By Garrick Brown, Vice President, Research – West Region
Welcome to this week’s Newsline. I just got back Board Game Dicefrom the ICSC Research Conference in Seattle, which for those of you who think is just a gathering of the egg-heads… well, you’re kind of right… but actually it is a great event every year—particularly for those of you trying to keep up on the latest tools of the trade and the hottest new trends in site selection. That being said, in addition to finding out some of the latest advances in Big Data and space analytics, I also learned the coveted secret of where visiting football teams stay when they are in town to play the Seattle Seahawks. I found this out thanks to some Seattle fan who also figured this out and set off the fire alarms at my hotel at 5:45 AM Sunday morning in order to disturb the sleep of both yours truly and the Carolina Panthers. Didn’t exactly work out all that well as Carolina came from behind to beat the Seahawks later that day.
I will be discussing some of those new analytic tools in the weeks to come in the Newsline…but today let’s focus on something more pressing. Luck…First, I we must ask, does the concept even exist? I am a statistics guy so the simple answer you should expect from me is “Absolutely Not!” That’s the realm of superstition and nonsense. It’s all a numbers game, right? Well, yes and no.
I do think there are variances in the numbers that happen in the short-term. Those variances work themselves out always in the long-term. But in the short-term those could translate into someone flipping a coin 100 times and having it come up tails 80 times out of those 100. If you were betting tails, you got lucky. If you were betting heads, you got unlucky. But if you kept betting just one side… eventually it would even out to a 50/50 proposition. That’s not deep. That’s math.
Now, one tale I have found fascinating for years is the story of the Phantom High Roller of Glitter Gulch. William Leo Bergstrom was a real estate investor and developer from Austin, Texas. On September 24, 1980, he walked into the Horseshoe Casino in downtown Las Vegas with two suitcases. One was empty. The other had $777,777.77 dollars in it. He put the briefcase full of money on the Don’t Pass line and called out, “money plays.” After a few moments, the table crew approved the bet—one of the largest single bets at that point ever made in Las Vegas history. The shooter rolled a point (different accounts I have read say it was a six and other say it was a nine). But within three rolls the shooter threw a seven. Bergstrom had bet against the dice and won. They filled his empty suitcase up with $777,777.77 and he disappeared into the night.
Three and a half years later he returned with more or less the same modus operandi. This time, however, he won $538,000 on a single roll of the dice and another $117,000 on three smaller bets. Again, he disappeared with two suitcases full of money into the night.
The Phantom High Roller’s luck ran out on November 16, 1984. If you’re interested, check out the whole story in this article.
What’s this have to do with commercial real estate you ask? This week it was announced that the last of the Fresh and Easy stores would be closing. For those of you who may have forgotten, Fresh & Easy was the ill-fated launch of Tesco into the American market.
What’s luck got to do with it? Well, I would say quite a bit. The luck of market timing is perhaps the biggest challenge to any developer and it certainly is a huge one for retail site selection people as well. Tesco sought to roll this concept out in the American west beginning in 2006/2007 when the residential real estate market was booming in places like Phoenix, Las Vegas, Sacramento and California’s Central Valley. They were following the conventional retail real estate wisdom of follow the rooftops and so they went into the strongest residential development markets they could find. Their bad luck was not realizing that the subprime loans, stated income loans and a whole boatload of toxic lending products were building a giant housing bubble in those markets. Sure, there were some forward-thinking economists who started to sound the alarms as early as 2006… but no one really listened to them for the first year or so. Everyone was making too much money to be too concerned.
And then the market collapsed… and what appeared to be the strongest markets suddenly became the weakest. Fresh & Easy was buried by that… and that was bad luck. But do you know what wasn’t just bad luck? It was that the Fresh & Easy model was based on a limited assortment of goods and a strong selection of premade foods. Their ideal consumer was the urban professional couple. Yet, their initial site selection was all about following suburban growth and, to a certain degree, chasing after the wrong demographic. While they should have been scouting urban locations (their concept pre-dated Millennial preferences by more than a few years), they instead locked into an old paradigm and went to the suburbs where bulk buyers and larger families rule the roost. That, folks, wasn’t luck. That was a mistaken site selection strategy and it’s not something unheard of when a retailer is looking to break into foreign markets.
We certainly have seen a fair amount of that with U.S. concepts heading overseas. Canada remains a challenge for many retailers; it may have an overall market size less than the state of California… but if you think the Canadian consumer is just a more polite version of the American one (but who wears more layers), you could be in trouble. The Canadian consumer, in most markets, more closely mirrors the European consumer and there is a world of diversity between what a retailer should expect in Ottawa, versus Vancouver, versus Montreal.
Bringing this back to Fresh & Easy; the chain finally got their site selection right at the end and picked up some great locations and was on its way to making profits (I think they were just 18 to 24 months away). The challenge is that their shareholders were fed up and weren’t willing to sink more money into the “American experiment” while sales were starting to fall back home in the European Union.
Was Tesco the victim of bad luck? Sure. Sadly, they were making their own luck better at the end… but it was too late. What’s it mean for the market? Well, other than giving me a chance to share with you a couple of pretty cool stories about luck… probably not a lot. However, what I can tell you about the 97 remaining sites in Arizona, California and Nevada that current owner Ron Burkle and the Yucaipa Companies are about to close down (he acquired a majority interest in the chain in 2013 though Tesco still holds a minority interest)? Well, the most problematic original sites are mostly long-gone. What remains and what will be going vacant are mostly sites from the era of when Tesco was getting it right. And so what does this have to do with luck? Probably a lot… it means a lot of prime real estate will be available at a time when the market is going to be rich with smaller format grocers looking for exactly this type of space. Which brings me back to my own statistician’s definition of luck; the issue of short-term variances in the odds. These are what, in the short term, make many lucky and make others unlucky. Right now, those looking for coveted small grocery sites in the West may have just hit a minor jackpot.
I know I have been teasing you all about it for a couple of weeks. I promise you that next week I will be releasing my 2015 Holiday Sales Season Preview. Many of you who have been tracking this year’s set of forecasts have probably noticed that most analysts have been pretty downbeat about their expectations for 2015. I’m a lot more optimistic and there are a lot of reasons that support my argument. I’ll be sharing those with you next week as well as a whole bunch of other interesting and amusing bits of data regarding the Holiday Shopping Season that you might not have known.
This post is commentary from the latest weekly edition of our Cushman & Wakefield Retail Newsline, which you can subscribe to for free by e-mailing email@example.com.
Garrick joined Cushman & Wakefield (formerly DTZ / Cassidy Turley) in October 2010. He serves as Vice President of Retail Research for the Americas. He speaks frequently at industry events and has been a keynote speaker at symposiums, conferences and market forecasting events for groups like the Appraisal Institute, Urban Land Institute, CREW, ICSC and PRSM. He is also a member of Lambda Alpha International, an invitation-only land use society for those who are involved in the ownership, management, regulation and conservation of land, but also those who are involved in its development, redevelopment and preservation.