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Death Spiral

That’s one Waikiki executive’s assessment of the future of retail and tourism.

What a difference a year makes. Last February the 182,000-square-foot, $65 million DFS Galleria Waikiki opened amid much hoopla, a shining beacon of hope for a vibrant entertainment and retail destination, theWaikiki of the future. Today, DFS President Bob Coe says DFS Hawaii is in peril, and so is all of Waikiki.

“We have cut expenses to the bone. It’s a very tough environment for all our people to be in. But we’re doing what we have to do to stay alive,” says Coe.

The reasons for DFS’s and Waikiki’s predicament are pretty clear. Hotel occupancies were already declining from their peak of 84 percent in 1995, before getting slammed by the terrorist attacks of Sept. 11. Landowners, hoteliers and retailers had been in the process of rethinking strategies, when they were abruptly presented with a global fear of flying and what commercial real estate company Colliers Monroe Friedlander Inc. is labeling a “Japanese Paradigm Shift.”

Tailspin: DFS Hawaii President Bob Coe overlooks the ground floor of the DFS Galleria Waikiki. Coe says Waikiki is in, what he calls, a death spiral.

According to Colliers, the shift is that Japanese tourist spending has dropped by about 50 percent from around $4.4 billion in 1995 to 2001. The company attributes the precipitous drop in Japanese dollars here to the recession in Japan, a devalued yen and increased access to imported goods in Japan.

Colliers’ Research Director Mike Hamasu asks, “Where does Hawaii go to recoup all that money that we’re losing?” and answers, “We have to target the growth in the sector that is demonstrating interest in Hawaii, which is the westbound tourist.”

It’s a strategy that DFS Hawaii, which has traditionally catered to the Japanese (Coe says Japanese have spent about nine to 10 times more per visitor with DFS than domestic visitors in the past), is trying to embrace now. DFS Hawaii Group Vice President Sharon Weiner says they are doing all they can to get the westbound visitors, whose numbers have been increasing, to come in and spend more.

“You try to do it with volume,” says Weiner. “We’ve reconfigured some of the merchandise in the store so that you have a T-shirt display on the right when you come in, which replaced some of the souvenirs, because good price-point T-shirts are a big draw for American visitors.”

In fact, for the first time in its history, DFS Hawaii is marketing toward westbound tourists. Coe says, “Anybody in luxury retailing is suffering right now. Anybody. The only people that are getting through this with limited negative impact are people who traditionally appeal to the American consumer. Everybody else is hurting.”

It’s an attitude that will likely lead to a different product mix and look for the Waikiki retail market. “Activity went dead on Sept. 11 as far as tenants looking,” says Mark Bratton, a vice president at Colliers. “But, at the beginning of the year, there were a bunch of tenants back in the market looking and I would characterize them as tenants like AX, you know you’re talking about $100 price points give or take, some kind of fashion sense or appeal, but definitely not $400 or $600 or $800 tickets. And there are about three or four of those kind of tenants, more average, more accessible price points that are looking around in the market right now for at least 5,000-to-8,000-square foot stores.”

Another commercial real estate firm, Grubb and Ellis,’ numbers seem to tell a similar story. Comparing the first quarter of this year to the third quarter of 2001, asking rents in the “tourist core” were up from $5.28 per square foot to $7.76. However, vacancies were also up from 126,579 square feet in 2001 to 127,923 square feet in 2002. Grubb and Ellis Research Director Jeff Nasrallah says, “There’s going to be an increased demand for making those retail sales. If you’re not getting those dollars from the Japanese, you are going to have to find another target.”

This makes it an interesting time for the Honu Group’s 2100 Kalakaua $140 million luxury retail project, which is gearing up for a December grand opening. Tiffany & Co., Chanel, Tod’s, Gucci, Yves St. Laurent and Boucheron are taking direct aim at the Japanese market. The design calls for a block of individual 5,000- to 20,000-square-foot townhouses on Kalakaua Avenue. The stores will be among the biggest, if not the biggest, in the world for each of the tenants.

At the time of this writing, the complex was 75 percent leased. Honu President Tom Applegate says that the project actually had new inquiries after Sept. 11 and has not had to make any rent concessions. He says they are betting on the long-term strength of the Japanese market, in spite of the current trends.

“The retailers that have signed leases are all long-term. They are global players. They’ve been through ups and downs. They’ve seen that Japanese, even though they’re in a long recession, they’re resilient and they come to the fore over and over again,” says Applegate.

Plus, says Applegate, the target never has been exclusively Japanese, based on past experience in the Hawaii market with 2100 Kalakaua’s neighboring King Kalakaua Plaza, which sports Niketown and Banana Republic. Says Applegate, “When Nike came to our project at King Kalakaua Plaza, they were planning for 95 percent Japanese sales and they’ve got about 30 percent sales to residents and that’s way outside the so-called Waikiki norm.”

Honu principal Mona Abidir says each luxury-brand retailer in the complex is being matched with a representative from the arts or humanities in Hawaii. In July, Honu representatives, tenant retailers and their Hawaii cultural community partners will be traveling to Japan on a trip targeted to luxury customers.

According to Applegate, neither Sept. 11, or the exacerbated effect it’s had on already declining Japanese visitors has changed Honu’s strategy. He says, “We spent three years in property acquisition and design and development simultaneously, so we went through every iteration of marketing concept and design concept that you can imagine.”

Outrigger Enterprises Inc. has been an enduring presence as a hotelier, but only recently, as it’s pursued plans for the $300 million Waikiki Beach Walk — to redevelop 7.9 acres of properties in the Lewers-Kalia area – has its retail clout been more evident. It’s not widely known that Outrigger owns about 300,000 square feet of retail space, a little more than that of the Royal Hawaiian Shopping Center. Of course, much of this is spread throughout its Waikiki hotel properties.

The chief operating officer for the Outrigger Properties Division Melvin Kaneshige declines to reveal what portion of its hefty $405 million in 2000 sales was from retail, but does say, “I can tell you it’s a hefty chunk of our net profit.” A chunk he expects to grow with the completion of the Waikiki Beach Walk.

To some Outrigger executives, the decline in Japanese visitor numbers and spending represents an opportunity. “I think it probably balances out the playing field. I think it’s causing retailers to really rethink and reshape their merchandise, so that it’s got a little broader appeal,” says Barbara Campbell, Outrigger vice president for retail development and leasing.

Kaneshige says the concept behind the new retail development is to provide a gathering spot, a function he says the International Market Place of Queen’s Surf served decades ago. He says, “You walk along Kalakaua on a warm summer evening. There are thousands of people wandering back and forth, with nothing better to do than watch gold man or silver man or parrot man. These are people walking around with money in their pockets and wanting to spend it, but there’s no place to go. It’s crazy. So we said, ‘Let’s build a gathering spot.’

Colliers Senior Vice President of retail services Jon-Eric Greene notes that the retail market has grown beyond Lewers and the Hyatt, with the recent additions of King Kalakaua Plaza and improvements to the Marriott and the Aston Waikiki Beach.

The opportunity is going to be there for those who can focus their marketing strategies and hang on during the tough climate. DFS’ Coe says he’s not sure how long his company can do it at the current rate. His parting observation on Waikiki as a whole is not optimistic. Says Coe, “We’re in a death spiral and we’ve got to turn it back. Only us can do it. Us together.”

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