E-tail This!

Reports of the Death of Bricks & Mortar Retail Have Been Greatly Exaggerated

E-tail This!
Photo By John Anderson

Okay, cyber-smart-guy. Explain this:

You're driving north along I-35. As you enter Williamson County, at the sclerotic interchange of the interstate and FM 1325, you pass Dell Computer Corporation. You genuflect. What they have to offer is not available in stores, and if Michael Dell has done anything, he's redeemed the image of the words "mail order." Or e-mail order. It was the Internet that made possible many of the SUVs and shiny bed-lined trucks in front of you -- and there are many in front of you.

So many that by McNeil Road it's clear you don't really need to be in Round Rock after all. You turn around and head back into the morass. Now on your right is La Frontera Village, the brand-new and quite significant (32 stores open so far) shopping complex that's Phase 1 of the 328-acre mixed-use La Frontera development -- hotel, apartments, offices, etc. Right now, before the landscaping has grown in, the big boxes and halogenated parking fields look like they should hold the space shuttle, not soft goods and home accessories. And with the battery of Sam's Club, Old Navy, Office Depot, et al., the place doesn't look, you know, especially "villagey."

Depending on how often you visit Round Rock -- aspiring to be the "Sales Tax Capital of Texas!" -- you may have never seen La Frontera before, since it wasn't approved by the city of Round Rock until mid-1999 and just opened last August. Even for a boomtown like ours, the conversion of this once-rural interchange into a "hot corner" has been alarmingly swift. Other hot corners in the tech belt along the county line, such as the Arboretum area and Lakeline, at least grew through accretion over the years, not all-in-one-swoop like La Frontera. (There are two power centers and Garden Ridge Pottery at the I-35/FM 1325 interchange, but La Frontera transforms the intersection into a regional, rather than just local, retail hub.)

Even numbed and dazed by the traffic, you grasp the paradox. The Net helped make Dell rich, but it's not making La Frontera's backers into paupers. Ironically, those same backers are pitching La Frontera's office component as a "net.plex campus" with all the kit needed for e-commerce to realize its potential. Yet those same e-tailers would be sharing their new community with 809,748 square feet of brand new retail space, the largest non-enclosed shopping center in Central Texas. Hmmm.

For the record, while La Frontera as a whole is owned by a limited partnership based in Austin, La Frontera Village is a project of Irving developer David Berndt and, more importantly, Developers Diversified Realty Corp. (DDR), a real estate investment trust (or REIT) based in Ohio that owns 265 centers in 41 states, controls about 50 million square feet of retail space, and claims to be worth $2.5 billion. Clearly, a player the size of DDR was not troubled by the thought of throwing big sugar right into the maw of the e-commerce revolution that was supposed to destroy its industry.

Talk about irrational exuberance. These past few months, as the dot-com deal has started to stink of death, it may be easier to understand the apparent abject failure of e-commerce here in its own back yard. But if you understand this stuff, you're better off than many who've made either clicks or bricks their livelihood.

The breath of e-commerce still smells of milk, and common sense tells us that land-based retail investments would still be safe and productive for some years to come. But markets are not, despite what you may have heard, guided by common sense. Investors saw that Time cover story in July 1998 screaming "Kiss your mall goodbye!" They heard about MIT guru Lester Thurow telling international infonauts last June that half of the retail outlets in the U.S. would be gone in 10 years. And they moved their money accordingly.

Witness the sorry fate of the nation's four publicly traded record-store chains: Musicland (which owns Sam Goody), Trans World (Camelot, Record Town), National Record Mart, and Texas' own Hastings Entertainment. After tough times in the sector in the mid-1990s, all rebounded in 1999 with what in Musicland and Trans World's cases were record profits. Wall Street rewarded those two firms, which between them own more than 2,000 record stores, last spring by driving their stock prices down more than 60%. (Musicland was bought by Best Buy last month. Trans World is still trading at under a third of its historic high, closing on Feb. 26 below 81é2.)

Now, at the same time, Wall Street was having its way with post-IPO dot-coms like CDNow, whose stock slid from near $40 to about $2 before it got bought out by Bertlesmann last August. But the money that could have gone into the actually profitable land-based retailers had already been blown on the Navigators and Escalades of the option-fed marketing managers of places like CDNow. At least those investors who put their money into music download sites like MP3.com, instead of into packaged-music vendors, deserve credit for having given the future some thought.

Nor were the landlords immune -- during the first quarter of 2000, DDR itself was trading at about $10 a share, whereas 18 months earlier it split 2:1 at more than $16 a share. (It closed at $13.44 on Feb. 26.) But retail sales are still growing, recession or no. And very few categories of retail have seen a real Net effect, as opposed to the mad-cow flinchings of the investment market.

One is computer sales themselves, with CompUSA being about the only land-based survivor in a marketplace that's bursting with online vendors. We used to have an Egghead Software, but that firm famously abandoned all its bricks for clicks in another purported harbinger of the end of the retail world.

E-tail This!
Photo By John Anderson

The other sector to see obvious damage is the travel-and-ticketing trade. Almost nobody goes to a travel agent for ordinary off-the-rack trips any more, as the capsizing of Austin's TravelFest -- conceived at its inception as a national chain of superstores -- can attest. But that's about it. Ironically, the soundest recent whippings of mall tenants have been taken by sectors without hope of a viable Internet presence -- the old five-and-dimes like Woolworth's and the multiplex theatre chains.

"Even those categories you'd have thought would be heavily impacted," says Cencor Realty's Tom Terkel, "like electronics or books, are still expanding and their sales seem to still be growing. Other than being a prime topic of cocktail parties and industry conventions, nothing has really happened. We had presentations two years ago about how the e-tailing boom was going to transform retail, and now we have presentations about why e-tailing didn't transform retail." Terkel's famous-cum-notorious Triangle Square project, crawling inexorably toward a warm-season groundbreaking, attests as does La Frontera to the failure of e-commerce to set its own world afire.

Compared to other kinds of development, retail is an odd endeavor -- a tenuous neo-feudal alliance between landlord and tenant. If you own a skyscraper, the tenant gives you a pre-established amount of money and you let them use your space. But if you own a shopping center, your tenants give you a percentage of their revenue, and if that revenue declines, you end up out the money -- whether because this year's garments were unwearable, the NBA-star spokesperson got busted for spousal abuse, or a dot-com cannibalized in-store sales and then stuck the physical store with the returned merchandise. Indeed, you end up spending more money on mall-wide marketing, tenant recruitment, and other ways to bail out those sad-sack stores.

No wonder retail developers had kittens when the dot-com thing started to crest, and when their big tenants started running their own online ventures. (Imagine the secret glee when big-name brick-and-click ventures like ToysRUs.com tasted highly public misery.) But now that stomachs have settled, "multi-channel" retail marketing is the industry buzzword. Indeed, the behemoths of the covered-and-managed mall market -- like Simon Property Group (the Arboretum, Barton Creek Square, Lakeline Mall) and the Rouse Company (Highland Mall) -- have dodged and feinted with online presences of their own (www.shop simon.com, www.premiershopperclub.com) to get their piece of what action there is.

Tenants with Net presences "are telling me it's enhancing their business," says Terkel, "the same way [as when] the soft-goods people started sending out catalogs. When the Gap sent out catalogs once a month, you'd think it would cut into their business, but the opposite happened. When you expand the distribution, it expands the pie rather than reallocates it."

Much as newspapers have realized that (except for classified advertising) the Net is more about promotion than distribution, retailers now see their Web sites as electronic renditions of their Sunday-paper inserts, and oh yeah, you can buy this stuff online too. Or you can get the sorts of value-added services offered by Rouse's Premier Shopper Club -- free shopping bags, gift wrap, coat check, and the like -- when you go into the meatspace mall. Since the industry-standard predictions (retail industry, not Net industry) from before the dot-com bust held that online commerce would represent but 7% of total U.S. retail sales by 2003, a bigger bang may indeed come from traffic driven into land-based stores by such incentives.

Now, 7% is still a lot of money -- around $100 billion. And since the fixed costs of retailing are, well, fixed, that decline translates into a bigger bite out of profits; a PriceWaterhouseCoopers study pegs a $4 profit drop for each $1 sales decline. But in markets like ours, population growth, let alone income growth, can easily outstrip such downward trends.

Hence La Frontera, whose heft is a bet on future growth. Based on today's demographics, and with the smell of bust in the air, the county-line tech belt is indeed overbuilt with big boxes. But according to DDR, there are close to 94,000 people in 34,000 households within five miles of La Frontera, with an average annual household income of $66,429. That's not enough to support 32 different big stores in style, but demographers expect southern Williamson County to at least double in population in the next two decades.

Meanwhile, downtown Austin couldn't grow fast enough, not only in retail but in all real-estate sectors, which in the central city are ultimately more dependent on retail. That appears to be turning around now, with the big corporate-HQ deals like CSC and Intel "ramping down" their schedules for building and occupying their urban campuses. But those changes have little to do with the desirability of downtown Austin itself.

People still want to be there, to work and especially to live, and what attracts them is the "lifestyle," by which they mean shopping, eating, and drinking. So every project being built in the urban core seems to have (through force if not choice) its street-level retail component, not to mention the urban big boxes around Sixth and Lamar.

A far cry from the pundit predictions that the Internet would destroy cities. "If you'd told us two years ago that Dell would be selling today at $22 a share, we probably wouldn't have done the deal," says downtown developer Perry Lorenz, talking about his long-awaited Nokonah condominium project. "We'd have been nauseated. But we're outstripping even our most optimistic expectations." Which in turn will make downtown that much more attractive a retail market. "If the Net was going to affect demand, it'd happen in Austin," Lorenz continues, "and what's happened instead is a feeding frenzy as people try to get through the door first to be downtown."

There are, of course, folks who do not wish further growth and success upon the land-based retail marketplace. As you sit in traffic at FM 1325, you may be one of them. And certainly if your retirement portfolio was heavy with Living.com and Garden.com stock, the sight of another Bed Bath & Beyond may gall you. But there are also questions of the common good at work.

Now, public policymakers at the local level have little built-in incentive to welcome e-commerce. Despite the money made by the lucky start-ups, you'll typically see bigger payrolls in a single Home Depot, and while most cities have no start-ups, they all have Home Depots. (Some municipalities, like Sunset Valley and Bee Cave, are basically major shopping centers with a city hall attached.) And in its infinite wisdom the U.S. Congress bought the techies' craven excuses for dodging state and local sales tax. But shopping centers put far more traffic on the roads than do most other uses -- even a middling strip mall like Capital Plaza generates more trips than the airport.

So along with the equally high-promise, low-deliver strategies of telecommuting, e-tailing has been viewed with hopeful eyes by planning-and-transportation policy junkies, both locally and nationally. Witness the Center for Energy and Climate Solutions (CECS), which reports on the just-around-the-corner death of land-based retail with both hyperbole and thinly veiled glee. If it caused a 5% drop in offline retail sales, saith the CECS, the Internet could render redundant 1.5 billion square feet of retail space. Which would save as much as $5 billion worth of energy per year, which is all that matters. Or not, if your job was to work in that redundant space.

In its well-intentioned myopia, the CECS is of course no different that the dot-comoisie itself, which felt everything would taste better if it sat on a chip, and thus failed to explain why the Net was uniquely well suited to traffic in, say, furniture. But there is an even simpler moral to the story. As the gospel is rendered by the International Council of Shopping Centers -- i.e., the papacy -- "Many customers are unwilling to pass up the entertainment value of shopping in a real store." Even amidst the traffic swirl of La Frontera, Shopping Is Fun. end story

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