Local mom-and-pop companies struggle to compete with national chains
11 March 2013
Driving south on Eastern Avenue from the 215 Beltway, there are more than a dozen shopping plazas with a seemingly endless stream of stores.
You’ll likely recognize all of them: Wal-Mart, Home Depot, Target, OfficeMax, Office Depot, Denny’s, Coco’s, In-N-Out Burger, Grimaldi’s Pizzeria, Red Robin Gourmet Burgers, Firehouse Subs, Wendy’s, Carl’s Jr., Nothing Bundt Cakes, Freddy’s Frozen Custard and Steakburgers, Gold’s Gym, Discount Tire, Famous Footwear, Ross Dress for Less, Anna’s Linens and Lowe’s.
And those are just some of the stores in the first mile.
Chains and franchises abound in the Las Vegas Valley, seemingly more so than in most other parts of the country. The Eastern Avenue corridor south of the Beltway is one of the most densely concentrated shopping areas in the valley and highlights the dominance of chain stores locally. Independent stores appear to be a tiny minority in the region.
“They’re far outpaced by the chains,” said Nelson Tressler, a retail real estate broker at Newmark Grubb Knight Frank.
No recent reports outline which regions have the most chain stores. But visitors and newcomers who are used to seeing neighborhood shops and restaurants quickly notice the valley’s homogeneous look.
To be sure, cities nationwide have been blanketed for years with chains such as Subway, RadioShack and Walgreens, but Las Vegas appears to be smothered with the stores.
There are almost 20 Wal-Marts in the valley alone, the most in the country.
“For a city of just under 2 million, that’s a whole lot of Wal-Mart,” a Forbes article noted last year. National retailers permeate the region for a few reasons.
The valley’s population almost tripled over the past two decades, soaring from 764,000 in 1990 to just less than 2 million in 2010. Locally owned shops had little chance to build a following among the region’s transient residents, who, perhaps for fear of the unknown, tend to favor well-known retailers.
During the boom era, Las Vegas got a new neighborhood seemingly every week and leased shopping centers sprouted all over the place.
“That doesn’t give the local guys time to mature and make a name for themselves,” Tressler said.
Real estate and finance played even bigger roles in helping the chains gain a foothold.
Commercial landlords want profitable tenants with name recognition — stores that will be around for years, draw heavy foot traffic and lure other tenants eager to capture overflow shoppers. And higher demand for storefronts leads to higher rents.
Strip malls filled with nationally known tenants during the boom years as mom-and-pop shops were pushed into cheaper, less desirable centers, RCG Economics principal John Restrepo said.
Those malls felt the brunt of the recession first. It’s hard enough for an independent store to survive, let alone in a strip mall with little foot traffic and no anchor tenant. Many emptied out and still struggle to find tenants.
Much of the valley’s empty retail space was built at a time when “making a project look good on paper trumped design considerations and, in some cases, common sense,” Colliers International said in a recent report.
Because of poor planning and a weak market, many of the vacant storefronts “will have a hard time ever attracting tenants,” the brokerage firm noted.
That leaves Southern Nevada with two distinct retail markets.
One consists of well-located, well-designed plazas that have tenants and charge high rents.
Retail centers that “languish on the margins.”
Regal Plaza is one of the struggling centers. It sits less than a mile from the Beltway’s Eastern Avenue exit but is north of the freeway, away from heavier traffic and the population base. It is dotted with empty storefronts and seems poorly designed, with a hugely oversized parking lot and tenants positioned more than 100 yards from the main road.
Trish and Ed’s Organics is tucked in a back corner of the sprawling retail hub. The independent grocer opened last May and pays 99 cents per square foot in rent. Closer to the freeway, the going rent was closer to $2.15 per square foot, co-owner Trish Van Arsdale said.
Van Arsdale figured it would be good to be on Eastern, a well-known roadway, even if her store would be situated on a quieter portion of it. The market isn’t visible to passing cars, but its sign is.
“People will find out about us,” she said.
Most retailers want good visibility, high traffic and affluent people living nearby. But those factors drive up rent and make many of the top-tier shopping plazas too expensive for small business owners.
So they typically rent stores they can afford.
“Any mom-and-pop operation is going to look for the cheapest place that they can get,” said Bill Blazvick, CEO of Royal Metal Works, a contracting firm that designs and installs commercial kitchens. Blazvick also is a partner with Van Arsdale on a juice bar inside the grocery store.
Four miles south on Eastern, the popular Bread and Butter cafe serves waffles, muffins and cakes.
When choosing a location, chef and owner Chris Herrin wanted to be near the affluent neighborhoods of Anthem and Seven Hills, which he felt had few breakfast options. He also wanted to be on the east side of Eastern to get customers driving north to the Beltway each morning.
He signed a lease in a strip mall at the northeast corner of Eastern and Sunridge Heights Parkway. The plaza has some longtime tenants, including Osaka Japanese Bistro, but no major anchors. He pays $1 per square foot in rent.
“Price had a lot to do with it,” Herrin said.
Unlike typical mom-and-pop stores, chains and franchises have vetted and successful business plans from Day One.
Recipes, signs, store design, billing, inventory, payroll and other basic functions are set by the franchise. That increases the store’s odds for success – and its chances for outlasting independent businesses, whose owners often are running a shop for the first time.
Chain stores also spend lots of time and money picking real estate. It’s a far more scientific approach than most people realize.
Executives at Capriotti’s Sandwich Shop, for instance, use a $250,000 proprietary modeling system to find the best storefronts, CEO Ashley Morris said. The model is based on customer surveys, real estate data and consumer patterns.
To build the model, the company asked 2,000 customers nationwide a range of questions: Where were you just before the restaurant? How far did you travel? Where are you going next? What did you eat today? What is your income?
Responses were combined with 200 pieces of information about every Capriotti’s store: The speed limit of the street it is on, the store’s visibility, where the grill is located, the number of seats, the building’s age, the competition in all four directions.
That information then was combined with psychographic data, or lifestyle categories of potential customers. One category is “young urban affluent,” 18- to 25-year-olds who live in big cities, don’t drive cars and went to good schools. Others are “dual-income, no kids” and “urban retirees.”
Morris and his partners bought the Las Vegas-based Capriotti’s chain in 2008. Their goal was to grow the 42-store company to include at least 500 locations nationwide. They have almost 90 now.
Real estate modeling systems are crucial for companies such as Capriotti’s that expand quickly and depend heavily on foot traffic. They also are an impossible expense for mom-and-pop operations.
“It takes that gut feeling away from, ‘Man, that looks like a really good location,’ and then you try it and it doesn’t work,” Morris said.
National chains not only open stores by the dozen in Las Vegas, they also test products here because the region has such a mix of people from other states.
Wendy’s rolled out an advertising campaign a few years ago pitching a new Dave’s Hot ’N Juicy cheeseburger line. Redbox started putting its movie-rental kiosks in local grocery stores in 2003, years before other cities. Home Depot brought its online shopping services here in 2000 before introducing them nationwide.
“It’s an all-American city,” Wendy’s spokesman Denny Lynch said in fall 2010. “You have a broad spectrum of people.”
Although chains and franchises are designed to outlast mom-and-pop shops, no retailers were safe from the recession. The housing bust and financial meltdown drained consumer wealth, and retail stores throughout the valley shut their doors.
Pharmacy chain Rite Aid, for instance, closed all of its 28 valley locations in 2008.
But the retail sector has begun to bounce back.
Clark County had $3.17 billion in taxable sales in December, up 6 percent from a year earlier. Electronics and appliance stores netted $141 million in sales, up 13 percent from the previous year. Food and beverage stores saw $126 million in sales, up 6 percent, while clothing and accessory stores collected $390 million in sales, up 7 percent.
Estimates for fourth-quarter vacancy rates differ, anywhere from 10 percent to 16.4 percent, but analysts agree the rate has fallen slightly. The average asking rent slipped 2 cents to $1.36 per square foot, Colliers said.
The retail market still is not back to peak levels though. During the boom years, from 2002 to 2007, anchored retail centers in the valley had a median vacancy rate of 3.4 percent and monthly rents of $1.66 per square foot, Restrepo said.
Despite the sluggish economy, chains and franchises still flock to the valley.
Tony Gioia, CEO of Togo’s Eateries, a San Jose, Calif.-based sandwich chain, said last year he plans to open 10 to 15 stores in the valley. There also is expected to be a handful of Mr. Transmission stores and Milex Complete Auto Care franchises opening here soon.
Anthem resident Gary Craig is coming out of retirement to be the Las Vegas developer for the auto-repair stores. He wants to open five valley locations in the next three years.
And while real estate lease rates have plunged locally, Craig still had sticker shock when he looked at prospective buildings. In Georgia, where he used to own two auto-repair shops, he paid $3,700 per month for a 4,500-square-foot building. The closest thing he’s found in the valley: a 3,400-square-foot building for $7,000 per month.
“That could be why you don’t see a lot of independents on the main roads,” Craig said. “It’s hard to have a learning curve on those kinds of rents.”
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