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News Release - Tuesday, Oct. 22, 2001

Sliding Down the Bleeding Edge is on the Web!
(http://www.borsuk.com/articles/bleeding.htm)

Borsuk’s paper presented at the annual American Real Estate Society meeting in April discussed why the mall developers’ ambitious plans to bring shoppers online and provide retailers with broadband and software applications was stumbling and unlikely to work.  The first-mover advantage of wiring the malls had a short shelf life.  Offering landlord-developed retail software applications to tenants also seemed questionable.  Finally, the merging of intellectual property and telecommunications law into real property leases was creating new risks for all the parties.  Borsuk advanced his idea for MetaSpacesm as a way to create an integrated retail sales environment beneficial to tenants, developers and shoppers.

Topics

 WEB SITE UP– The Real Estate Transformation Group.

 Online Retail -- Terrorism’s impact.

 Terrorize Terrorists - Put a contract out on bin Laden.

 Online Buying – 2001 merchandise sales up 25% over 2000.

 Second NRF Multichannel Study – Women are the heaviest online buyers.

 Shop.Org’s Key Finding – Little noticed analysis points to retail space reduction.

 Internet Acceptance Is Not Like TV – Reporters are lousy analysts.

 GGP’s Heartache – Seeming failure will rebound to mall developer’s benefit.

 Good Deals Abound Online –Still cheaper.

 Upcoming Talks – Negotiating multichannel leases.

 Paris Flat – Winter/Spring 2002 availability.

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WEB SITE UP– The Real Estate Transformation Group.

The Real Estate Transformation Group’s Web site (www.borsuk.com) is active and contains articles and commentary going back to June 1997.  Randall Vemer (fhr@earthlink.net) is the Web master.

Online Retail -- Terrorism’s impact.

The September WTC attack may be the first in a series for America.  The next targets could be urban retail areas and malls.  As a result, some shoppers are likely to buy more online rather than risk crowded places.

Shopper safety concerns are real.   Over the last eighteen years there have been a number of terrorist attacks against them.  For example, on December 17, 1983 a car bomb exploded outside Harrods department store in London.  The massive explosion was the climax to an IRA Christmas bombing campaign.  On September 17, 1986, the Paris department store, Tati, was car bombed.   French police blamed Hamas.  On March 20, 1993 the IRA bombed a shopping mall in Warrington, England.  On March 4, 1996, a Hamas suicide bomber set himself off in front of a Tel Aviv shopping mall.  Finally, on May 19, 2001, a Palestinian suicide bomber blew himself up in an Israeli shopping mall.

Since September 11, articles in the NYT (10/1/01 @ C13) and WSJ (10/1/01 @B1) raised the possibility of customers moving from the mall to online.  A story on October 16 “Online shopping expected to rise after attacks” renewed the debate.*
*(http://www.cnn.com/2001/US/10/16/rec.holiday.onlinesales.ap/index.html)

Recent events prompted the ICSC to add several security sessions to the fall Management and Marketing Conference in Orlando on October 25.  With the possibility of fanatical suicide bombers in their midst, how can the owners protect shoppers and property?  See Ann Zimmerman, “Malls’ Challenge: Protect Shoppers, Soothe Nerves”, WSJ (10/18/01 @ B1).

One idea is to move parking away from buildings.  However, the inconvenience might cause shoppers to bypass the center.  Merchandise deliveries also present another problem.  The thought of a bomb-laden delivery truck hurtling towards the mall is very scary.  Establishing checkpoints offsite to screen FedEx, UPS and Postal Service delivery trucks is one possibility.   But these measures could not foil a terrorist intent on crashing a helicopter or private plane into a mall.  In 1985, a small plane accidentally crashed into the Sun Valley Mall in Concord, CA, causing severe damage.

 Road barriers, a wider no parking corridor and offsite delivery areas could help, but what about the walk-in bomber?  How will shoppers react to metal detectors, bag searches and suspect profiling as they enter malls and stores?  A Letter to the Editor from a writer in Israel (NYT 10/16/01 @ A30) noted the difference between how things were done here and there.  He wrote: “In contrast to the United States, where customers are checked for merchandise as they leave stores, in Israel, customers are checked for bombs before they enter.”  Will customers accept the “airportization” of shopping, or will they opt to avoid the hassle?  One other concern that should not be discounted is that certain mall owners could face a higher risk of attack.

A subject receiving little attention is the possible links between terrorists and domestic groups.   While the IRA’s liaison with Mideast terrorists is reported (see Frederick Forsyth’s “Let’s Target Irish Terrorists Too” in the WSJ (9/21/01 @ A22)), there has been little consideration of how home-grown groups could be acting in concert with the WTC murderers or using September 11 as a cover to advance their own agenda.

It was not so long ago that the Weather Underground and Puerto Rican Nationalists were bombing New York and the Symbonise Liberation Army was terrorizing the country.  Today, their progeny are the anti-globalization extremists, animal rights arsonists, environmental terrorists and others seeking to radically transform the economy and American values.  To ignore the possibility of their involvement or tacit support is to invite disaster.

Terrorize Terrorists  - Put a contract out on bin Laden.

Why not put a $100 million price tag on bin Laden ‘s head?  A superlotto-size prize for him and his capos could bring out many unexpected soldiers-of-fortune.

Farfetched?   Maybe not, considering how other administrations have taken care of business.  Judith Exner, a reputed JFK mistress, claimed Kennedy sought the Mob’s help to rub out Castro.  During World War II, the Government enlisted Lucky Luciano, the jailed NY mob boss, to gather intelligence about German espionage on the New York docks.  His later deportation was the quid pro quo.

An official “Wanted Dead or Alive” Web site should augment the US government program, offering five million dollars to bring terrorists to justice.  Raising the money, say $250 million, might not be that difficult, given the intense desire by commercial property owners, lenders, insurers, retailers and unions to return to normalcy.  Groups like Al Qaeda would then have to fear true believers betraying them for mammon. 

Online Buying – 2001 merchandise sales up 25% over 2000.

Merchandise sales are holding up very well.  Online purchases through September are running slightly ahead of last year ($18.6bn v. $18.2bn).*  However, merchandise sales in September were up 14% over August ($2.4bn v. $2.1bn).  This is quite remarkable compared to store sales.  The Real Estate Transformation Group estimates total online merchandise sales in 2001 will exceed $36bn, a twenty-five percent increase over last year.

*NOTE:   The Forrester/Greenfield survey data is revised to reflect “net” merchandise sales by excluding the categories for food and beverages, all travel-related services and “Other.”

The Forrester/Greenfield survey of online purchasing also tracks buying households.  The monthly number of online buying households for January through September averaged 14.3 million.  Last December the number of buying households peaked at twenty million.  This is online buying’s core group.  The core represents about thirty percent of the total number of households predisposed to buy online.  See next section.

Underscoring the rapid growth in online buying was last month’s HarrisInteractive poll.**   It tracks online merchandise sales and travel-related expenditures.  The poll also counts buyers.  Interestingly, there were more buyers online in September than in December 2000 (38.6M v. 36.1M). 

**(http://www.harrisinteractive.com/news/allnewsbydate.asp?NewsID=377)

One online merchandise category experiencing continued growth is consumer electronics.   Sales were up six percent over the prior year through September ($1.6bn v. 1.5bn).  Last year online consumer electronics sales totaled $2.5bn, or about the same as books.  During the fourth quarter 2000, sales reached almost one billion dollars.  This year online sales could total $3.5bn, a forty percent increase.  Until major retailers like Best Buy and Circuit City break out their online sales, it will be difficult to determine whether a channel shift is occurring.   

Second NRF Multichannel Study – Women are the heaviest online buyers.

The NRF released the second multichannel study done in conjunction with Shop.Org, BizRate.com and the J.C. Williams Group.   The 2001 study significantly expanded the number of customer interviews from 6,000 to 48,000.

Press releases for the report highlighted the following:

++Those who shop in all three channels, called Super Shoppers, are more loyal and spend more.   They spend four times more online, 70% more in the store and 110% more on catalog purchases than their single channel compatriots.

This parallels an observation made by Staples’ Chairman and CEO Thomas G. Stemberg at the Goldman Sachs Retail Conference on September 9.  He said multichannel customers buy four and one-half times more than store-only customers and twice what the store and catalog customer purchase.

++Tri-channel buyers are now 34% of all shoppers.

++Tri-channel shoppers are 72% female, have lower household income, have fewer years of college and are younger.  It will be interesting to see whether the survey customers this year are from a better mix of hard and soft goods retailers.  Last year the participating retailers were skewed to the soft goods side of the market. 

The study again found the best customers spend more in the store, but the question remains as to whether the share of total purchases is changing in favor of online sales for certain merchandise categories.  Additional details should be forthcoming ahead of the NRF annual convention in January. 

Shop.Org’s Key Finding – Little noticed analysis points to retail space reduction.

Last May, Shop.Org, now part of the National Retail Federation, in conjunction with the Boston Consulting Group issued “The State of Online Retailing 4.0.”  The report contained several important findings for retail property owners and developers.

First, online sales are nearing or exceeding ten percent of total purchases in some merchandise categories.  Examples are computers, software, books, music and video.  See p. 9.  Another growing category, which was not mentioned, is office supplies.  Office Depot will generate approximately 15% of total revenues this year from online sales.  Staples online sales are running close to 10% of total revenues. 

Second, if online sales do reach ten percent of total sales, store performance starts to suffer.  Why?  The Boston Consulting Group’s retail financial model found that a ten percent decline in store sales, through online cannibalization, could drive store operating profits down by fifty percent!  See p. 25.  The analysis validated The Real Estate Transformation Group’s early qualitative findings.

Third, store rationalization is necessary.  The report stated unambiguously, a number of retailers would have to reduce store count.  See pp. 25 – 26. 

There has been no public comment on the Shop.Org analysis.

Internet Acceptance Is Not Like TV – Reporters are lousy analysts.

Will the Internet spread like TV through society?  The NYT (5/21/01 @ Business Sec.) and WSJ (7/16/01 @ B1) used the TV analogy to comment on the slowdown in online user growth.  Decelerating growth could harm online commerce.

The WSJ article took the prize for sloppy analysis.  The article asked, “How much longer will it take for the rest of America to join the Internet revolution?”  This gave the false impression that, like TV, the Internet should be in every household.

While the article may have been confusing as to when the Internet would achieve a higher adoption rate, in the context of online buying, the WST story makes no sense. 

First, most of the customers who frequent the retailers that real estate developers and investors prefer as tenants are middle-income and above. 

Second, by using Everett Rogers’ diffusion analysis cited in the article, those not yet online are mostly the “Late Majority (34%)” and “Laggards (16%)” comprising about half of the potential user population.  As the article noted: “He [Rogers] found that early adopters tend to be highly educated, wealthy, attuned to mass media and particularly social.  Later adopters tend to be less educated, more financially strapped and isolated from their peers and culture.” 

Third, most of the households predisposed to buy online are ready to shop.  The Real Estate Transformation Group estimates that out of the 105 million US households, only about 44% (47M) will become online purchasers.  The estimate assumes approximately one-third of households (35M) will not get wired.  The reasons are varied.  Some people are just disinterested, technophobic or find cyberspace too expensive.  The fact that not every household has a burning desired for Internet access should come as no surprise.  For millions of people reading is a chore.  The Internet remains a text-based medium, unlike TV.  Millions of others can not participate because they lack credit cards.

Furthermore, of the remaining two-thirds (70M) only about two-thirds of them (47M) will want to buy.   Those online but not buying are likely to cite fears over credit card fraud and providing personal information, or lack of interest.   Thus, the majority of households likely to buy online are already online or will shortly arrive.  During Holiday 2001 close to 40 million households could be buying online, in essence doubling the number from last December.  The strong up-tick will result from a larger online household base, a longer average tenure by those online (the longer one is online the higher the proclivity to buy), and fears over personal safety.

Someday Internet use will be as commonplace as watching TV is today, but the online buying market is reaching maturity now.  Retailers and property developers should not wait for the future; it has already happened.

GGP’s Heartache – Seeming failure will rebound to mall developer’s benefit.

In July GGP announced the write-off of $65 million in software development costs, effectively exiting from the applications service provider business.  A number of commentators took this as a sign that retail developers could not leverage technology.  This was a knee-jerk criticism. 

The major retail developers undertook investing in the telecommunications infrastructure and software in the mistaken belief they could capture online sales migrating from their tenants.  Thus, getting ahead of the retailers made sense.  However, the experiential nature of most mall merchandise made cannibalized sales unlikely, undermining the operational assumption.

Instead, they should have partnered with the major retailers and trade organizations to develop software beneficial for tenants.  The software applications would then have driven demand for the high-speed data infrastructure.

Despite the setback, GGP’s instincts were correct – major mall tenants are evolving into multichannel merchandisers in need of broadband and sophisticated e-commerce applications.  The NRF multichannel study clearly notes that retail management must meet the needs of the super shoppers.  The GGP R&D effort has created a wealth of intellectual capital and know-how.  Use of it for the next iteration will prove more profitable.  Up ahead is a fully integrated retail sales platform like MetaSpacesm. 

Like Levi Straus, not all the pioneers ended up with arrows in their back;, some did well both as pioneers and settlers.

Good Deals Abound Online –Still cheaper.

While many articles dismiss big discount differentials between online and offline prices, they continue to exist for commodity items like books.

Frugal buyers continue to find the “Joys of Shopping” online.  Whether new or used, books are still cheaper there.  Sites like Half.com (www.half.com), part of EBay, and BookFinder.com (http://www.bookfinder.com/) lead the way. 

Finding a used book is simple, the prices are astounding and the quality very high.  However, the downside is the hit or miss nature of the constantly changing selection and longer delivery times.  Recently published books are harder to find, but not impossible, and delivery can take ten days to two weeks.  But, who cares, when the savings are anywhere from fifty to seventy-five percent including shipping, for like new.

For those too snobbish to buy used, sites like AllDirect.com (www.alldirect.com/) are a joy for bargain hunters.  A recent purchase of two new hardcover non-fiction books marked at $35 each totaled $46.30 including shipping.  No sales tax applied.  On the other hand, Amazon.com wanted $49 before adding shipping and BN.com priced them at $56 but offered free shipping.  For those who keep lists of what they want, buying online is almost always cheaper.

 Upcoming Talks – Negotiating multichannel leases.

 ICSC Law Conference – October 26, 2001 – Palm Desert, CA.

 Online Antics: Can Landlords Dictate a Tenant’s Broadband Provider?

Borsuk will lead a roundtable discussion on the landlord’s emerging role as broadband and applications service provider.  The question for discussion is whether landlords can impose a broadband provider on the tenant.  If so, what negotiation leverage do tenants have?

 Blindsided in Cyberspace: Negotiating around the black holes in clicks and mortar leases.

 Borsuk will join Gene Sykes, Esq. and Howard Sigal, Esq. to lead a workshop on multichannel leasing issues.  Attorneys face new and vexing questions posed by the growth of online sales and landlord participation in cyberspace.  The panel will use hypotheticals to explore how telecommunications, intellectual property and real property law are all interconnected in a wired world.  The panel anticipates a spirited debate with an audience representing retailers, developers, property owners and lenders.

 National Retail Tenants Association – November 6, 2001 – Orlando, FL.

 Tenant Leasing Risks in the New Economy.

Borsuk and Sykes will team up to discuss multichannel leasing pitfalls with tenant lease negotiators, attorneys and property administrators.  The program builds upon Borsuk’s 2000 NRTA presentation.   The talk covers the economic and real estate implications of online buying, the pitfalls awaiting tenants negotiating the multichannel lease and an analysis of several key lease clauses.  Diane Glass, Esq. of CVS will moderate the session.

 Paris Flat – Winter/Spring 2002 availability.berliozfade.jpg (4614 bytes)

 The Berlioz flat will be available from January 5, 2002.

 The sunny condo on the fourth floor (walk-up) of a landmark building was completely renovated in 1999.  The full floor unit has three bedrooms and two full baths and is located in the 9th arrondissement.  The property is two blocks south of the Moulin Rouge (Montmartre) and convenient to all public transportation.  To view the apartment go to www.parisflat4u.com.   Contact Liliane Travert-Borsuk (markborsuk@aol.com) for additional information.

 Contact Information

 Mark Borsuk (mark@borsuk.com) is Managing Director of The Real Estate Transformation Group, a firm analyzing information technology’s impact on space demand and providing strategies for property owners, developers, retailers and lenders.  In addition to consulting, Mark is a retail leasing broker and real property attorney practicing in San Francisco.  For further information contact Mark Borsuk at (415) 922-4740.

Copyright 2001.  All Rights Reserved.  Mark Borsuk.

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