The familiar aphorism “Location, Location, Location”, first attributed to a classified ad in Chicago in 1926, has been widely used as a mantra for retail executives and real estate investors for the past century or more. While we can all debate the virtues of mall types, co-tenancies, adjacency, corner or center court locations, strip centers vs. big box nodes and sunny vs. shaded sides of the high streets, this is not the point of this entry. Nor is it about the precious space a brand occupies in the consumer’s mind. Nor is it about brands occupying the ‘real estate’ in cyber space.

This is about department stores and the value of their owned and leased locations.

Rumor has it that Hudson’s Bay Company (HBC) has made overtures to Macy’s with regards to a merger or acquisition of some fashion. Richard Baker, a commercial real estate lifer, through his family’s company NRDC (National Realty and Development Corporation), has successfully leveraged not only Hudson’s Bay’s real estate, but also the real estate of Lord and Taylor, Saks Fifth Avenue and Galeria Kaufhof in Germany in purchasing, operating and expanding these retail businesses.

Macy’s fits the model of a real estate-rich, business-not-so-rich model that can be leveraged to fix, rationalize and potentially unleash the underlying value of its assets. Richard Baker’s model worked to perfection when he suckered Target Corporation to buy the Zellers leases for $1.8 billion, essentially paying him back almost what he paid for the entire company (including Hudson’s Bay and Zellers department stores, Home Outfitters home furnishings stores and other brands since closed or sold). That is the power of the right locations. This also turned out to be a monumental mistake for Target Corporation – but the fault lies on so many levels and in so many wrong and ill-informed decisions and strategies. (see my blog post from November, 2013 where the demise of Target in Canada was foreshadowed: )

For an encore, Mr.Baker purchased Saks Fifth Avenue for $2.9B in 2013 only to have the flagship store location on Fifth Avenue in New York alone appraised for $3.7B. This real estate savvy has led to NRDC and its myriad of retail entities entering into real estate joint ventures with some of the largest landlords in the country including Simon Property Group. I do not doubt that Mr. Baker and his team are crunching the numbers and probably willing to pay Macy’s more than anyone else would since they more acutely understand the intrinsic and real value of the land underneath so many of their stores. It is a larger replica of what they bought in Canada. Who knows, maybe that was the master plan all along – HBC as a dress rehearsal followed by approaching the largest fish in the sea.

Sears, however, is a cautionary tale regarding driving decisions on value and arbitrage through real estate in and of itself. As Mr. Baker has proven, he has been able to leverage the real estate to sustain acceptable operating results and enhance the customer experience in their stores. Sears and Mr. Lampert, on the other hand, have not as yet. Granted, Sears and Kmart were at a disadvantage as their brands had already lost their brand identities to some degree and had been devalued in the customer’s minds while HBC is a virtual monopoly in Canada as a general merchandise department store, but the perils of being too real estate focused are on display in the Sears/Kmart strategy.

Department stores’ leased real estate must also now be leveraged in a different way. The Japanese department store model has always been that of acting as a landlord, leasing out space to the most productive retailers and brands in the world. My friend Ron Johnson was ahead of his time at J.C. Penney (JCP). I believe his strategy of developing town centers within his departments stores and pulling in world class brands to operate floor space under the JCP roof would have worked and will eventually bear out in some way at some point in time. His issue might have been one of too much too fast for both the JCP customer, the organization and its culture.

I believe a viable way forward for department stores is to leverage their vast floor plates in malls and on high streets (at very advantageous occupancy rates),  and find the very best, most productive retailers both online and offline and offer them programs of expansion for a fraction of the cost and a fraction of the time frame that they would otherwise have to expand on their own.

Whoever coined the phrase “Location, Location, Location” as being the three keys to retail success certainly wasn’t thinking of valuation and leverage. But this industry’s evolution has turned our focus away from traffic patterns and sunshine. Pity.