modelling rent performance of shopping center stores in shopping cluster

In this type of shopping cluster context, besides retail clustering economies and retail agglomeration economies, each shopping center’s association with other shopping centers in terms

However, retail real estate properties and their marketplaces are in a state of constant change Different types of shopping centers are transforming urban landscapes and the qualitative differences are emerging between areas as consumption centers (Crew and Lowe, 1995) In Western countries, the redevelopment of downtowns becomes popular recently in the urban landscape (Hankins, 2002), while in Asian countries, the dominant competitive position of the central shopping area continues to exist Downtowns ─ especially main streets in central area of large cities ─ are the setting for

a wide variety of individual shops and multi-level shopping center developments (Gray

and Melish, 1996), in which many shopping centers tend to cluster and form a new type of retail area

Shopping centers are usually located in close proximity to each other either along a major road or dotted and conveniently linked in a compact space in the central areas of large cities With prototypes like “Fifth Avenue” in New York or “Orchard Road” in Singapore, a new shopping typology is becoming more prevalent in Asia as “the urban linear mall” This is also noted in a book of “Harvard Design School Guide to Shopping” (Chung and Leong, 2001) A shopping cluster rescales the plan of the traditional shopping center (indoor shops along a main corridor or path) to one that agglomerates the spaces of shopping centers along a main outdoor corridor in the city

The mechanism of a shopping center cluster is more complicated than that of the stand-alone shopping center as revealed in the recent theoretical shopping center literature (Konishi, 2005; Arakawa, 2006) The cluster of various shopping centers with different owners is full of intense competition yet demands close cooperation among the shopping centers A shopping cluster’s effectiveness as a catalyst for a broader revival or health growth of retail activity within the cluster depends on whether the retail externality within the shopping area is beneficial to all retail activities (Lorch and Smith, 1993) Here retail externality is referred to as a positive clustering effect of retail activities among shopping centers which is similar to the agglomeration effect of retail activities within a shopping center (Mejia and Eppli, 2003)

Motivated by shoppers’ multi-purpose shopping behavior pattern and differences in shoppers’ preferences for shopping centers with diverse major attributes such as size and market-positioning, a variety of shopping centers tend to cluster at a certain urban area as a one-stop shopping area for people from different walks of life Consequently,

at the cluster level, shopping centers can benefit from retail clustering as this increases drawing power for each shopping center At the same time, each shopping center also produces agglomeration economies at center level which are determined by the shopping center’s attributes and this benefits all in-line stores In this type of shopping cluster context, besides retail clustering economies and retail agglomeration economies, each shopping center’s association with other shopping centers in terms of the center’s major attributes and space allocation strategies are also important factors influencing retail activities in the shopping cluster and thus economic performance of the shopping center and its stores

1.1.2 Existing Studies

Existing theoretical studies of retail agglomeration and retail externalities provide knowledge related to the mechanism sustaining agglomeration of stores in the shopping center or the cluster of shopping centers Firstly, theoretical works related to the retail agglomeration phenomenon explain the incentive for stores and centers to agglomerate or cluster The main incentive is the trade-off between market size effect attributable to the customer’s taste uncertainty and price-cutting effect due to competition in the shopping center or shopping cluster For example, Fischer and

Harrington (1996) observed a general tendency of retail agglomeration patterns based

on numerical examples: greater store agglomeration is associated with retail product characterized by greater heterogeneity Konishi (2005) has constructed a model allowing the co-existence of multiple different shopping centers in both non-overlapped and overlapped market contexts, which respectively provided theoretical explanations of suburban shopping center and shopping cluster phenomena Secondly, theoretical studies related to two types of retail externalities ─ inter-store externalities and inter-center externalities ─ focus on free-ride phenomenon within the center and among the competing centers In the midst of numerous studies of inter-store externalities, Brueckner (1993) put forward a comprehensive study of inter-store externalities through an analysis of space allocation strategies decided by shopping center owners based on their estimation of retail externalities produced by each store In contrast to broadly recognized importance of inter-store externalities, inter-center externalities are relatively unexplored in the literature Arakawa (2006) has built a theoretical model for understanding inter-center externalities in the shopping cluster, in which shopping centers free-ride on the rivals’ product varieties while consumers search the cluster and buy product varieties of “the total of the centers”

Most existing empirical studies of the shopping center store’s economic performance adopted models consistent with existing shopping center theories and examined major traditional attributes at store and center levels as rent determinants Tay, et al (1999), and Des Rosiers, et al (2005), for example, empirically examined impact on the store rent of a set of attributes such as store’s size, retail product types, floor level, and the

center’s size, accessibility, and intangible attributes like image and tenant mix

Furthermore, empirical studies of the shopping cluster (or similar phenomenon) focus

on retail distribution, and retail mechanism and dynamics in the shopping cluster Brown (1987) and Caplin and Leahy (1998), for example, respectively examined spatial structure of the shopping cluster in the city retailing core and explore the forces behind changes happening in the shopping cluster The studies suggest that, in the shopping cluster, attributes at the store, center and cluster levels, are all relevant to economic performance of the shopping center store

In Singapore, many empirical studies of the shopping center market have been done in several research fields For example, Sim (1984) and Sim, et al (2002) examined the evolution of shopping center market Davies (1994) examined the strategies of foreign retailers and their impact on Singapore retailing market Ibrahim (2000) evaluated the impact of transport mode/travel attributes on consumers’ shopping center choice Yeung and Savage (1996), Pow (2002), and Alias (2004), in research fields of urban study or sociology, examined two specific shopping cluster phenomena such as Orchard Road and Marina Center However, none of the studies focused on economic

performance of shopping center stores in shopping clusters

1.1.3 Research Gap

In spite of huge amount of theoretical and empirical shopping center works reported in disciplines as diverse as economics, retail geography, consumer behavior and real estate, there remain two research gaps in the changing shopping center market

First, there is no sound theoretical or conceptual framework for analysis of factors influencing the store’s economic performance in the cluster of shopping centers Past theoretical studies mostly focus on agglomeration of stores in the shopping center while most empirical retail rent studies concentrate on investigation of factors related

to the stand-alone shopping center Pashigian and Gould (1998) have called for research efforts to explore influence on economic performance of retail establishments from retail externalities in the Central Business Districts in major American cities This requirement for more research efforts was raised in view of the demand for improvement on the viability of these districts In view of the increasing popularity of the shopping cluster in the central area of major Asian countries, it is timely to investigate the shopping cluster phenomenon, and particularly, to examine factors influencing the economic performance of the stores in the cluster

Second, in contrast to numerous empirical studies of retail structure (or retail association) and retail dynamics within the city retailing core, few studies have examined the clustering pattern of shopping center stores in the cluster In view of the context differences between the previous studies (major retail establishments are stand-alone shops) and the present study (major retail establishments in the cluster are shopping centers), this study attempts to derive some factors related to the clustering pattern by examining the retail associations among shopping centers’ stores of different retail product types

z What determinants of the store rent can be found in the shopping cluster?

z What forces, at micro urban level, drive the rent dynamics among the shopping center stores in the cluster across certain period of time?

1.2 Research Objectives

This dissertation aims to extend the shopping center literature by analyzing the shopping cluster phenomenon and empirically modeling the store rent determinants in the cluster context The objectives of this dissertation are described as follows:

z To examine the retail associations within the shopping center stores in the cluster,

by evaluating the shopping centers’ major attributes and space allocation strategies

to different retail merchandise categories;

z To explore and examine the influence on the store rent (in year 2006) from traditional rent determinants as well as new rent determinants designed in view of the cluster context;

z To examine the factors that may explain the dynamic change in historical performance of the store rent in the shopping cluster

To address the above research objectives, this study selects two major shopping clusters, Orchard Road and Marina Center in Singapore, as two cases Three areas are explored in this study Firstly, this study investigates the factors related to the clustering pattern of shopping center stores Secondly, this study models the store rent determinants for the two clusters in year 2006 Thirdly, this study explores factors that may explain the differences among rent growth rates of stores across a period of 11 years (1996-2006) This dissertation is demonstrated in the context of Singapore’s shopping center market because (1) financial, time, and technical constraints limit the expansion of the study area to other shopping clusters in other countries; (2) knowledge and implications obtained by studies on the two major shopping clusters in Singapore can be applicable to other Asian countries since they are recognized as the prototype for the shopping clusters being established in other Asian countries; and (3) reliable current and historical data regarding rent performance of the shopping center stores can be obtained from the Inland Revenue Authority of Singapore (IRAS)

Chapter 2 discusses the research context Definitions of shopping center and shopping cluster are made accordingly It also presents an overview of the shopping center market in Singapore to serve as local background knowledge for this study

Chapter 3 contains a fundamental discussion of existing theoretical shopping center studies and empirical studies in understanding the store rent determinants The theoretical shopping center studies provide an understanding of the mechanism in agglomeration of stores in the center and in the cluster of shopping centers Existing studies of shopping cluster phenomenon are also reviewed To provide the local research background and knowledge regarding the study area, this chapter reviews existing Singapore shopping center studies

Chapter 4 introduces theoretical framework and research methodology, including the research hypotheses, study area, data collection, and description of database, in the stipulated context of the shopping cluster

Chapter 5 firstly presents the empirical analysis of retail associations within the shopping cluster and explores the factors to explain the clustering pattern within the shopping cluster Secondly, it presents empirical tests of the research hypotheses regarding the store rent determinants in the two shopping clusters of Singapore, Orchard Road and Marina Center The empirical store rent analysis puts emphasis on rent determinants designed in view of the shopping cluster context Finally, it presents empirical tests of the research hypotheses regarding factors that may explain

Understanding Incentives to Retail Agglomeration & Retail

Clustering in a Shopping Cluster

differences among growth rates of stores’ rent, respectively for the two shopping clusters

Chapter 6 summarizes the results and findings, draws conclusions, and highlights contributions to the existing literature, and the implications It derives implications to the shopping center owner for the center’s operation strategies such as space allocation decision and to the shopping center developer for the selection of the center’s major attributes Implications are also suggested to the urban planners regarding the sustainability enhancement of the cluster Future research direction is recommended

Chapter 2: Research Context

2.1 Introduction

This chapter presents the specific research context for this study Definitions of the shopping center and the shopping cluster are identified in Singapore’s shopping center market context It also presents an overview of the Singapore shopping center market and discusses types of shopping center and shopping center retailers in Singapore

2.2 Definitions of Shopping Center and Shopping Cluster

A shopping center is loosely defined by ICSC (International Council of Shopping Centers, 2004) as: “a group of retail and other commercial establishments that is planned, developed, owned and managed as a single property On-site parking is provided The center's size and orientation are generally determined by the market characteristics of the trade area served by the center The two main configurations of shopping centers are malls and open-air strip centers.”

The above definition is more applicable to Western countries Shopping centers in Singapore or other Asia countries differ from their counterparts in Western countries in several aspects Firstly, most shopping centers in Western countries, particularly in the United States, are single or double floor levels and rarely multi-levels In Singapore, a city-state with scarce land resource, a shopping center is perceived as a commercial development in which multi-level building structure is used not only for retailing but also for other complementary amenities such as office and residential units (Sim and

Choo, 1993) Secondly, in Western countries, most shopping centers are located in suburban areas and very car-oriented, charging almost no parking fee However, in Singapore, many shopping centers are located in urban areas and oriented to advanced public transportations such as Mass Rapid Transit (MRT), and therefore have limited car-parking facilities and charge parking fees Thirdly, in Western countries, most shopping centers are fairly standard in design, big in size, and with diversified tenant mix, while Singapore shopping centers have more diversified design and size, but have relatively less diversified tenant mix

Sim (1984) established an acceptable working definition of the shopping center which considers differences in environmental conditions, government policy related to the construction and lay-out of buildings, and local developers’ shopping center concepts This definition features a shopping center in Singapore as “a group of commercial establishments planned, developed and managed as a unit, with off-street parking provided on the property, to facilitate ‘one-stop’ shopping, either in the Central Area

or suburban areas” The current study adopted this definition which is also applicable

to other Asian countries, since major aspects of shopping center developments are similar to those of shopping centers in Singapore

This study also distinguishes standard shopping center from strata-title shopping centers though they have same configuration These two groups of shopping center differ in ownership and operation strategies: the strata-title shopping center stores are owned by numerous individuals or firms while the whole standard shopping center

stores are owned by single or several owners; In contrast to the standard shopping center, the strata-title shopping center management can not control the tenant mix and adjust the space allocation decision Therefore, only standard shopping centers in the shopping cluster will be examined in this study

In this study, a shopping cluster is defined as an important urban shopping area consisting of various shopping centers in close proximity and conveniently linked for the consumer’s one-stop shopping purpose These shopping centers are either located along a main corridor or in a compact shopping district

2.3 Overview of Shopping Center Market in Singapore

2.3.1 Singapore as a shopping paradise

Over the past two to three decades, Singapore has become a popular tourist destination and a renowned shoppers’ paradise internationally.1.1 Similar to Hong Kong, shopping seems to be everyone’s favorite pastime (Krannich and Krannich, 2000) and “life for Singaporeans is not complete without shopping”1.2 Singapore has a total of more than

30 million square feet of retail space for the 3.5 million resident population.1.3 Tourism,

a major contributor to the economic well-being of Singapore, has greatly boosted the

1.1

In 2005, 8.9 million visitors visited Singapore representing a 7.4% increase

compared with 2004 (Singapore Tourism Board, 2005)

shopping potential of the city-sate (Moscove and Fletcher, 2001) Figure 2-1 shows a map of Singapore by planning regions

2.3.2 Shopping Center Developments and Shopping Cluster Formation

Singapore has undergone dramatic and wide-ranging changes in its retail trade (Sim, 1984; Dale, 1999) This is reflected in shopping centers’ development, their locational and commercial patterns, functional role and consumer shopping patterns (Sim, 1984)

During the three decades since 1960s, state planning and intervention has resulted in the concentration of large-scale shopping centers in the Central Area which was promoted by the URA (Urban Redevelopment Authority), and the development of predominantly convenient small-scale shopping centers as well as some large-scale

Figure 2-1 Map of Singapore by Planning Region

shopping centers in the suburbs which was controlled by the HDB (Housing Development Board) Consequently, most retail businesses in Singapore are located in shopping centers Although these policies laid foundations for distribution of retail facilities by determining retail types, locations, and densities in the downtown hub and the surrounding town centers, policy makers could never have anticipated the critical mass achieved by the program of shopping in the 1990s ( Tran, 2001)

Shopping center developments within and outside the central area have been able to complement each other to some extent Some evidence of such complementary relationship is found in the studies of the shopping behavior of public housing residents (Sim and Choo, 1993; Ooi, 1991) Sim and Choo (1993) claimed that unlike the Western situation, planned suburban shopping centers in Singapore did not actually draw away any of the downtown retailers, because “the new towns offer mainly convenience goods, and their merchandise stock and specialty goods tend to be poorer

in quality and limited in variety Hence, the Central Area, with its better quality, wider range and variety of goods, still reigns supreme” (Sim, 1984) The claim was confirmed by Dale (1999) with the further observation that major top quality and big size shopping centers concentrate in the central area Nowadays, Orchard Road sees increasing competition from suburban shopping centers in the middle market and apparel sections However, as an established shopping destination in Singapore, it will

be able to retain its strength in terms of high fashion retailing, authentic brand products, specialized shops, and its synergy of existing business for a continuous shopping experience In addition, many efforts have been put by both public and private

organizations to freshen up Orchard Road and position it as “one of the greatest shopping streets of the world”. 1.4 Competition is controlled to fill the gaps between the existing shopping centers for more synergy rather than cannibalization of existing retail business

Over the past three decades, many different retail centers or shopping clusters have been established, particularly, in the Central Area According to Dale (1999), shopping facilities in the present Central Area can be grouped into eight clusters varying in scale and intensity of retail activities, in addition to the two types of retail establishments scattered in the Central Area such as neighborhood shops and traditional shophouses.1 5 Among the eight clusters, the two most important and dominant shopping clusters are Orchard Road and Marina Center Due to changing distribution pattern of retailing during the decades 1973-93, Orchard Road gradually became a distinct and important shopping cluster This is reflected in the proliferation of about total of thirty modern shopping centers (standard or strata-title shopping centers) and other retail establishments like stand-alone department stores/shops as well as hotels They together cater to local affluent customers and the influx of tourists Just as claimed by Tran (2001), co-existence of competing (close proximity intensifying competition for customers) and cooperative (linkages among shopping centers

1.4

For example, the Remaking Orchard Road plan, was initiated by Singapore

Tourism Board (STB), URA, Land Transport Authority (LTA), and got S$40 million grant from the Singapore government

1.5

The eight clusters include shopping areas such as Orchard Road, Marina Center, South, North, and Lower parts of Singapore River, Chinatown, Golden Mile/Jalan

optimizing traffic access) relationships among shopping centers exist in the Orchard Road shopping cluster

Another shopping cluster, Marina Center shopping cluster in the Downtown Core, refers to the area at the end of Stamford Road The redevelopment of the Downtown Core which started in the 1980s, gave rise to several mixed commercial developments There, Marina Center shopping cluster was finally established with five standard shopping center developments

2.3.3 Shopping Center Operation in Singapore

Although many other aspects such as marketing, advertising, maintenance, and facilities management are all important components in the shopping center operation, the retail lease and tenant mix arrangements are the two major and most important components in the standard shopping center operation

Firstly, rent income is a main source for the basic return on investment for shopping center owners Although the percentage lease has become the most widely used kind of the rent contract for both tenant and owner in Western countries, a few shopping centers adopt the percentage rent lease while most of them take fixed rent lease in Singapore According to market news and some retailers (through interviews), the first centers to implement percentage rents were Scotts Shopping Centre and Marina Square, followed by Parco Bugis Junction.1 6 Some shopping centers which subsequently

1.6

Straits Times, “Seeing red over rent”, October 20, 2004, H24

employed the percentage lease are Ngee Ann City (for selected floor levels), Paragon, and Wisma Atria It is noted that based on a survey of owners and tenants of selected shopping centers in Singapore, Kwame and Yeo (1998) found that the implementation

of percentage rent was hampered by retailers’ unwillingness to submit their sales information to shopping center owners

With more and more shopping centers built in Singapore, the industry has learned from its experiences in shopping center operation and put emphasis on the tenant mix There exist four common strategies Firstly, combining entertainment and eating components becomes a formula for most shopping centers to attract customers Secondly, owners are more concerned with the overall tenant mix and take a long term view which can

be reflected in incubation of new retailers with creative concepts for a more interesting tenant mix Thirdly, in order to control the tenant mix and marketing strategy of the centre in the face of competition, developers and owners of shopping centers prefer full ownership to individually owned strata-title ownership Last but not least, in the intense competitive market, some shopping centers no longer try to provide as wide a variety of stores as possible Instead, they tend to specialize and adopt a specific positioning strategy for market niches, e.g Scotts Shopping Center focusing on fashion, Forum The Shopping Mall focusing on the children and women’s market, and The Hereen Shops on the youth market

2.3.4 Challenges for Shopping Center Market in Singapore

Shopping center development market has become more competitive Thus the newly developed centers are larger, better planned, and usually targeted at specific consumer groups At the same time, the supply of good quality space and healthy occupancy has led to intense competition among shopping centers in the Central Area The challenges are reflected in various aspects Firstly, the retail landscape in Singapore is becoming more varied, as consumers are increasingly well traveled, sophisticated and discerning

In response to these changes, retailers tend to have a higher standard for quality shopping environment This forces shopping center owners to upgrade the centers with fresh concepts and style regularly, and even to extend space in centers.1.7 Secondly, the duplication of anchor stores (like Isetan, Marks & Spencer, and Metro) in different shopping centers in the main shopping areas, such as Orchard Road, makes the differentiation and repackaging of retail centers more difficult Thirdly, securing a good anchor store is one big challenge to all shopping centers as competition has forced several anchor stores to exit the market or reduced their size.1.8 This in turn forces shopping centers to focus more on the tenant mix, increasing weight put on non-anchor tenants

1.7

Most malls have undergone refurbishment works/revamped their tenant mix/took an extension, e.g Plaza Singapura, Liat Towers, Wisma Atria, Paragon, Marina Square, and etc Some malls like Centrepoint, extended their existing center to cater for the increase in demand for shop space

1.8

For example, Metro closed several of its branches: Grand at Lucky Plaza, Scotts Shopping Center, Bukit Timah, etc

2.4 Shopping Center Types and Shopping Center Retailers

2.4.1 Shopping Center Types in Singapore

The International Council of Shopping Centers (ICSC) defined eight principal shopping center types (see Appendix A) These definitions serve as guidelines for understanding the major differences among the basic types of shopping centers in the USA in terms of retail concept, size, anchor stores and primary trade area However, in Singapore, the major differences among shopping centers are related to various factors, such as location at certain urban area, tenant mix, and intangible attributes such as image, etc

Wee and Tong (2005) identify three major types of shopping centers in Asia according

to tenant mix, using shopping centers in Singapore as examples The first type is the mass shopping center which is the “all-under-one-roof” family-oriented center Anchored by department stores, it is a shopping place with large size as well as a wide variety of retail product types Examples are Paragon, Takashimaya Shopping Center and Suntec City Mall, Specialists’ Shopping Center and Centrepoint Shopping Center, though they differ in intangible attributes such as retail image The second type of shopping center is the niche shopping center which is the non-anchored specialty center Its tenant mix comprises thematic and distinct lifestyle-related merchandise targeting at niche market Most niche shopping centers are located in the Central Area and supported by the affluent local consumers and tourists Examples are Scotts Shopping Center, Pacific Plaza, and Delfi Orchard on Orchard Road which also vary

in intangible attributes The third type is the specialist shopping center, which is less often observed It is smaller in size and focuses on one main retail trade with other amenities like food and beverage Examples are high image Park Mall for furniture merchandise and low or middle image Sim Lim Square and Funan Mall for electronics and computer merchandise

However, it is recognized in the market that, besides their tangible attributes like size and location, their intangible attributes like image also varies in shopping centers of each type Therefore, with additional information collection of shopping centers’ intangible attributes, this study will further subdivide two groups of mass and niche shopping centers Given there is only one specialist shopping center in the study area (Park Mall in Orchard Cluster), this study include Park Mall into niche shopping center group

2.4.2 Shopping Center Retailers in Singapore

A shopping center normally consists of anchor stores and non-anchor stores Anchor stores in a shopping center — whether supermarkets, category killers, or department stores — with their brand reputation and many shopping choices can increase the traffic of customers in the center In Singapore, supermarkets like Carrefour, Cold Storage, NTUC FairPrice, and Giant are anchor stores for many shopping centers Category killers stores include Toys “R” Us, Courts, and Best Denki Department stores range from regional high-quality department store like Takashimaya to local

fashion-oriented retailers such as Robinsons or discount-oriented retailers such as John

Little and Seiyu A list of Singapore department stores is presented in Table 2-1

Shopping center non-anchor stores, thereafter in this dissertation, called “shopping

center stores”, can be classified by ownership into three types: chain stores, franchised

stores, and independent stores (Wee and Tong, 2005) Chain stores refer to multiple

retail outlets operated by the centralized ownership and management Chain stores are

similar across space, merchandise, price, and display, such as G2000 and Giordano A

franchised store is operated by the franchisee according to terms specified in a

contractual agreement while the franchisor remains as the brand owner Examples of

franchise retailers include 7-Eleven, Body Shop, and Kentucky Fried Chicken

Independent stores refer to stores owned and managed individually

Table 2-1 A List of Department Stores in Singapore Department Stores Number of Presence

Tangs 1

Table 2-2 Retail Merchandise Categories (RMCs) in Singapore Shopping Centers

1 Apparel oriented

Fashion /Accessories Men and Women’s Wear, Jeans, Uniform

Women’s

Specialty/Children’s Wear

Bridal Wear, Maternity, Children’s Wear

Specialty Wear Sport Wear, Golf Wear, Swimming Wear, Diving Wear, Cold Wear

2 Specialization oriented

Shoes/Bags/Leathers Athletic Footwear, Ladies Shoes, Children Shoes, Men and Boys’

Shoes, Family Shoes, Outdoor Footwear, bags and leathers

Jewelry/Watches Jewelry, Costume Jewelry, Beads, Pearls, Rocks, Gems and Minerals,

Watches, Glasses

3.Special Interests or Leisure

Oriented

Arts/ Antiques Antiques, Art Galleries, Basketry, Crafts

Flowers, Gift Baskets

Leisure/Entertainment Audio and Video, Musical Instruments, Bike Shops, Magazines,

Books and Stationery, Camera and Equipment, Tobacco and Wine Shop, Toys, Music & Movies

Italian Food, Japanese Food, Thai Food, etc.)

5.Family Life Oriented

Appliance/Home Furnishing Appliances, Kitchen and Cooking, Cutlery Shops, Furniture, Home

Improvement, Flowers/Plants, Mattress/Bedding Shops

6 Service Oriented

Personal Services Hair Salon, Nail Salon, Beauty Salon, Day Spa, Optometrist, Photo

Copy/Fast Print, Photo Finishing, Photographer, Shoe Repair, Telephone Service

Retailers in Singapore shopping centers sell a wide range of goods from all over the world In terms of retail merchandise categories (RMCs), retailers in the shopping center can be classified into seven major groups (Table 2-2) The classification methods are based on a combination of two classification methods respectively established by Sim (1984) for the Singapore shopping center market and by Beyard, et al.(1999) for American shopping center market Apparel oriented retailers are divided into three types, namely, fashion & accessories, women’s specialty and children’s wear, and specialty wear Specialization oriented retailers are classified under shoes, and jewelry/watch/sunglasses Special interest or leisure oriented retailers composes of antique/art/crafts, gifts, and leisure/entertainment Food oriented retailers are composed of beverage / eateries / fastfood / cafes and restaurant Family life oriented retailers include home appliance/home furnishing Service oriented retailers include personal services, convenience, and medical/financial/travel Anchor oriented retailers include department stores of different types, supermarkets, category killers and Cinemas

Maintenance of an optimal tenant mix over time is of great interest for shopping center owners, especially in terms of number of retailers with different ownerships as well as proportional allocation of retail space to different retail merchandise categories It is especially critical for the cluster of shopping centers in the Central Area to differentiate themselves from each other in order to attract consumers Normally, consumers shop

in the shopping cluster with strong expectations of a wider choice of selection beyond what a single shopping center can offer They expect to have different shopping

experience in the cluster with different attributes such as the tenant mix and image In view of the importance of the tenant mix for shopping center’s economic performance, this study will identify patterns of agglomeration of stores and clustering of centers at the center and cluster levels

2.5 Summary

This chapter presents the research context for this study With the understanding of differences between shopping centers in Western and Asian countries, the shopping center and shopping cluster concept are respectively identified Major aspects of Singapore’s shopping center market like development of shopping centers, formation

of the shopping clusters, operations of existing shopping centers, and challenges faced

by the Singapore shopping center market, have been highlighted For a better understanding of micro retail market related to shopping center types and shopping center retailers, detailed illustrations are shown The reasons behind different classification methods have been discussed to establish the basis for the research design and empirical analysis

Chapter 3: Literature Review

3.1 Introduction

This chapter primarily provides a discussion of two main streams of the theoretical shopping center literature, namely, retail agglomeration theory and retail externality theory, in understanding agglomeration of stores in the shopping center and the cluster

of shopping centers, with a focus on incentives of stores or centers to concentrate It also presents a survey of empirical literature on determinants of the shopping center store’s economic performance, retail structure and dynamics in the shopping cluster Finally, major studies related to the Singapore shopping center market are discussed

3.2 Theoretical Shopping Center Literature

Academic literature on shopping center has evolved into three broad but related streams, namely, central place theory, retail agglomeration theory, and retail externality theory In this study, the literature review of theoretical works focused on retail agglomeration and retail externality theory Central place theory is not discussed

in this study as it examines retail structure at city level

3.2.1 Retail Agglomeration Theory

The theory of homogeneous retailer agglomeration of Hotelling (1929), with the concept of “Principle of Minimum Differentiation”, states that price stability could be maintained in the agglomerated stores when stores’ homogeneous products or services are slightly differentiated Hotelling’s statement employs highly restrictive

assumptions of perfectly informed customers and inelastic demand Since then, the retail agglomeration phenomenon has been examined extensively in a considerable amount of theoretical works, with efforts to relax Hotelling’s (1929) restrictive assumptions to explore alternative theoretical explanations for similar retail agglomerations.3.1

Stahl (1982) and Wolinsky (1983) separately modeled the store location choice where stores sell heterogeneous products and customers search for a favorite combination of price-product Both models introduced market-size effect due to the taste uncertainty

of customers, but neither examined the price related effect (e.g lower price expectations of customers in the agglomeration due to competition among stores/centers) Customers are attracted to shopping centers only based on their knowledge of product variety while competition between stores or centers has no effect on customers’ search decisions However, without consideration of the price related effect, their models can not tell the complete story of agglomeration of stores/centers, since higher agglomeration of stores/centers will result in customer’s expectation of lower prices and therefore increase customer’s expected utility of shopping the stores/centers

A notable work done by De Palma et al (1985) reformulates Hotelling’s model and introduces heterogeneous-taste customers, even though with the assumption of perfectly informed customers In their model, the only reason for stores to agglomerate

3.1 Brown (1989) gives a thorough review of literature extended from Hotelling

(1929)

is attractiveness of the central location so that they intend to stay there as long as price competition is not so fierce Evidence shows that the principle of minimum differentiation is maintained when customers and retailers are heterogeneous enough Integrating the relative degree of heterogeneity in both customer taste and retail products, they found that the greater the heterogeneity in customer taste, the larger the demand for slightly differentiated retail products That is, the utility of a special product for a particular customer at a more distant location is bigger than a common product in proximity Thus customers would like to shop at the store with special products because they think additional travel cost is worthwhile Empirical research by Stokvis and Cloar (1991) confirmed the idea of reduced search costs in an attempt to apply the innovation of suburban shopping centers to downtown shopping areas In this study, one of the incentives for shopping centers to concentrate in the same location is assumed to be the attractiveness of the place Other incentives like the customer’s search caused by imperfect information and the shopping center’s free-ride on other shopping centers’ product variety will be discussed in the review of retail externality literature

Focusing on customer’s search over price, Dudey (1990) considers a homogeneous product model in which stores are assumed to sell homogeneous products With the imperfect price and shopping center location information, customers choose their preferred shopping centers with the lowest price His model can explain why stores decide to locate together in the shopping center even in face of head-on competition The reason is that given the agglomeration of shopping choices supplied by the center,

the customer’s search patterns can be influenced or even changed by the center’s location decision Unfortunately, due to assumption of homogeneous products, in his model, all shopping centers must have the same number of stores, which is inconsistent with shopping centers of various sizes in the real world

In their analysis of the retail agglomeration phenomenon in the shopping center, Fischer and Harrington (1996) and Konishi (2005) incorporate both market-size effect due to customer’s taste uncertainty and price-cutting effect due to intense competition Differing from Konishi( 2005) ’s interest in the analysis of trade-off between the two effects, Fischer and Harrington (1996) assessed the relative magnitudes of the two effects on the retail agglomeration This was done by an analysis of inter-product variation in the agglomeration patterns and by an investigation of the impact of product variety on the incentives for stores to agglomerate or to stand alone In their model, there exist two assumed locations in the form of “cluster” of stores like a shopping center and “periphery” with stand-alone shops A retailer first decides to join the

“cluster” or the “periphery” and then decides the price while customers optimally search these two locations This retail mechanism is characterized by a free-entry equilibrium Using numerical examples, they find a general tendency: greater store agglomeration is associated with greater product heterogeneity in the retail product type Their finding is consistent with empirical observations that a higher degree of agglomeration in products like antique, jewelry or clothing attracts more customers to come and search within the “cluster”

Konishi (2005)’s study provides further theoretical foundation for this study, exploring beneficial trade-off between market-size effect and price-cutting effect among shopping centers The related trade-off generates different agglomeration patterns of stores which depend on the distance between shopping centers Employing a free-entry equilibrium, Konishi (2005) shows that multiple shopping centers can emerge in stores’ location choice equilibrium He illustrates two numerical examples featured by uniformly distributed customers over space and uniformly distributed customers’ willingness-to-pay at each store in the shopping center In the example of the non-overlapped market, different shopping centers are far from each other thus each store’s profit is determined solely by the number of competing stores within the same center In the example of overlapping markets with two (or more) closely located shopping centers, the centers’ difference between numbers of agglomerated stores have different impact on their stores’ profit Therefore, shopping centers either have the same number of stores or different number of stores, which is determined by the overlapping market size and relative distance between centers If the overlapping market size is small and shopping centers are very close, the incentives for stores to agglomerate is stronger due to competition between centers and therefore only one shopping center may exist If the overlapping market size is large and shopping centers are close to each other, two shopping centers can co-exist, since with similar number

of shores in each shopping center, neither center can dominate the other in terms of the number of stores

The findings of Konishi’s theoretical work can explain the spatial distribution pattern

of shopping centers in cities, where empirical evidence of the first example can be found in the phenomenon of suburban shopping centers with non-overlapping markets; while empirical evidence of the second example can be found in the shopping cluster phenomenon in city centers with overlapping markets This study is interested in the investigation of the second phenomenon characterized by the cluster of shopping centers sharing overlapping market

The retail agglomeration theoretical works comprehensively demonstrate the incentives for stores and centers to agglomerate or cluster in the presence of trade-off between market size effect and price-cutting effect They imply that the shopping centers tend to cluster to share the overlapping market, which helps this study to understand forces behind the formation of the shopping cluster However, these studies did not explore the way to measure the stores and centers’ share of the overlapping market and their influence on the store rent in the cluster context This remains a research gap which this study attempts to cover Since the shoppers buy “the total of the cluster”, this study assumes that the market share of stores in the same retail product type, at the center or cluster level, is determined by this retail product type’s share of the retail space in the center or the whole cluster With the belief that the market share influences the center and thus the store’s economic performance, this study tries to examine its influence on the store rent

3.2.2 Retail Externality Theory

Literature of retail externalities theory is composed of two main strains of inter-store and inter-center retail externalities Numerous studies recognized the existence of inter-store retail externalities within shopping centers while limited studies of inter-center retail externalities have been reported

3.2.2.1 Inter-store retail Externalities

Proponents of inter-store retail externalities believe that a large shopping center can attract both low-order retailers and high-order retailers, not only due to benefits from agglomeration economies and multi-purpose shopping activities but also due to additional traffic generated by high-order retailers for low-order retailers which allow for complementary retail activities A number of theoretical works model this free-ride phenomenon within a shopping center (Ingene and Gosh, 1990; Brueckner, 1993; and Miceli et al., 1998) In the models, all stores benefit from store agglomeration because more customers are attracted to the shopping center, while the disadvantage is that the stores are subject to the direct competition from other stores within the shopping center However, beneficial trade-off between the advantages and disadvantages exists for anchor stores and non-anchor stores through an analysis of customer’s viewpoint and developer’s perspective Firstly, if customers know their tastes and price of the anchor store’s commodity price but learn about non-anchor stores’s commodity only by costly search, co-location may benefit both store types Secondly, in a profit-maximizing developer’s perspective, competition as well as compatibility among multiple stores

can increase traffic for the shopping center Thus through different subsidy strategies

in the shopping center space allocation and the rent setting for anchor stores and non-anchor stores, it is possible to maintain a controlled tenant mix attractive to shoppers

The proposition made by Ingene and Gosh (1990) that a shopping center’s specific attributes affect the center’s economic performance forms the basis for retail externality theory This theory highlights the possibility that the center’s specific characteristics such as image of anchor store, tenant mix and center design can impact its economic performance The theory of inter-store retail externalities has gained support from many researchers (Brueckner, 1993; Benjamin, et al., 1992; Gatzlaff et al., 1994; Eppli and Shilling, 1995; Miceli and Sirmans, 1995; Pashigian and Gould, 1998; and Konishi and Sandford, 2003) Although shopping center lease studies have taken inter-store retail externalities into account, they aimed to explore the contract and agency problems between shopping center tenants and owners, which differ from the research interests of this study Therefore, shopping center lease studies are not reviewed here.3.2

Within the economic or investment framework, the comprehensive theoretical treatment of retail externalities provided by Brueckner (1993) analyzes the problem of space allocation in view of retail externalities in shopping centers Brueckner (1993) focuses particularly on the role of inter-store retail externalities and assumes that a

3.2 These retail lease studies include Miceli and Sirmans (1995), Miceli, et al (1998), Wheaton (2000), Gould et al (2005)

store’s sales are a function of its own space and the space of other stores In his model, based on the estimation of retail externalities produced by each store, a shopping center owner decides an allocation of space to different stores in order to maximize aggregate sales of the center On the other hand, stores with image attractive power to customers (like anchor stores) pay less rent while stores with less image power to customers pay more, since they benefit from the crowd attracted by the store with better image Brueckner (1993) bridged the gap between the retail activity and the investment return by demonstrating that, given retail externalities generated by anchor and non-anchor stores, shopping center owners will attempt to maximize sales per square foot and hence economic returns at the center level

Studies following Brueckner (1993) have focused more on knowledge about how to quantify the strength and the importance of retail externalities in shopping centers Many studies confirm or imply that the presence of department stores benefit other stores in enclosed shopping centers by creating a customer spillover effect Benjamin,

et al (1992) offered a first step in this direction by empirically testing that landlords used tenant characteristics to set rent rates in a discriminatory manner Their findings showed that stores with high sales per square foot, representative of strong externality generator, paid lower shopping center rents This, however, leads to a negative relationship between the rent and sales as successful tenants are rewarded An interesting paper by Eppli and Shilling (1995) found that customers’ increasing desire

to do multi-purpose shopping in order to reduce time and transportation cost, leads to co-existence of anchor stores and non-anchor stores They also investigate how an

increase or decrease in “cross-patronage” effects (externality effects) between anchor stores and non-anchor stores can affect large size shopping center development opportunities Their findings are evidenced by increased development opportunities for large size shopping centers in U.S as well as other countries3.3

Focusing on internalization of retail externalities in the shopping center, Pashigian and Gould (1998) studied how the space in a shopping center was priced by shopping center developers and how much lower an anchor store’s rent was attributable to the external effect created by anchor store Furthermore, Pashigian and Gould (1998) also examined whether anchor stores in larger shopping centers conferred greater retail externalities than do their counterparts in smaller shopping centers Pashigian and Gould (1998) covered the research gap in the existing literature of shopping center retail externalities by using store rent data to estimate the scale of retail externalities, and thus, using rent subsidy to proxy for retail externalities

Differing from their predecessors, Konishi and Sandfort (2003) explained the anchor store phenomenon by reinterpreting the brand name theory Konishi and Sandfort’s (2003) explanation for the significance of the brand name of the department stores is that customers are more familiar with the characteristics and prices of commodities in the department stores than other retail stores in the shopping centers The different characteristics between the two types of stores may generate positive retail

3-3 Eppli and Shilling (1995) characterize large size shopping center as a combination

of one or more full-line anchor department store and other specialty stores, service, recreational facilities

externalities for each other If a customer visits a department store to search for her desired goods, with high probability, she will find it in this store, and if she visits other stores stocking the types of goods similar to her desired types, she also has a chance to buy or not to buy To specify how a shopping center landlord decides the composition

of the shopping center, Konishi and Sandfort (2003) borrowed the idea of the traditional local public good theory and club theory of ά la Tiebout (1956) and Buchanan (1965) The assumption is that to maximize his profit, the landlord chooses characteristics of a club composed of shopping center tenants Each type of store has

an outside option if many optional shopping centers exist Consequently the rent structure is determined in the market by negotiation between stores and developers, each aiming to maximize their profits

3.2.2.2 Inter-Center Retail Externalities

In contrast to broadly recognized importance of inter-store retail externalities within shopping center, inter-center retail externalities between/among competing shopping centers have only been recently addressed Inter-center retail externalities are presented

as that major attributes (i.e image, tenant mix or size) of competing shopping centers influence the subject shopping center’s economic performance Given that all centers strive to attract customers and expand their market size, the influence depends on the difference among major attributes of shopping centers and the scale of trading area these shopping centers aim to cover

Sirmans and Guidry (1993) examined determinants of the inter-center rent variation across a large metropolitan market using the shopping center size and anchor stores as proxies for the customer drawing power They found that these factors increased shopping center attractiveness and center rents Subsequently, Eppli and Shilling (1996) used a retail gravity model to examine the effect of distance to competing centers and competing shopping centers’ size on sales performance of subject centers These studies analyzed interaction among shopping centers scattered in the large urban area and did not focus on exploration of inter-center retail externalities However, they illustrated that the attributes of one center affect the retail sales and rent performance

of the others Therefore, shopping center developers/owners must consider retail externalities among competing centers before making decisions to enter a market or refurbish existing shopping centers

Mejia and Eppli (2003) expanded the retail externalities literature by empirically examining inter-center retail externalities They adopted a non-linear retail share model

to measure the impact on the subject center’s in-line retail sales from the anchor store size and image of both the subject and competing centers The findings drawn were that size and image of anchor stores in both the subject center and competing centers had a significant and non-linear impact on the subject center’s sales performance However, Mejia and Eppli (2003)’s study highlighted the influence of the anchor’s size and image, not that of agglomeration of non-anchor retailers, on the center’s performance According to Konishi and Sandfort’s (2003) observations, agglomeration

of non-anchor retailers make it possible for anchors to benefit from low rent as non-anchor stores pay relatively higher rents

Arakawa (2006) provided the most related theoretical foundation for understanding inter-center retail externalities in the cluster context In his model, customers have preferences for a center’s location and tenant mix At the same time, the center landlords compete against each other by location decisions of being clustered or separated and subsequent tenant mix decisions of the wide product variety or suitable product variety Without considering the price competition among shopping centers, Arakawa (2006) built a model of developers competing in product variety Complementing the theoretical work by Fischer and Harrington (1996), Arakawa (2006) investigated the interaction between customer’s preference of product variety and stores’ agglomeration tendency He found that if the customers have high preferences for the product variety, shopping centers tend to cluster to free-ride on the rivals’ product varieties, since customers search products within the cluster of shopping centers and buy “the total of the centers’ variety of the products”

The retail externality theoretical literature suggests that the benefit of free-ride on the rival’s product variety and the positive shopping spillover effect of the anchor store (department stores or chain stores) are the main motives for retailers or shopping centers to agglomerate in the center or the cluster The estimated scale of the free-ride effect and the spillover effect were assumed to influence the center’s decision to be separated from or clustered with other centers In the single shopping center, the

measurement of these effects can be reflected in the higher rent charged by the center owner to those benefiting from these effects than those producing them However, few studies have explored the way to estimate these effects among the centers in the shopping cluster

In the shopping cluster, no subsidies are granted by other centers to those stores in one shopping center which produces free-ride opportunities or positive shopping spillover effect to the stores outside the center Therefore, it is difficult to measure these effects

in the shopping cluster Alternatively this study postulates that shopping centers can maximize the benefits from the free-ride and positive spillover effects in the cluster through their space allocation decisions The maximization of the benefits can be enhanced by the center’s space allocation decisions which are interactive with the competitors’, either in multi-purpose and comparison product types Furthermore, the center’s space allocation to chain stores at the center and the cluster levels may influence the center’s appeal to attract shoppers These factors will be considered in the empirical analysis

3.3 Empirical Determinants of Shopping Center Stores’ Economic Performance

Most existing empirical shopping center rent determinant models are consistent with existing shopping center theories and can be evaluated along with the applicability of these theories These empirical works focus on influences of major attributes of the store and center on the rent performance In these studies, shopping center store’s rent