Expanding the net

Famous clothing brands, major drugstore chains and large electronic goods stores are no longer only available for the residents of the biggest cities. The big chains are now opening outlets in smaller and smaller towns – even in the smallest ones. But just how deep is this market?
Emil Górecki

In the opinion of Katarzyna Michnikowska, a senior analyst in the valuation and advisory department at Cushman & Wakefield: “The retail markets in the biggest cities are now saturated and tenants have to look for new directions to expand in. This is why more and more our clients want to develop outside the eight biggest cities.” She categorises towns and their retail potential according to their size. “There is currently dynamic and unhindered growth in retail in cities with over 200,000 inhabitants. The offer in such locations is close to that in Warsaw or Kraków, with only a few top-shelf brands not being present. The next group are smaller cities with 70,000–200,000 inhabitants, where the development is slightly more limited. Shops with mid-range products are broadly represented, and even if they are not there yet they soon will be. Only selected business lines develop in smaller towns and they tend to be low-range products. This is where the slowdown in retail chain development is most perceptible,” explains Katarzyna Michnikowska. She remarks that apart from the size of the towns it is also their purchasing power that counts. In holiday resorts such as Zakopane or Sopot, it is tourists that drive the trade, particularly during the high season. Another factor could be good work places, such as can be found in Lublin and Płock. An example of a shopping centre which is popular despite being located in a smaller town is Plaza Suwałki. The north-eastern town of Suwałki is not big and does not appear to be affluent; however, according to the analyst from Cushman & Wakefield, the facility is “well designed, not too expensive and has little competition.”
“What intrigues us developers most is how retail chains are going to develop further,” says Beata Kokeli, a member of the management board of Centrum Development & Investments. She adds that: “The period 2007-2008 was a time when people sometimes made over-hasty decisions, as they tried to steal a march on the competition and secure the best locations in the most interesting projects in nearly every town. Later came the time for tenants to limit their expansion plans when the local currency started to fluctuate wildly against the euro. It was a painful time, not only for them, but also for us. Recently I heard in a meeting with a tenant that he would gladly cross out all the contracts signed in the years 2007 and 2008 with a thick line.” Centrum Development & Investments current plans include the construction of shopping centres in smaller towns such as Lublin (Pasaż Victoria) and Katowice (Supersam).
The anchors are not scared
It is the biggest tenants – the so-called anchors – that are experiencing the most dynamic growth right now. However, this is a much more costly process for developers than two or three years ago. Such retailers have strong bargaining power and are in a position to negotiate preferential conditions for themselves, such as rent based on turnover, convenient exit clauses or the owner’s participation in finishing work. If the operational conditions are good, then this guarantees their expansion in the years to come. Such tenants are indispensible in a mall to attract customers and promote it as important shopping location on the map of a town. Smaller tenants generate more revenue for developers, especially those from the fashion industry. However, they usually have limited expansion plans and are much more cautious in this respect. This is why it is sometimes hard to secure certain projects, especially in smaller towns. “Hypermarket and DIY store chains, as well as shops from the interior finishing and furnishing sector, are nowadays unthreatened when it comes to expansion into smaller towns,” claims Katarzyna Michnikowska.
The power of the biggest tenants is so strong that they can even afford to enter a town with only a dozen or so thousand inhabitants where there are no modern retail facilities to speak of. One example of this is the recent opening of Media Expert shops in Łowicz and Rawa Mazowiecka. These are small towns with practically non-existent modern retail markets.
Also Media Markt and Saturn, which belong to Media Saturn Holding Polska, are among the strongest group of tenants – anchors. Jacek Hudowicz, the president of the management board of Media Saturn, reveals that the chain will continue to expand into both the bigger and smaller towns, but this depends on the retail projects being developed. “In many cases it is not the size of a town that determines its attractiveness for us, but the purchasing power of the conurbation or region. Our presence in smaller towns is certainly a result of the saturation of the bigger markets and the strong competition present there. However, it is also an investment in the future. The latest openings in smaller towns confirm that this is the right approach,” argues Jacek Hudowicz.  In 2010 the chain opened five Media Markt stores in Przemyśl, Płock, Tarnów, Gdańsk and Wałbrzych and a Saturn outlet in Łódź.
Nowhere to grow
Brands which grow their networks without encountering any major obstacles outside the biggest cities include those in the LPP group of clothing retailers (Reserved, Cropp, House and Mohito), the C&A clothing chain; children’s clothes store Smyk, low- and mid-range shoe shops such as Deichmann, CCC and Boti, bargain clothes chains Takko and Pepco, household appliance and electronics outlets, Drogeria Natura and Rossmann drugstores, multi-brand sports shops such as Adidas, Reebok, Nike, and Empik megastores. “An interesting case is the Apart jewellery chain, which also seems unperturbed by such challenges.  It may be the most exclusive boutique in this group, but almost everyone spends some money on such items once or twice in their lives,” notes Katarzyna Michnikowska.
In the first six months of 2010, 200,000 sqm of modern retail space came online, which constitutes only 55 pct of the supply in the same period of 2009. At that time a number of shopping centres were finished in large cities (Bonarka in Kraków, Galeria Malta in Poznań and Renoma in Wrocław), but most new projects were built in medium-sized cities such as Lublin (Cuprum Arena), Częstochowa (Galeria Jurajska), Piotrków Trybunalski (Focus), Opole (Solaris), Tarnów (Galeria Tarnovia), Nowy Sącz (Galeria Sandecja), Oświęcim (Galeria Niwa), Iława (Galeria Jeziorak) and Sandomierz (Galeria Sandomierz). According to Cushman & Wakefield’s calculations, 473,200 sqm of retail space was built in small and medium towns and cities last year – 62.9 pct of all the retail space built in the country, with the share of smaller towns in the total volume increasing to nearly 40 pct.
Fashion in towns and very small towns
The supply of space will only start growing after 2012, so tenants who want to expand earlier will have nowhere to do this. LPP, one of the most active of the larger tenants on the retail market, with its clothing brands Reserved, Cropp, House and Mohito, is among those faced with this problem. This year the company opened 75 outlets, of which 67 are located in smaller towns – partly because of the lack of new shopping centres in the biggest cities. “If such facilities were opened, assuming that they are good ones, we could not afford to be absent in them because that would make our position in a given big town weaker,” explains Dariusz Pachla, the vice-president of the management board of LPP. He goes on to add that the increasing interest of large tenants with regard to smaller locations does not result from the saturation of big conurbations. “One of the most important factors determining a given tenant’s presence in an actual town is the availability of retail space. And it is developers who decide this. If they take on the investment risks, it means that they can see the potential of the town. And this is not only determined by the size of the town but also by the purchasing power of its inhabitants and the existing competition of other retail facilities,” explains Mr Pachla.
Money sees no borders
The most common growth pattern for retail chains is to start out in Warsaw, then to take in other regional cities, before gradually branching out to smaller cities and towns. This does not have to be the rule, however. TK Maxx has recently expanded into the country, opening its first Polish store in Czeladź, which has just under 34,000 inhabitants. Its new Warsaw store is in fact its second in the country, while leasing contracts are now being negotiated in a number of medium-sized cities. Such a strategy of broad entry into both big cities and small towns is aimed at increasing brand awareness.
According to Katarzyna Michnikowska, the size of a town or city should not be a barrier for tenants in a long run. Retail chains create new brands for smaller centres and adapt the concepts for their outlets, making them smaller; but they will follow customers anywhere. The pace for expansion outside metropolitan areas depends on the growth of Polish purchasing power. The exceptions are only the very expensive and luxury brands, which make cautious entries even into the biggest cities, as it is in their interest to keep their prices high. This is why some of them even hesitate about whether to be present in Warsaw at all.
One notable example of diversification and the new concepts aimed at smaller centres is the Carrefour Express brand of supermarkets; another is the development of two seemingly competitive brands by the same group – Saturn and Media Markt – which are differentiated only by their locations. Shops under the Saturn brand only open in the shopping centres of the biggest cities, while Media Markt stores are located mainly in the outskirts or in medium cities.
Can LPP shops be expected to appear in even smaller towns? “It is hard to say. We will open our shops where good shopping centres are built. Only ten years ago the smallest cities where shopping centres were being built still had around at least a hundred thousand inhabitants. Now this limit has been lowered significantly, but we cannot exclude that it might have reached its bottom level. Opening our shops in small towns is an alternative to this, and one that is by no means inferior,” believes Dariusz Pachla.