Saturday, April 15, 2006

How Mills Corp. built its way into big trouble

By Ryan Chittum and Jennifer S. Forsyth, The Wall Street Journal

As recently as last summer, Mills Corp. was soaring.

Its giant retail and entertainment complex near Ft. Lauderdale, Fla., drew more visitors than Disney World, the mall company told analysts. Its development pipeline popped out a blockbuster project nearly every year. Its stock performance was the envy of the industry.

Larry Siegel, its 52-year-old chief executive, was credited with injecting new life into the nation's tired mall industry. His "shoppertainment" retailing formula offered customers more than just stores. There was glow-in-the-dark miniature golf, simulated Nascar driving and dining in faux rain forests. His staid competitors took notice.

But now Mills, a real estate investment trust based in Arlington, Va., is drawing attention for different reasons. Its recent developments have largely been flops. One in five employees has left or been laid off, including its development director, raising doubts about whether it can finish the projects it hasn't already abandoned. Last month, the Securities and Exchange Commission launched an investigation into its accounting practices. Its stock has plummeted 55 percent over the past eight months. On Wednesday, its lenders forced it to slash dividend payouts and to submit biweekly financial reports while it readies itself for a likely sale.

Mr. Siegel stumbled during one of the hottest real estate markets in years by pushing into markets that were either too small or too competitive to support the company's mammoth malls. Mills compounded its problems, say investors and analysts, by focusing more on development than on managing its existing properties. Its current struggles make one wonder whether its unique, expensive retailing approach can survive.

"I think their projects are the most creative of any developer out there," said Warren Weiner, executive vice president of Philadelphia-based Deb Shops Inc., which has 340 teen fashion stores nationwide and six in Mills properties. "The question is: Is it possible to be that creative and be financially successful?"

Mills, which has 42 malls in the United States and abroad, has said it was exploring "strategic alternatives."

In recent years, mall companies have performed well as consumers continued to spend. The nation's major mall developers expanded primarily by buying other mall companies.

Mr. Siegel decided to expand by building new properties. He ascended to the chief executive position shortly after Mills went public in 1994.

Mr. Siegel saw most malls as ho-hum rectangles with four large anchor stores. The outlet malls that came in the 1980s and '90s, which carried name brands at discount prices, often offered no place to eat or sit down. Mr. Siegel decided to marry two concepts: to build full-service malls with food courts and even skateboard parks and feature outlet retailers.

Other mall developers also explored ways to combine retailing and entertainment, but Mr. Siegel became one of its most enthusiastic proponents.

He pursued retailers not typically found in malls, such as Bass Pro Shops, which offers a 60,000-gallon aquarium and an archery range along with its outdoor supplies. Mills was one of the first mall companies to offer prominent space to IMAX theaters instead of sticking movie theaters in an unused corner of the parking lot, says Paco Underhill, who runs a New York-based retail consulting firm, Envirosell Inc.

Shoppers flocked to Mills' early projects, such as Potomac Mills near Washington, D.C., and Sawgrass Mills outside Fort Lauderdale. So Mr. Siegel picked up the development pace. After building just four large malls between 1985 and 1995, over the next decade Mills built 13 malls and converted two more to its shoppertainment formula.

Mr. Siegel planned on a large scale. Mills's properties typically sprawl over about 1.5 million square feet, compared with about 1 million square feet for other major regional malls.

While a typical large mall draws customers from a 10- to 20-mile radius, many Mills malls are so big they need to draw from a larger area to attract enough customers. So Mills became more vulnerable to new competitors, including outlet centers, discount stores and the hot new model -- open-air "lifestyle centers," which adhere to a "Main Street" approach, with stores opening onto a street, says Steven Gartner, president of retail consultant Metro Commercial Real Estate Inc., of Conshohocken, Montgomery County.

In the United States, it was becoming difficult to find large new markets where the Mills concept would still be novel. Mills pushed into the outskirts of the Pittsburgh and St. Louis markets, which already had quality malls and didn't have enough demand to support newcomers. Last year, in Pittsburgh, Mills resorted to its first-ever "soft opening," starting operations without a big marketing campaign due to a low number of retail tenants.

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