Keith Lord

It seems that everywhere you look in the urban Chicago retail marketplace, retailers large and small are throwing out conventional wisdom — and their rulebooks — to stay in the game of obtaining locations and market share in this vibrant city. For example, Blockbuster Video, Aldo Shoes, Einstein Bagels and an oversized Starbucks Coffee on Chicago’s North Side all have sites without parking. In addition, Banana Republic, Express, Victoria’s Secret, Restoration Hardware and Z Gallerie — all in the same area — have two-story street entrance stores that are well outside of their standard store plans.

It seems that not long ago, retailers analyzed urban sites in the same manner as traditional suburban locations. Site analyses included square feet of available land, traffic counts, ease of access and, of course, parking ratios. Next, retailers analyzed whether their typical corporate space needs could be met. Standard store size, optimal layouts, ceiling heights, loading requirements, standard signage and normal hours of operation were key. If an urban site or developer did not conform to “the game rules” of the retailer, the retailer punted and went somewhere else. The conventional wisdom was to stick with what worked rather than to try something new.

Then, the innovators came to Chicago. Starbucks Coffee opened a 5,800-square-foot urban concept, without parking, located on Rush Street. This location became its highest volume store in the country. Next, The Home Depot squeezed its first urban store onto an undersized, underparked site on North Avenue. It also soon became one of the retailer’s highest volume stores. Target followed soon after with a smaller than optimal store on Elston Avenue and, after resolving its parking problem with a structured parking deck, this site became one of its highest in sales volume per square foot. Dominick’s has also successfully opened a two-story, 32,000-square-foot store in the heart of Lincoln Park and a 40,000-square-foot store in the West Loop, complete with underground parking. Both of these new store concepts have been innovative and successful.

Market Foods, out of Rogers, Arkansas, is pursuing several sites in Chicago. Its concept is a 17,000-square-foot to 25,000-square-foot marketplace.

The requirements set by retailers have indeed changed and, as some struggle to understand why, others are quickly getting into the game by acquiring the new and preciously few great locations remaining. By looking at the trends in Chicago and a few other national residential urban cities, the roots of the change are identifiable.

First, land is scarce, expensive and, many times, must be developed to its maximum floor area ratio to be economically viable. This means that typical “suburban sprawl” has been replaced by “urban climb.” If there is no room to spread out, then developers must build up or down; this trend applies to all types of retail. The big box must now reconfigure to a shoe box, and this involves new creative store designs. Many 10,000-square-foot and larger concepts understand that they must lose their freestanding identity and compromise with signage, loading and access increases to become part of a larger mixed-use development.

Chicago currently has more than 10 banks looking to open new urban sites. Most have already conceded their rules for parking and for on-site, drive-thru lanes. Smaller stores are conforming to typical 25-foot-wide Chicago lots. This trend can demand that retailers take second floor or basement space to operate profitably.

At 200 East Ohio, in order to reach a very dense area east of Michigan Avenue called Streeterville, a combination Dunkin Donuts/Baskin Robbins Store is taking an off-corner location with some second floor office space. Restaurants and bars are also choosing to conform to the new rules of the game — as multilevel, valet-parking-only locations are becoming the norm.

Second, the macro set of trends for the urban game lie with the consumer. The typical urban resident no longer wants the big mall or the grocery-anchored center. Instead, they want to shop quickly and for specific items, and smaller stores have become preferable. Consumers are less concerned about available parking because the cost to insure and park a car in the city has increased and now ranges between $3,000 and $8,000 a year. Rivernorth condominium parking spaces have climbed to more than $50,000 per space, which has forced many urban families to have only one car. These consumers are walking or taking public transportation for shopping and entertainment.

Subsequently, retailers’ analytical rules of traffic counts by intersection are being replaced with pedestrian counts per block. Furthermore, consumers are educating retailers that convenience and location are far more important than conventional retail store design.

Since the playing field (available sites) and the players (consumers) have changed, and the old rules no longer apply, what should retailers look for when analyzing the urban market? Retailers should start with their typical demographic report, and throw it out the window. Education level; average age; race; median income; and 1-, 3- and 5-mile radius reports are just no longer as important. For example, a typical Chicago suburb may have an average household income of $75,000 with two wage earners in a four-bedroom house on half an acre. In urban Chicago, on that same half-acre footprint, a retailer could access 50 to 100 condominiums with $15 million to $30 million in household income. The urban site would give the retailer access to disposable incomes 400 times greater than the suburban site.

The retailers’ new rulebook should focus on density of income, pedestrian traffic patterns, off-site public parking, commuter routes, public transportation hubs and vertical co-tenancy of mixed-use projects. Urban rental rates must be re-examined because they are significantly higher, but they may be offset by retailers’ higher sales volume. Also while these rental rates are higher, many times common area maintenance, exterior maintenance and joint marketing fees are lower. Retailers must also learn how to maximize floor plans and operate with less square footage. This change may involve reducing SKUs, changing loading programs and re-educating urban store personnel.

While this new focus sounds easy enough, not all retailers are willing to change for the urban market. Many retailers have yet to figure out how to re-design the urban locations, and some refuse to do so. However, those who have changed their game plan have found success.

For example, CVS/pharmacy has entered Chicago in the past few years, and it has been very flexible adapting its stores to the urban requirements. The retailer has several sites without parking or drive thru-windows — including one at Armitage, Lincoln, and another site that is under development at Division and State Street. CVS has decided to take these risks in the “infield” of Walgreens, one of their largest national competitors. Walgreens has responded with a very different game plan. It is holding to its typical prototype store — a freestanding box with a consistent look, surface parking lot and a drive-up window. This strategy has eliminated many urban sites for Chicago’s hometown pharmacy.

Another retailer, Market Foods, out of Rogers, Arkansas, is pursuing several sites in Chicago. Its concept is a 17,000-square-foot to 25,000-square-foot marketplace, which is ideal for the urban community and lifestyle center developments. Several cities across the country are offering sites to this retailer, as they can satisfy the urban grocery consumer with a small store site concept.

In the past few years, the Chicago urban market has proven to retailers that if they will change their normal operating rules, the consumers will respond. Is this city unique? In some ways the answer is yes. Chicago’s urban residential growth has been nothing less than extraordinary. The lake setting, the culture and the urban lifestyle are attractive to all demographic segments. The Mayor’s office, the Department of Planning, Retail Chicago and many aldermen understand the importance of retail growth throughout the city. Many new developments have retail components that are mandated by zoning, and many community groups are supportive of neighborhood retail development. Other urban centers should take note.

If retailers want to play by the old rules and simply wait for their ideal site to come along in Chicago, the game may be over before they step on the field. If their competitors understand the new rules of land use, city planning and urban consumer trends, and the retailer is willing to rewrite its rules, it will win the urban climb. Of most importance, for those already playing the Chicago urban retail game by following the new rules, the game has proven to be worth winning.

Keith Lord is president and managing partner of Chicago-based The Lord Companies.


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