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News Release - February 7, 2000

The January 24 issue of The Industry Standard carried Mark Borsuk’s essay on how Wall Street cybersurgeons will carveup retailers who fail to profitably leverage the online sales channel.  In the process they may flay property owners and lenders.  In 1995 Borsuk coined the term “cybersurgeon” to describe the corporate raiders who would emerge to dismantle traditional retailers as a way to increase shareholder value by leveraging the online sales channel.  See “Commercial Real Estate: Roadkill on the Info Highway?”, MICROTIMES, October 15, 1995, pp. 92-100).


Is the first patient CompUSA?

Are store sales cannibalization happening?

Are consumer electronics stores immune to cannibalization?

Does Webvan threaten community centers?

No more euphemisms--Deloitte & Touche says long-term store leases are a burden.

So how was Xmas ’99?

The New York Y2K meltdown trip.

PaineWebber November conference call.

Training wheels for the masses? – The Wal-Mart/AOL/Accel Alliance.

Who could be this stupid?

Interviews and articles.

Upcoming talks.

March in Paris?

 Is the first patient CompUSA?

Will Grupo Sanborns SA from Mexico, the new owner of CompUSA, keep the stores?  CompUSA is the poster child for sales channel disintermediation and an ideal cybersurgeon patient.   CompUSA has name recognition, the merchandise works online, the Web site ( is underdeveloped, the chain has over two hundred stores, and it loses money.  What will the Slim family do to improve CompUSA’s performance?  Closing twenty percent of the CompUSA stores and downsizing a significant number into showrooms a la Gateway could be very profitable.  Grupo Sanborns can also leverage its strong Hispanic links to bring in many first-time computer buyers and online users.  Another good move would be to rename the site and make it bi-lingual.

Are store sales cannibalization happening?

 The strong Christmas deflected attention away from the cannibalization question.  However, despite the impressive sales results for most location-based retailers, the signs emerged of cannibalization.  Sales in the October-December quarter were down by 2% for Toys-R-Us.  Where did they go?  Likewise, CompUSA reported a 1.8% decline in same-store sales for the quarter ending December 25.   Did customers shift purchases to the store’s online site, pure-plays or to other location-based competitors?  Did sales decline due to Internet pricing pressure? 

The January issue of ICSC Shopping Centers Today carried an interview with Leonard Riggio, President, Barnes and Noble.  He said, “In the short range, our land-based businesses will be cannibalized to some degree,” by online buying.  Also, last month Borders Books named a new President to “aggressively further Borders Group’s retail convergence strategy.”  The strategy is to go “beyond bricks and mortar.” The accretive vs. dilutive debate continues.

 Are consumer electronics stores immune to cannibalization?

 Best Buy, Circuit City and the Good Guys all announced major efforts to leverage the online sales channel while minimizing the potential cannibalization of store sales.  The irony was especially evident when Best Buy’s Senior V.P. for Strategic Marketing described his core customer as “…the youngest most technology savvy customer in the marketplace today.”  He noted approximately 68% of their shoppers are between 15 to 39 years old; 59% are male; half have at least one child at home; 42% have a college degree; and 51% make between $40-100,000 a year.  Doesn’t this customer profile match the heavy online buyer?

See .

 Does Webvan threaten community centers?

Webvan is a San Francisco Bay Area phenomenon, but plans to be in 26 of the nation’s largest metropolitan areas by 2002.  This is not good news for community centers, those anchored by supermarkets and drugstores.  Again the issue is not whether no one buys online or everyone buys online but the percentage of grocery, home replacement meals, health and beauty items and other daily necessities that migrate to cyberspace.  In a recent interview Webvan’s CEO, George Shaheen, noted the online services would, over time, take 10-15% of traditional grocery store sales and “...I don’t think their [brick-and-mortar] current model can take a loss of 10 or 15 percent market share and survive.”  Was this the reason AMB dumped their community center holdings last year?


 No more euphemisms -- Deloitte & Touche says long-term store leases are a burden.

 The National Director of E-Business, in a speech critical of retailers for failing to understand the impact of online buying, said “…the shift in consumer spending to online retailers could hurt offline companies that were weighed down with long-term fixed costs such as store leases.”  See

The comment comes as no surprise, but how can consulting firms advise retailers and retail property owners about online strategy when a significant impediment to change is the long-term lease?  Moving to a “clicks and bricks” format requires mass merchandisers to prioritize their investments and throttle back store expansion. 

Property owners should be on guard when listening to consultants working with retailers to reform the sales channel matrix.  How can they also be objective when counseling the real estate client?

 So how was Xmas ’99? ( estimates merchandise sales of $8 bn vs. $3 bn last year during November and December.  Put another way, online buying captured about 4.5% of holiday GAF (general merchandise, appeal and furniture) shopping vs. 1.7% in 1998. is a trade group comprised of pure-plays and multi-channel retailers along with allied service firms.  The Real Estate Transformation Group is a member.

 The New York Y2K meltdown trip.

Over year end Borsuk met in New York with retail company and REIT analysts, credit rating agencies, editors, consultants, institutional property investors, bankruptcy workout firms, investment bankers and Internet survey companies to share views.  It was evident online buying’s impact on space demand was a hot topic.  Attitudes ranged from disbelief of any significant impact to certainty over a loss of value for certain property types.  On balance, technological obsolescence of retail space was a concern.

 Interestingly, the well-publicized effort to bring cyberspace to the mall does not impress the analysts.  Some noted it was being done more to maintain investor confidence than to create a sustainable source of revenue. 

Borsuk proposed several investment ideas: the Crisis Fund and MetaSpace(sm).  He proposed the “Crisis Fund,” a.k.a. “Vulture Fund,” to purchase distressed properties and adapt them for non-retail use.  This presupposes a sharp decline in value.  He was not alone.  Kimco Realty’s Chairman Milton Cooper had also identified the problem.  He said in a Wall Street Journal interview (January 12, 2000, p. B-12) “You can comparison shop anywhere, anytime, and the middleman is under attack.   It will not help retail rents.”  Rising interest rates are another factor undermining value.   On the other hand, if there was gloom and doom, he saw it as a buying opportunity.

Borsuk also discussed MetaSpace(sm): the next frontier for retial.   Here the reaction was more uniform -- disbelief.  In only a handful of meetings was there sufficient interest to explore the notion of building a fully integrated Web site for tenants occupying physical space.  Very few were willing to think beyond the existing retail development model.  Interestingly, in several conversations, an analogy was made to the railroads in the early twentieth century.  Railroads thought of themselves as being in the railroad business and not providing transportation services for their customers (Theodore Levitt, Marketing Myopia, HBR, July-August, 1960).  They missed investing in emerging transportation modes like airlines, trucking and automobiles.  The railroads ceded advantage to the emerging competitors sowing the seeds for their long financial decline.

Retail developers are aping the railroads’ myopia by continuing to define themselves in terms of physical location.  Even the sophisticated players are only seeking to bolt on Web sites and install broadband service to existing properties.  The effort adds little value for merchants or customers.  The property owners are locked into defending legacy assets dependent on geocentric shopping patterns while their clients, the retailers, are moving into a multi-channel environment where location competes with cyberspace.  Unfortunately, having a location-based mindset prevents them from forging bonds with emerging tenants, meeting the needs of wired customers, and adapting retail space for other uses.

The New York meetings made one point abundantly clear: office developers are in the best position to build MetaSpace(sm).  As part of a mixed-use project, it would add tremendous value.  First, the 20,000 -- 40,000 sq.ft. needed by MetaSpace(sm) fits neatly into an office deal.  Second, office developers are unburdened by past retail relationships and heuristics.  Incubating tenants specifically designed to maximize MetaSpace(sm) advantages would not be rejected out of hand.  Third, office developers have the necessary technological skills.  The good ones are integrating Web sites into their projects that already provide broadband to the tenants.

Borsuk also noted MetaSpace(sm) bore no resemblance to Metreon [], the shopping/entertainment complex in San Francisco.  While the early reviews were favorable [NYT, Sunday, July 25, 1999, Business Section], touring Metreon leaves one wondering what happened between vision and execution.   January’s Chain Store Age provided a more realistic appraisal by pointing out the poor intergration of retail and entertainment.  Another distinguishing characteristic is the unimaginative Web site.

PaineWebber November conference call.

On November 19, Borsuk spoke along with Pam Stubing of Ernst & Young in a conference call with one hundred institutional investors and analysts.   The call was hosted by PaineWebber’s Specialty Retail Analyst, Aram Rubinson.  After the formal presentations, listeners were curious about the impact of cyberspace on malls and the retailers’ effort to leverage the online sales channel.

Borsuk said the Class A malls were not immediately threatened by cyberspace.  The mall owners are able to merchandise their tenants to retain customers at the experiential end of the goods and services spectrum while those malls with tenants offering commodity type goods and services are at greatest risk.

Borsuk thought retailers should make their intentions known to the market.  He felt concerns would moderate over the likely earnings drag, if investors viewed it as part of an overall strategic shift to reduce reliance on stores.  The Wal-Mart/AOL/Accel alliance is one example.  Another example is OfficeMax’s announcement last September to reduce new store growth and leverage the online sales channel as a proxy for traditional stores even though they believed online customers were not cannibalizing existing store sales.   Interestingly, the Grupo Sanborns SA purchased 7.5% of OfficeMax last month.  See REITWEEK commentary on the call.

Training wheels for the masses? – The Wal-Mart/AOL/Accel Alliance.

The alliance of Wal-Mart with AOL is important from the standpoint of further popularizing online buying.  While 43% of Wal-Mart customers are online, 40% of the markets where Wal-Mart operates lack a local Internet dial-up connection.  (Discount Store News, January 3, 2000, pp. 1, 48).  This is where AOL comes in to provide the local service.  Wal-Mart’s new users will quickly learn to buy online.  There is a down side to this strategy.  Some of the new online buyers will seek cheaper prices and a wider selection outside of Wal-Mart and their local communities. 

Wal-Mart’s creation of a separate entity with Accel Partners to run the online operation from California has important sales tax implications.  A separate Internet company, similar to Barnes & Noble’s online business, can avoid the sales tax even though there are stores in the state.   However, how will deal with returns?  Taking them back at the store will give state tax authorities a plausible argument for imposing the collection obligation.  The US Supreme Court bars states from imposing sales tax collection obligations on remote sellers who have no nexus with the state.  

Wal-Mart is also part of the e-Fairness Coalition that promotes equal tax treatment between local merchants and out-of-state catalog or online businesses.   Wal-Mart’s new strategy seems to undercut the coalition’s demand for parity even though the NRF voted to join the group last month.

Two members of the e-Fairness Coalition deserve special mention: NAREIT and the ICSC.  Do they believe imposing a tax on online transactions will stem the rot?  These organizations remain oblivious to the irresistible value proposition online buying represents.  From the customer’s standpoint, why drive to the store and lug the stuff back if purchasing a DVD player, books and office supplies at the same price including tax and delivery or even cheaper can be done online?  What seems to have escaped notice is that most commodity and name brand goods buying is drudgery shopping.  It is not proper shopping in the experiential sense but a tremendous time waster.  There is very little satisfaction going to the warehouse club, supermarket or drugstore to buy daily necessities or items pre-selected from Consumer Reports.  Avoiding the sales tax is icing on the cake and not the huge competitive advantage they seem to think it is.

Who could be this stupid?

An example of the clash between the new economy and the old economy was the attempt by the St. Louis Galleria to prevent merchants from promoting their Web sites during the holidays [WSJ, November 24, 1999, p B-1].  The owner quickly reversed the policy as news spread. 

The short lived prohibition was equivalent to barring tenants from listing more than one location in their print ads.  While it is easy to dismiss the property owner’s overreaction, these incidents are only going to increase.   Expect many nasty fights over “settled” lease provisions like percentage rent and exclusivity clauses.  Here is one issue just itching to be litigated.  If the tenant has an obligation to fully stock the store, does an in-store ordering kiosk substitute for merchandise?  If yes, then an aggressive tenant could create a mini-mall within the store and generate additional revenue as a concessionaire.  A well-drafted lease should prevent this, but maybe not in a wired world.  

Few landlords are aware of how the online sales channel undermines the inherent geocentric assumptions contained in retail leases.  Even fewer are drafting provisions to accommodate the shifting sense of place.  Furthermore, there is a substantial time lag between recognizing the problem and negotiating a favorable provision.  Landlords will face the problem as leases come up for renewal.  Many tenants are going to give landlords tsuris with their new agenda.

Interviews  and articles.

Interest in the equity and real property markets about online buying ran high in December.  Rick Ackerman, a market commentator, used an interview with Borsuk to warn about the stock market’s reaction to retailers who could not execute online and the implications for REITs.   See

Peter Pike also interviewed Borsuk.  PikeNet’s online audience comprises institutional real estate investors, commercial brokers and service providers.  The questions focused on retail property values and the changing nature of lease negotiations in a wired world.


 Borsuk is contributing an article on MetaSpace(sm) to the May (ICSC) issue of Chain Store Age.

Upcoming talks.

Borsuk will speak about MetaSpace(sm) at the annual American Real Estate Society (ARES) meeting in Santa Barbara.  The panel is set to explore retail property issues on March 31.

On April 17 at the National Association of Real Estate Investment Managers (NAREIM) Research Conference in Phoenix, Borsuk will outline investment research pitfalls in a wired world and new uses for redundant space.  NAREIM members include real estate advisors, financial institutions, REITs, opportunity funds, and private investors.

Borsuk will also speak at the July Appraisal Institute’s VAL2000 Conference in Las Vegas.  The meeting brings together for the first time the major appraisal organizations in one super conference.   The impact of cyberspace on retail property appraisal is Borsuk’s topic.

Mark Borsuk {""} 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.

March in Paris?

By popular demand the Paris flat is available for ten day stays.  The completely renovated condo is a sunny, full floor 3bd/2ba unit on the fourth floor (walk-up) of a landmark building in the 9th arrondissement.   It is two blocks from the Moulin Rouge (Montmartre) and convenient to all public transportation.  Photos available online at  For details and availability contact Liliane Travert-Borsuk at {}

Copyright 2000.  All Rights Reserved.  Mark Borsuk.



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