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Friend or Foe?

How Wal-Mart will change urban Honolulu

Hawaii residents love their big box stores. Costco, Kmart, Home Depot, you name it - locals flock to their openings by the thousands.

That will likely happen again next spring, when Wal-Mart's mega-store in Honolulu's Ala Moana area opens to the public. Its retail space will exceed 315,000 square feet. That's larger than the Royal Hawaiian Shopping Center in Waikiki, or more than twice the area of the Costco in Iwilei.

The problem is these enormous retailers can trigger ripple effects proportionate to their size. The Wal-Mart superblock is particularly worrisome, because it's located in one of the most jam-packed sections of Honolulu. The 10.5-acre lot is bounded by Keeaumoku, Makaloa, Sheridan and Rycroft streets - a neighborhood that's home to Hawaii's largest shopping center, several supermarkets, thousands of apartment residents and dozens of small businesses. They will all be affected by the superblock's opening. Some of them are thrilled; others are horrified.

The project includes a double-decker retail complex, with Wal-Mart on the ground floor and membership-warehouse Sam's Club on the second, and a four-story parking structure with 1,700 stalls.

Over the past 15 years, big boxers in Hawaii have traditionally sprung up in suburban and industrial areas. Currently, Wal-Mart has two Oahu locations, Royal Kunia and Mililani. Sam's Club has one location in Pearl City. The Keeaumoku superblock defies the pattern. And that will mean big changes for urban Honolulu - opportunities for some, challenges for others.

SMALL BUSINESS

It was a tough lesson, but Hawaii retailers have learned how to co-exist with big boxers: Don't compete with 'em. Merchants that want to succeed alongside the Keeaumoku superblock should adhere to that tenet, as well.

"You can't compete with Wal-Mart on price," says Mike Hamasu, director of consulting and research at Colliers Monroe Friedlander Inc., which was Wal-Mart's broker for the superblock deal. "So you need to find a niche and have different product lines, services and retail goods that are not in competition."

NEW KID ON THE BLOCK: Wal-Mart’s Hawaii general manager, Tim Ross, says the Keeaumoku location will carry more ethnic goods than other local Wal-Mart stores.

That's easier said than done, considering Wal-Mart and Sam's Club sell almost everything under the sun. The Ala Moana area now contains a motley mix of small businesses - retail, services and adult entertainment. But there are a variety of noncompetitive operations, Hamasu says, that could flourish near the superblock: restaurants, banking services and specialty stores, such as Trader Joe's.

So what about the businesses selling products similar to those of Wal-Mart and Sam's Club? Two area retailers remain optimistic: Pacific Diamond & Swiss Watch Exchange and Elite Electronics at Samsung Plaza. Both stores insist they cater to a more discerning clientele than either of the value retailers. Ted Gonzales, owner of Pacific Diamond & Swiss Watch Exchange on Kapiolani, says, "I'm not at all concerned about the competition - who wants to buy their engagement ring from Sam's Club anyway?"

If you ask Dean Okamoto, manager of Elite Electronics, if he's worried, he'll say, "Yes and no." The reason? "We sell different types of products from

Wal-Mart and Sam's Club; our store has upper-average to higher-end types of products," he says. "The types you find in Wal-Mart or Sam's Club are more entry-level merchandise. Our type of quality products can't be found anywhere else in Hawaii."

Okamoto thinks his store could actually benefit from the several thousand customers who'll visit the superblock daily. In fact, Okamoto plans to post a more prominent store sign near Elite Electronics' Keeaumoku entrance to draw some passers-by into his own store. But planning consultant John Whalen warns retailers against pinning their hopes on such scenarios. The superblock development includes plans for about 4,000 square feet of shop space fronting Keeaumoku Street - enough for at least six small stores of their own. That row of shops is tentatively titled The Shops at Keeaumoku.

"Businesses around there that think they might get some spillover trade may be mistaken about what effect Wal-Mart and Sam's Club will have," says Whalen, president of Plan Pacific Inc. "The parking lot is designed so that it only serves the superblock, so I don't think you'll find a lot of people parking there and walking in the immediate vicinity. Wal-Mart and Sam's Club have all sorts of departments, so smaller businesses will have a tough go."

BIG BUSINESS

The economic impact of the superblock may hit small businesses the hardest, but there's no overlooking the area's larger retailers, which will also feel the pinch. Hamasu says the superblock could suck sales from stores within a five-mile radius. That would include Costco Wholesale Corp.'s location in Iwilei, one of three on Oahu.

"People living within suburban Honolulu - Makiki, Punchbowl, Manoa, Kaimuki - historically, they travel to Costco and Home Depot in Iwilei," Hamasu says. "But they'll consider Wal-Mart on Keeaumoku because it's closer, and it's a new store. Hawaii residents love new stores."

A conceptual rendering of the Keeaumoku superblock.

The Keeaumoku location of Ross Stores Inc., an off-priced retailer, sits directly across the street from the development. The store's price points are comparable to Wal-Mart and Sam's Club. That shouldn't matter, though, says Jim Radtke, district manager for Ross' Hawaii and Guam stores. Ross sells designer labels, while Wal-Mart and Sam's Club carry lower-end clothing lines.

"We're not necessarily going after the same markets, so I'm not really concerned about the competition," Radtke says. "Actually, I know it will be good for us, because it will bring a lot more traffic into the neighborhood."

Just a few blocks away from the superblock is the Kaheka store of Daiei USA Inc., a 30-year retailer in Hawaii and former owner of Ala Moana Center. Daiei anticipates competition for their only Honolulu location, says Theresa Chang, the company's sales promotion manager.

Last year, Daiei Kaheka underwent a multimillion-dollar renovation. The store reduced its hard goods, such as toys, and expanded its foods department, known for its wide assortment of Asian items. Unfortunately, some analysts speculate such changes won't counter the impact of Wal-Mart and Sam's Club.

"Daiei is extremely vulnerable to Wal-Mart's penetration in urban Honolulu, because they compete on a toe-to-toe level; they're almost identical," says Fred Noa, vice president of retail services at CB Richard Ellis Hawaii. "I would say this: Daiei has done a real good job in finding a niche, catering more toward the Asian market. But Wal-Mart is pretty good about creating the right merchandise mix in a specific market."

And that's exactly what the new store will do, says Tim Ross, general manager of Wal-Mart's Hawaii operations. Its Hawaii stores buy about 45 percent of their products from local wholesalers, such as S&K Sales Co. and Webco Hawaii Inc. That's unlike most Wal-Mart stores on the Mainland, which receive their goods from the corporation's general warehouses.

CORPORATE PROFILE : WAL-MART (NYSE: WMT)
ESTABLISHED: 1962 in Rogers, Ark. Currently based in Bentonville, Ark.
FOUNDER:
Sam Walton
NO. STORES: More than 2,300 worldwide, including discount stores, supercenters, neighborhood markets and membership warehouses (Sam’s Club).
NO. CUSTOMERS: More than 100 million worldwide each week.
SALES: $244 billion for fiscal year ending Jan. 31, 2003.
NO. EMPLOYEES: More than 1.2 million worldwide. The Keeaumoku superblock will employ more than 1,100 people.
NOTABLE: World’s largest retailer and private employer. Ranked No. 1 on the Fortune 500 list in 2002.

"This Keeaumoku store will be a little different," Ross says. "Because if you just look at who our competitors are, we're going to carry more Asian products there than in our Mililani store. It'll also be geared a little more to tourists, as far as souvenirs and things like that, but the main goal is to serve the people who live in the community."

Even Hawaii's largest shopping center isn't immune to the effects of the superblock. Analysts note that Ala Moana Center offers a much broader array of products, namely high-end retail and specialty stores, which shouldn't be affected. But lower- to middle-priced retailers aren't as secure.

"Those Gucci-Gucci type stores won't lose market share," says retail analyst Stephany Sofos, president of SL Sofos LLC. "But if you sell aloha shirts that are the quality of Hilo Hattie but a little less expensive, customers will go to Wal-Mart. If you sell cotton polo shirts like Izod or Ralph Lauren, your customers will go to Wal-Mart. Wal-Mart will tap the middle market and value shoppers."

Ala Moana Center's 230-plus tenants are aware of that possibility, says Dwight Yoshimura, general manager of General Growth Properties Inc., which owns the center. Most stores have prepared for the increased competition.

"Price points are being looked at to offer customers products at equal value of what a Wal-Mart would typically offer," Yoshimura says. "We feel very confident that the majority of our tenants will compete on that basis."

In fact, Yoshimura says tenants should welcome the challenge.

"Retail is so competitive today that it's really important for all retailers, no matter where they are, to stay on top of their merchandise game," he says. "In the end, it benefits the consumer."

Contrary to some speculation, Ala Moana Center will not add a big box retailer to the mall's roster of stores, Yoshimura says. The space vacated by JCPenney will accommodate at least 30 new merchants, with a focus on restaurants and youth-oriented merchants. That section of the mall will open next August.

RESIDENTS

Thousands of apartment residents live within blocks of the development. Many have contested the project since last year, when Wal-Mart broke ground on the superblock. Those residents argue that their congested neighborhood can't handle any more traffic.

"The store will smother the neighborhood and create intolerable gridlock, pollution and noise, especially if this is going to be a 24-hour operation - I don't know how we're going to sleep," says Jim Becker, whose 18th-floor condo overlooks the development. "These streets are pre-war layouts, very narrow, so it's hard to get anyone in and out of here. It staggers the mind that anybody would stick it in a residential neighborhood."

NEIGHBORHOOD WATCH: Sheridan Street resident Doris Nakamura, with granddaughter Kelsea Nakamura, worries about the noise and traffic from the superblock.

Homemaker Doris Nakamura and her family have lived on Sheridan Street for more than 30 years. From their apartment window, she can spot the loading docks where the superblock will receive about 12 container-load deliveries each day. Nakamura worries about the noise and diesel emissions from those delivery trucks.

Her husband's family owns the five-story apartment building she lives in, as well as an adjacent two-story walk-up. Nakamura says there are a number of elderly residents in these units who are also concerned.

"Some occupants have been here 20 or 30 years, too, and that's why I feel I should protect them - where would they move?" Nakamura says. "I'm very concerned we won't have a quality of life here if this is allowed to go on without any changes."

Last year, Nakamura and Becker helped form Citizens Against Reckless Development, which filed a lawsuit to stop the development. They complained that before the city approved the massive project, it should have required Wal-Mart to hold public hearings and conduct an environmental impact study. The district's zoning is BMX3, or business mixed use, which allows for both commercial and residential developments. Under city land-use ordinances, Wal-Mart wasn't obligated to perform a study or hold a hearing.

In June, a Circuit Court judge dismissed most of the lawsuit, except for personal nuisance claims brought by Becker and Nakamura. That matter is scheduled for trial this month. "The project is entitled to significantly more than what we're doing," says Jon-Eric Greene, Wal-Mart's local real estate broker and senior vice president of Colliers Monroe Friedlander. "The allowable density for that property is 1.6 million square feet, which could be developed for several uses. A previous project planned for that property was 1 million square feet, but the total project we have now is 315,000 square feet."

Greene insists that Wal-Mart has tried to work with residents in the neighborhood. Wal-Mart did not conduct an environmental impact study, but it did perform several traffic studies. The company included several traffic-improvement projects in its development (see "The View").

But those measures don't ease Nakamura's worries one bit. "This is not a NIMBY (not in my backyard) issue for us," she says. "It's very serious for the residents in this area. I'm trying to convey the feelings of the people here."

Councilwoman Ann Kobayashi, who represents part of the Ala Moana area, echoes that sentiment. But she concedes there is little residents can say or do at this point. "It's good to have development, but a project that big right in middle of the city - it shouldn't happen," she says.

REAL ESTATE

Considering that most big boxers in Hawaii move into suburban or industrial areas, it might seem unusual that Wal-Mart has set up shop in one of Honolulu's highest density areas. Not so, Greene says. There are only a handful of available Honolulu properties large enough to accommodate the complex.

The Keeaumoku site was particularly attractive because of its high residential population and job counts. "Within five miles of the site, there are about 300,000 residents and about a quarter of a million jobs," Greene says. "But if they want to go to a Wal-Mart, they have to go out to central or west Oahu."

While the superblock poses direct competition for a number of businesses, Wal-Mart's presence makes the neighborhood's retail space much more desirable. That will translate into higher rent rates within the vicinity. Currently, retail spaces in the area rent between $2.50 and $3.50 per square foot. Merchants who want to rent space at The Shops at Keeaumoku, however, will have to fork over $8 per square foot - around three times the going rate.

Greene justifies that amount by citing the number of customers Wal-Mart can draw. The company's Mililani store sees between 5,000 and 6,000 customers daily. There are higher projections for Keeaumoku. Still, the $8-per-square-foot price tag has raised eyebrows among other real estate brokers.

"Rents are indicative of sales, and it's very unlikely more tenants will be able to pay $8 rent, plus operating expenses," Noa says. "It would be more appropriate for Wal-Mart to charge between $3 to $4 per square foot. Can tenants double their sales by being next to Wal-Mart? Maybe. Quadruple? Unlikely."

Analysts guess that rent rates for retail space in the area will rise by 10 percent to 50 percent. Increasing rents will eventually lead to a boost in the area's property values, as well. Today, land sales in the Ala Moana district range from $50 to $70 per square foot. Within the next few years, that could climb to $85 per square foot.

While such hikes will benefit landlords and property owners, they could also squeeze out the area's small businesses, many of which operate on slim margins. Noa predicts that, with the exit of a number of small businesses, developers will consolidate multiple properties to accommodate larger retailers.

"The market will determine what's possible, but I think you're going to see more one-off developments, made possible by the consolidation of several parcels," Noa says. "I think we'll see, in the next 12 months, brands we haven't seen in the past, like [furniture retailer] Cost-Plus and [home-fashion superstore] Linens-N-Things."

That means more competition for Hawaii stores, which will have to go the distance to keep customers from straying. "It's going to make [other businesses] better their servicing, customers relations and product lines," Sofos says. "Increased competition is just going to bring everybody into the 21st century and make them pay attention to consumers. And in the end, consumers will win - that's the main thing."

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