Wall Street Journal-Retailers Seek Smaller Real Estate Footprint

Wall Street Journal reported that retailers need to reduce their leased real estate. Reporting byElizabeth Holmes at elizabeth.holmes@wsj.com

Retailers have a new strategy to increase profits: shrink to fit.

For two decades, mall-based apparel companies saturated the market, aggressively adding more stores and building them bigger. Chastened by the recession, however, retailers including Gap Inc. and AnnTaylor Stores Corp. are poring over their holdings, looking for stores they can cut down to size.

The effort marks a new phase in the industry's response to the weak economy. After consumers snapped shut their wallets in the fall of 2008, sending sales plummeting, retailers laid off waves of employees and slashed inventory.

Now, many of them see re-evaluating their real estate, one of retailing's biggest expenses, as a critical step on their path to recovery.

Gap expanded tremendously in the 1990s. But in the last decade, sales per square foot have fallen and now, Gap is looking to shrink its footprint."During the '90s era, everybody wanted a bigger box," says Kay Krill, AnnTaylor's chief executive. "Now, all of us are trying to get out of those bigger boxes."Ms. Krill says she is shrinking square footage at AnnTaylor's new namesake stores by a third. Her reasoning: "I like productivity."

Average sales per square foot at American malls, a closely watched measure of retailers' productivity, peaked in 2007 at $454, according to research firm Green Street Advisors Inc. By the end of 2009, the average had fallen to $401, wiping out five years of progress.

For many retailers, the decline has been even steeper. Between 1999 and 2009, sales per square foot at Gap, the country's largest apparel retailer, fell 40% to $329. Total square footage for the company, which also owns the Banana Republic and Old Navy chains, jumped 62% over that period, even though its number of stores increased just 2.6%.

Gap is dealing with "a hangover of yesteryear," says Chief Financial Officer Sabrina Simmons.

The company wants to shrink the size of its namesake stores to between 8,000 and 12,000 square feet, she says. That compares with a current average of about 18,000 square feet, excluding marquee locations, which are among its largest stores.

"Quite frankly, it's just not as positive of a shopping experience as a smaller box that's a more intimate experience," Ms. Simmons says.

In locations where Gap has multiple store formats, such as GapKids or Gap Body, in addition to a conventional Gap store, the company aims to consolidate them into a single store.

Lengthy lease terms can make it difficult to close stores outright. But mall landlords often can be persuaded to accept downsizing, because it keeps the retailer in place, avoiding a dark storefront.

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