July 24, 2000

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Redefining Business:
The Landlords Of Cyberspace

Property owners are determined not to be left behind as their retail tenants move to the Web

By Christopher Heun

bout a month ago, Mike Schuelke didn't even have a Web site for his company, which sells NASCAR auto-racing souvenirs and clothing from three shops around Grand Rapids, Mich. Now, Checker Flag Lightning is selling goods online, but it hasn't caused any added headaches for Schuelke. He doesn't worry about keeping the site running, adjusting to changing traffic loads, or even shipping orders. Instead, his landlord takes care of it all.

Schuelke is benefiting from a determined effort by large retail property owners--about the most brick-and-mortar business there is--not to lose out when their shopping-mall tenants shift sales to cyberspace. Leading the charge are the United States' two largest retail property owners, Simon Property Group Inc. and General Growth Properties, which are moving fast this summer to wire hundreds of malls with broadband Web access and to provide the Internet infrastructure that lets retailers sell online from their stores. Simon's and General Growth's goals are similar: to link the convenience of Internet shopping with actual malls.

Schuelke just happened to be the first in line when General Growth decided to test the technology at the Grand Rapids mall where he has a store. "We get to tap into a system that's bigger than us," says Schuelke, Checker Flag's co-founder.

What makes property owners think store owners want to bring their landlords with them online? Why would they turn to a property developer instead of companies specializing in E-business?

First, retailers need help to sell online. Contrary to popular belief, not every retailer in the country has added .com to its name. General Growth, which is based in Chicago, surveyed its retail tenants earlier this year and found that only one in 10 was selling online. So the company began two major initiatives to wire its 136 U.S. malls with broadband Web access and create an Internet infrastructure for individual shops to sell online from their in-store inventory. Simon, North America's largest retail property owner, has similar plans.

Second, property owners are sharing the risk. Brick-and-mortar retail rents are based on a percentage of sales, and the online operation will work the same way. If online goods don't sell, the property developers eat the costs of laying broadband wires and developing Web sites. "If the stores succeed, we succeed. If the stores fail, we fail. It's that simple," says Robert Covington, VP of technology for Clixnmortar, an Indianapolis E-business venture-creation subsidiary that's majority owned by Simon. Covington contrasts that approach with fee-based E-service specialists and telecom companies that will also compete to provide Web services to their tenants.

While retailers seem to welcome the involvement of property companies, there are two looming questions: How well can the technology unite brick-and-mortar and online shopping, and how much will people want to shop online from inside a mall?

THE TECHNOLOGY
Much of the effort by Simon, General Growth, and others is focused on getting the technology right. Simon and General Growth are concentrating on providing stores with broadband Internet access. Simon is working through Merchant Wired--a consortium of seven property owners, including the Macerich Co. and the Rouse Co.--to wire 400 malls nationwide by the end of the year. With Cisco Systems, IBM, and Intermedia Communications as its partners, the group provides stores with the infrastructure for Internet access, secure managed network services, and connections to business partners. General Growth is also working with Cisco to wire its 136 malls with broadband cable using IP.

The other piece is getting retailers online. General Growth is doing this through Mallibu.com, a national site that lets online shoppers find a nearby General Growth-owned mall, browse the Web sites of stores such as Checker Flag, and order and pay online from multiple stores in a single checkout. Customers can ship the goods via United Parcel Service or pick them up at a drive-through center at the mall. General Growth is building the site with the E-business services firm Organic Inc. and the infrastructure company Pandesic LLC, a joint venture between Intel and SAP.

Simon Property is implementing similar plans with its ShopSimon.com site. It's working to link store inventories to search engines and create Web sites for smaller, specialty shops. Simon has partnered with Found Inc., a San Francisco E-business infrastructure provider that will supply the online product-search technology that lets store managers use the Internet as the platform to sell and manage inventory at their stores and distribution centers. "We drive the transaction to the store-based register level," says Richard F. Lawson, president and CEO of the company, which will test its product in 10 mall stores in three markets this holiday season.

Neither company, however, can offer an accurate picture of what's on the stores' shelves. Retail companies run their back-office inventory on a range of platforms from SAP to Microsoft to proprietary systems, making it too complicated to link directly to the ShopSimon.com or Mallibu.com sites. Yet the ability to list a store's actual inventory online is key to the strategy of Simon and General Growth, because they are paid based on individual store sales. "That's the greatest challenge to us all," says Charlie Graves, VP of E-business at General Growth.

Simon's experiment with Christmas wish lists last year illustrates that practical obstacles lie ahead for linking shopping malls and online shopping.

continued...page 2

Photo of Schuelke by Dwight Cendrowski

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