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September 08 , 2010

Toys 'R' Soaking Up Mall Spaces

Wall Street Journal

September 8, 2010

Taking advantage of vacant mall space, Toys "R" Us is opening 600 temporary shops—or "pop-up stores"—this fall, a move that doubles the number of its U.S. stores for the crucial holiday season.

Toys 'R' Us says its temporary holiday stores, like this one in Texas, didn't cannibalize its regular stores.

The toy retailer is super-sizing a bet it made last year when it opened 90 temporary mall-based Toys "R" Us Express stores during the holidays, many in spaces previously occupied by KB Toys, which folded in early 2009. Toys "R" Us also added holiday toy sections to its 260 Babies "R" Us locations and plans to do so again this year.

"We did it last year and it worked," said Gerald Storch, chief executive of Toys "R" Us. "Our customers told us they liked the convenience of buying toys where they were shopping for other holiday gifts."

No one knows exactly how many pop-up stores have materialized in recent years, but it is a trend that has blossomed since the recession took hold in December 2007. Some last a few days for special events, like designer-sample sales. Others stay a few months, looking to grab seasonal traffic.

"Over the course of the recession, that concept increased in popularity," said Jesse Tron, spokesman for the International Council of Shopping Centers. "It helps fill vacant space, so landlords can gain revenue when they otherwise wouldn't, and retailers can test certain concepts. It's a nice fit for both."

As retail sales plummeted in the economic downturn and numerous retailers went out of business, malls were left with a plethora of empty stores. The national vacancy rate for malls in the U.S. was 9% in the second quarter of this year, up from a low of 5.1% in the second quarter of 2005, according to Reis Inc.

While the upward climb of the vacancy rate has slowed, few retailers are opening stores amid the wobbly economic recovery.

Temporary stores have been around for a while, pioneered by the Halloween industry, whose costume shops sprout in vacant retail space for a few weeks in October. Party stores also have favored this practice, as have Hickory Farms and gift wrap concessionaires, which open up in malls from Thanksgiving to Christmas.

But in the last decade, pop-up stores also have become a way to test-market new concepts or create brand awareness. Target Corp. regularly has opened temporary stores in New York to sell its latest collection of designer fashions. This spring, Target opened a store for three days in midtown Manhattan that featured floral apparel and home furnishings created by Liberty of London that was so popular it sold out after two days.

Mr. Storch at Toys "R" Us said last year's gamble paid off, helping the company to grab market share. For the fourth quarter, Toys "R" Us saw sales at stores open at least a year rise 3.3% and total sales were up 5.5% to $3.6 billion. In the previous year, its holiday sales declined 3.4%. Industry-wide toy sales for the fourth quarter were flat, according to NPD Group.

"The numbers show we were able to add additional sales, rather than cannibalizing sales from our free-standing stores," Mr. Storch said.

Toys "R" Us, which was bought in 2005 by private-equity firms Kohlberg Kravis Roberts and Bain Capital for $6.6 billion, is anxious to show it is still growing in a mature industry. In June it filed registration documents to raise $800 million in an initial public offering.

For the pop-up plan, Mr. Storch said each lease was negotiated separately and declined to say if the stores were getting a rent discount. But, he said, some of the stores are housed in lavish environments, where jewelry stores and upscale clothing boutiques once operated.

It isn't clear whether retailers opening temporarily get a rent break compared with retailers with long-term leases. ICSC's Mr. Tron said that in Manhattan, retailers with pop-up stores still pay the going rate or even a premium, because they value the exposure.

Steven Lieberman, chief executive of the Retail Connection, a retail leasing and investment firm in Dallas, said that retailers opening temporary space probably get a discount on rent, paying a smaller percentage of sales than long-term tenants do. But at the same time, landlords aren't paying out store improvement monies.

"It is probably a better deal for the landlord; his return on investment is higher," Mr. Lieberman said.

Toys "R" Us, based in Wayne, N.J., said its pop-ups, which average about 4,000 square feet, will feature the latest toys and time-honored classics, but bigger items such as bicycles as well as gaming consoles and baby items will be relegated to its traditional free-standing stores.

Toys "R" Us is hiring 10,000 workers to staff the temporary stores, which will be run by seasoned department managers from established stores. It also is opening eight permanent outlet stores. Some of the pop-ups could become permanent, it said. Last year, 30 of the temporary Toys "R" Us stores became permanent establishments.

It takes less than a week to open and close a temporary store, the company said. Toys "R" Us said about 300 of the stores are already open and the rest will be open by the end of October.

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