the first time, American-style retail centers, outlet centers and entertainment complexes are being developed in European countries such as Italy, Spain and the United Kingdom. Many American retailers think the time is right to expand the retail market, increasing consumer demand and the number of retail dollars spent by European consumers.

From a European perspective, America, and New York City in particular, are strong and stable markets. The collapse of the Soviet Union, the devaluation of the Yen and the problematic economies of the Far East and South America have highlighted the stability of our economy and the opportunity of generating revenue during a period of softness in the European market.

Many European retailers seeking to create revenue in the near-term are considering the American market, and those with an existing American presence are considering expansion. This trend is clearly visible on Madison Avenue and in SoHo, where more and more foreign-owned and operated retailers have snatched up retail space.

Americans' seemingly insatiable desire for European luxury goods adds to the attraction. "Key money," a common expense in Europe, is not a factor here, and the cost of commercial real estate is low in comparison to Europe. Prime retail space on Madison Avenue can cost as much as $450 per square foot, however, equivalent space on Milan's Via Montenapoleone or London's Bond Street well exceeds this cost when one factors in the key money often required.

Foreign retailers also recognize that Americans are capable of enormous consumption. The average disposable income of United States residents has risen steadily since 1993. The ICSC reports that 188.8 million American adults (94 percent of the population over the age of 18) shop in shopping centers on a monthly, basis. This level of activity makes America the most promising market in the world.

However, as retailers explore new markets, they are learning that cultural differences are very important. American retailers are finding that Europeans have surprisingly strong brand loyalty, while European retailers have been surprised at the level to which consumers in the U.S. have become "spoiled" by an extraordinarily wide range of product choice and price.

(Retail Development Partners is an international retail services Organization headquartered in New York City, with offices opening in London and Milan. Through its three major divisions - RDP Brokerage, RDP Property Advisors and RDP Retail Consultants - the company provides creative solutions for retailers and property owners.)