They are the unloved Zellers stores.
While cheap-chic U.S. discounter Target Corp. snapped up most of the Canadian chain's outlets to convert them to its namesake banner by next year, 86 Zellers Inc. stores didn't make the cut.
Those stores, which were rejected by Target and other major retailers because they're mostly in smaller towns or marginal neighbourhoods, represent a challenge and an opportunity for their landlords. The mall owners anticipate Zellers won't operate much longer as it struggles to keep up with stronger rivals. The landlords are eager to replace Zellers with savvier retailers, which can generate more rent and entice more customers to their shopping centres.
For the towns themselves, the unwanted Zellers stores underscore the difficulty of smaller markets to lure major merchants – and the jobs and customer base they bring with them to help strengthen a local economy.
The landlords' hands are tied because many Zellers' leases are long term, putting the retailer in the driver's seat. Richard Baker, the U.S. owner of Hudson's Bay Co., the parent of Zellers, said he is reviewing his options. As a result, the malls face a period of uncertainty in setting their future course.
"Until we know what their plans are for Zellers, we really can't act," said Donald Clow, chief executive officer at Crombie Real Estate Investment Trust in Stellarton, N.S. Of its seven Zellers outlets, three – in New Glasgow, N.S., New Minas, N.S. and Summerside, PEI – will remain under the banner, at least for the time being. Two are being picked up by Target, one by Wal-Mart and the last one (with a short lease remaining) was recently bought back from Target by Crombie to redevelop into new space.
The landlords are grappling with a delicate balancing act at a time when attractive mall space is in high demand and short supply. While Zellers continues to pay its rent, the landlords think other retailers could generate as much as four times more rent. And the developers don't want to have to pay Zellers to get it to ditch its long-term leases.
They suggest that Mr. Baker, who is on solid financial footing after having closed his $1.8-billion deal to sell most Zellers leases to Target, is talking to alternative chains about taking over the orphaned Zellers' space. Even so, Zellers can't easily find a single chain to fill the relatively large spaces it would be leaving behind, which could require it to hand the property back to the landlord to divvy up among a few chains – and potentially ring up even bigger returns.
"These are the Zellers that have been left behind," said Alex Avery, real estate analyst at CIBC World Markets. "Landlords are looking at this space and seeing it as an opportunity. But it is very site specific."
The stakes are high because Zellers today pays a paltry rent of as little as $1 per square foot under decades-old leases that give the chain big breaks for being a mall's "anchor" tenant, based on the theory it draws customers to the centre, even if it doesn't any more. On average, Zellers' rent is about $7 per square foot – although the rates in the rejected stores are closer to $1 or $2 – while average national rents for anchor tenants overall are about $14, Mr. Avery estimated.
Landlords have started to map out their own contingency plans for the Zellers sites. "What I envision is two or three different tenants carving up the space," said Anthony Cohen, chief executive officer at Gulf & Pacific Equities Corp., which owns a mall in Cold Lake, Alta., with a Zellers that is remaining under that name.
"We've been approached by national realtors about potential tenants for the property," Mr. Cohen said. "But you can't offer to lease something that you don't have."
He thinks a national restaurant chain and a fashion retailer would make good replacements for the Zellers in the thriving oil town. Other potential retailers that are believed to be interested in setting up shop in the rejected Zellers stores include discounters Dollarama, Giant Tiger, Bargain Shop and Big Lots; clothiers Northern Reflections and Mark's Work Wearhouse; and sporting goods chain Forzani Group (the latter two are owned by Canadian Tire Corp.). Edward Sonshine, chief executive officer of RioCan Real Estate Investment Trust, the largest Zellers landlord, said his team will meet with HBC next week about RioCan's nine orphaned outlets.
He expects that Mr. Baker will open discussion with landlords by asking them how much they're ready to pay him to get the Zellers stores back. "Depending on the store, our opening position will be: 'You know what, just keep paying your rent, it's okay. We don't need your store back.' … To get them back, they'll pay us, at least I hope so."