Book Chain Taps Underserved Neighborhoods

By Robert Shareoff
New York Times
July 8, 2004

Borders Books and Music is tapping into one of the retail industry’s few remaining new frontiers -- underserved urban neighborhoods -- with stores in Detroit and Chicago.

In November, the company, a subsidiary of the Borders Group, opened an 8,000-square-foot store in the heart of downtown Detroit at the Compuware Corporation’s new world headquarters building, the first new office building to be constructed there since the 1970’s.

The company is also the main retail anchor for an ambitious new mixed-use retail and residential complex on the North Side of Chicago.

“There’s no doubt that there’s certain rough spots in these trade areas,” said Alex Lelli, vice president for development of Borders, which is based in Ann Arbor, Mich. “But there’s a lot of change coming.”

Of the two projects, the Detroit store is probably the bigger gamble, if only because of the general absence of retail activity of any kind in the downtown area.

“Retail is lacking in downtown Detroit,” said Charles Maday, the chief executive of Exclusive Realty, a Detroit commercial brokerage firm. “All the retailers left. It’s the only major city that doesn’t have even a hardware store.”

A walk around the downtown area confirms that. It is impossible to buy even a T-shirt in downtown Detroit, let alone necessities like groceries or furniture.

Compuware’s new headquarters, a 1.1-million-square-foot office building with about 60,000 square feet of retail space, is the first significant retail development -- aside from restaurants and entertainment spots-- since the construction of the riverfront Renaissance Center in the 1970’s.

The location, at the corner of Woodward Avenue and Monroe Street, has powerful associations for many older residents. For most of the last century, the area was the city’s retail hub, home of the J.L. Hudson Company and other department stores now vanished. Hudson’s, which occupied a square block just north of the Compuware Building, closed in the 1980’s and its building was demolished in the mid-1990’s.

“Retail from Day 1 was a component of our strategy,” said Denise Knobblock, executive vice president for administration at Compuware. “Hudson’s is still sorely missed in the city. We wanted to bring back some of the things it used to provide.”

Ms. Knobblock said that Compuware pursued Borders “quite heavily” by appealing to its civic responsibility as a Michigan-based company and by pointing out that the downtown area, while deserted at night, continues to have a viable population of daytime office workers. In addition to the 4,000 people who work in Compuware’s new building, the headquarters for General Motors is several blocks away in the Renaissance Center.

“We feel the population is just unserved,” Mr. Lelli said. “They have no alternatives on their lunch hour in terms of retail. Our feeling is that if we’re careful about our operational discipline in terms of hours of operation, we will be successful.”

The store opened in early November and according to Mr. Lelli is performing to expectations. While declining to say what kind of sales he expects the store to generate, he did say that Borders’ “general rule of thumb” for stores in underserved markets is to “break even in Year 1 and look forward to Year 2.”

Three other retail operations -- a Hard Rock Cafe, a coffee shop and a credit union office -- have opened in the building, and leases have been signed for six others, including a Kinko’s, two restaurants and a clothing store.

The Chicago project, called Uptown Square, is also an attempt to bring retail life to a blighted commercial district. Situated in Uptown, a North Side neighborhood that has resisted gentrification for many years, it consists of three buildings, two of them existing and one new, totaling about 80,000 square feet at the intersection of Broadway Street and Lawrence Avenue.

Both of the older buildings -- one, in neo-Classical style, originally housed a bank; the other is a terra cotta department store -- date from the early decades of the last century. Both have been vacant for many years.

The project has about 40,000 square feet of retail space, with Borders taking 25,000 square feet for its store, which will open in April. The project also has 33 condominiums, 8 of them earmarked for residents who earn 60 to 80 percent of the area’s median income.

The developer of the project is Joseph Freed & Associates of Palatine, Ill., a company that until recently was known mainly for constructing mixed-use downtown revitalization projects in the Chicago suburbs.

“It’s an interesting project,” said Dennis Harder, vice president for development services at Freed. Mr. Harder said the company “got past the idea that this would be a big risk or gamble” by studying what he called “the positives” associated with the neighborhood.

The Uptown neighborhood has traditionally been an entertainment district and is still home to several concert halls and nightclubs. The area also has a considerable amount of new and renovated residential housing and is easily accessible by public transportation.

“We looked at it in terms of its proximity to residential areas and the fact that there isn’t any competition in this location,” Mr. Lelli said.
The city also cooperated by awarding the $23.5 million project a $7 million tax break.

“This is a catalyst project that involves retail, market rate and affordable housing, and historic preservation,” said Alicia Berg, the city’s commissioner of planning and development. “It’s a microcosm of how we’re trying to create balance in our neighborhood redevelopment efforts.”

Both projects are part of a larger trend playing out in many urban neighborhoods around the country. According to Mark Blaxill, senior vice president of the Boston Consulting Group, a Boston-based business consulting firm that helped write an influential study on urban retailing in the late 1990’s, the core areas of cities represent an $85 billion market. He also said that in some areas unmet demand was as high as 60 percent.

“The popular press often promotes the notion that inner cities are drug-ridden gang-dominated horrible places,” he said. “But the vast majority of these neighborhoods are populated by working-class people who have jobs and incomes and some degree of education.”

Increasingly, retailers are taking notice. “Virtually all retailers that are seeking expansion today are considering underserved urban markets,” said Richard Totaro, president of the corporate services division of the real estate brokerage and services company CB Richard Ellis.

The reasons, he said, include “the high densities you find in many inner-city markets and the fact that there’s typically an extremely diversified income base in these neighborhoods.”

There are also numerous competitive advantages for guessing right and being the first retailer to enter a gentrifying neighborhood.

“The first guy in gets all the goodies -- the best location, the incomparable economic deal,” said Bruce Kaplan, president of Northern Realty Group, a Chicago-based real estate services firm.

Mr. Kaplan said that bookstores are viewed as especially desirable tenants for neighborhood revitalization projects. “They have a lot of influence with developers because their drawing power far exceeds the actual size of their space,” he said. “They play the same role that diners or gas stations do in small towns -- they are places where people meet their friends, socialize and hang out.”

Another plus is the general lack of competition in many urban neighborhoods. In both Detroit and Chicago, Borders will be the only large national store for many blocks.

“Being the first store into a trade area gives you and your brand the first shot at underserved customers,” Mr. Lelli, the Borders executive, said. “Hopefully, that impression is long lasting.”

The downside, of course, is that a retailer can arrive too early or in a neighborhood that ultimately does not revive as anticipated.

Also, building in the city is typically a far more complicated process than suburban development.

“There’s a different set of operational challenges,” said Mr. Blaxill of Boston Consulting. These include, he said, everything from the added time to line up approvals for zoning changes and construction permits to dealing with the competing agendas of various neighborhood groups.

The benefits, however, remain compelling. “Anytime and anywhere you open a store, there’s risks associated with it,” Mr. Lelli said. “But I think there’s sufficient background and support for each of these locations.”