(See Corrections & Amplifications item below.)

Weak consumer spending is pushing struggling retailers close to or over the edge, and that is starting to hurt shopping-mall owners.

(See Corrections & Amplifications item below.)

Weak consumer spending is pushing struggling retailers close to or over the edge, and that is starting to hurt shopping-mall owners.

The latest retail casualty is Linens 'n Things Inc., a 500-store home-accessory chain, which is considering filing for bankruptcy-court protection as soon as this week. The chain, which went private in a leveraged buyout two years ago, is running short of cash, and its vendors have stopped shipping products, said two people familiar with the company.

For shopping-mall owners, it is a rude awakening from the boom times of the past few years, when consumers borrowed to furnish new homes. While vacancies should remain low, the slowdown means weaker rent growth for all mall owners and serious pain for the most heavily indebted landlords.

Stock investors are dismissing the weakness, driving up shares of retail-property owners 7.7% this year, though the sector fell 19.6% last year.

The list of weak retailers is growing by the day, including furniture seller Domain Inc., high-end jeweler Fortunoff Inc. and electronics merchant Sharper Image Corp., all of which have sought bankruptcy protection since January.

Mall mainstay Foot Locker Inc. closed 274 stores last year and anticipates 140 more closures this year. Jeweler Zale Corp. is closing 100 stores in the wake of disastrous holiday sales. Wilsons the Leather Experts Inc. is closing 158 of its 260 mall stores this year, and teen retailer Pacific Sunwear of California Inc. is closing its 153-store Demo chain.

Making matters worse, new construction will raise the total amount of retail space by 3.5% this year in the top 54 U.S. markets. But retail-sales demand, which has slowed with the economy, will justify only a third of that new space when it is completed, according to market-research firm Property & Portfolio Research Inc.

Problems with lenders are especially painful for retail landlords who bet that rising rents and falling vacancies would help them handle heavy debt loads.

Centro Properties Group, a debt-laden Australian real-estate investment trust that owns 682 shopping centers in the U.S., faces an April 30 deadline to present a plan for repaying $3.4 billion in short-term debt that it failed to pay on time earlier this year. The company recently attracted preliminary buyout bids averaging $1 per share, according to people familiar with the matter, far less than the 10 Australian dollars (US$9.27) per share it traded for last year.

U.S. mall REIT General Growth Properties Inc., while far more sound than Centro, nonetheless is seeking to refinance $6 billion in debt due this year and next. Company executives insist the REIT has many options, including equity sales and putting properties into joint ventures, to handle its debt obligations. It has funding in place for some of that $6 billion. But the deteriorating retail market isn't going to help.

In fact, conditions are likely to get worse. The International Council of Shopping Centers, a trade group, predicts nearly 5,800 store closures this year, outpacing last year's 4,600 and approaching the recent high of 6,300 in 2004. Several anchor tenants -- Wal-Mart Stores Inc., J.C. Penney Co. and Office Depot Inc. among them -- have slashed expansion plans and have delayed store openings.

While Linens 'n Things is expected to survive bankruptcy, any expansion plans likely have been shelved. The company is considering a so-called prepackaged bankruptcy, in which the company's creditors agree to a bankruptcy plan even before the filing in hopes of limiting the amount of time the company is in bankruptcy and helping improve the company's prospects upon emergence.

Deutsche Bank Securities analyst Lou Taylor forecasts that the average vacancy rate of public retail REITs will swell by two percentage points this year. Even with that setback, many REITs still will boast vacancy rates of less than 10% because of the gains they made during the recent boom. But such a decline would sap the REITs' growth in net operating income -- which averaged a 3.5% gain last year -- to something in the range of 0% to 1%, Mr. Taylor said.

The market shift has given tenants more bargaining power. In some cases, landlords are granting less-expensive rent or forgoing increases, covering more of tenants' costs in customizing their space or allowing struggling stores to move to smaller, cheaper space, among other options.

"The pendulum has swung from the landlord to the tenant," said Eric Termansen, president of retail brokerage Western Retail Advisors in Phoenix.

For example, shoe retailer Foot Locker, a top-10 tenant for most mall REITs, closed 26 fewer stores than it anticipated last year after reaching "some favorable deals with our landlords to keep some stores open," Chief Executive Matt Serra said in a call March 11.

John Johannson, senior vice president at property firm Welsh Cos. LLC, is allowing a national office-supply retailer to move from its 35,000-square-foot slot in a Welsh-owned shopping center in Minneapolis into an adjacent 25,000-square-foot space vacated by electronics retailer CompUSA Inc. Welsh didn't increase the retailer's rent and forgave the final two years of its initial lease in exchange for a 10-year extension. "We've satisfied a long-term tenant," Mr. Johannson said.

On the positive side, some retailers have plans to launch store concepts. Among the phenoms: Gilly Hicks by teen retailer Abercrombie & Fitch Co., Aerie by teen retailer American Eagle Outfitters Inc. and international upstarts such as Canadian sportswear retailer Lululemon Athletica.

“Helping America eat healthier, live longer and spend less.”

With a mission statement like that, it’s no wonder that Sprouts Farmers Market is striking a chord with consumers across the sou...
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“Helping America eat healthier, live longer and spend less.”

With a mission statement like that, it’s no wonder that Sprouts Farmers Market is striking a chord with consumers across the southwestern United States, especially given the current economic climate and Americans’ never-ending quest for health and a long life.

And people are taking notice. Sprouts was recently voted the best grocery market in Arizona by the Arizona Republic.

Expanding Upon History

Its success is no surprise,given Sprouts’ pedigree. Sprouts has been sprung from 66 years of family experience in the grocery store industry. That experience started back in 1943, when Henry Boney started Boney’s Marketplace in San Diego. Boney then started a convenience store business that grew to 163 stores before he sold it in 1963. Ten years later, Boney’s children founded Windmill Farms, which specialized in produce, health foods and vitamins. It eventually became Henry’s Marketplace before being sold to Wild Oats in 1999.

Sprouts founder and CEO Shon Boney is Henry’s grandson, making Sprouts the third grocery venture from the Boney family. Sprouts abides by five core values: value to the customer, uniqueness, integrity, loyalty and fun. It prides itself on getting input from all of its some 2,000 employees in order to promote creativity and innovation.

President and COO Doug Sanders oversees day-to-day operations of the privately held, Phoenix-based company’s 31 stores. After getting its start in Arizona in 2001, Sprouts has expanded into Southern California, Colorado and Texas. Seven stores were opened in 2008, including two in California, bringing the total number of stores in California to seven.

And they’re not done yet. Sprouts is looking to reach 100 stores in the next five years.“We see aggressive expansion in 2009 and 2010 due to increased opportunity from retailer shake out,” says Ryan Sullivan, broker for Sprouts.“The value-oriented health food segment is very strong.” An additional 12 store openings are planned for 2009, including one in Brea and one in Riverside. California regions of interest include Ventura, Los Angeles, Orange County,the Inland Empire,San Diego and the Central Coast.

How It’s Different

Sprouts prides itself on providing customers with the freshest all-natural meat, seafood and produce at prices that are lower than those found at similar stores such as Whole Foods. Seventy percent of the store is stocked with perishable items, giving Sprouts a true “farmer’s market” feel. Sprouts aims to buy from local farms whenever possible, and groups its stores in relative proximity to each other to ensure the freshness of produce.

In addition to the perishables, Sprouts stocks natural and organic grocery items as well as brand-name herbs, vitamins and supplements.They also carry Sprouts private label items.

“Sprouts is a value-oriented specialty food store with a focus on produce and natural and organic grocery items,” Sullivan says.“It provides a healthy and fun shopping experience.”

Some of that fun is found in Sprouts’ dedication to creating a dialogue with its customers, showing and teaching them how to live that healthier life. In-store activities include lectures and health screenings. Sprouts also publishes a free, bimonthly magazine publication packed with healthy living tips and healthy recipes. The magazine is available at Sprouts stores. The electronic version can be found, along with healthy recipes and weekly ads, online at www.sprouts.com.

The company is also dedicated to its communities, providing sponsorships and product donations. Their “bring your own bag” policy gives customers 5 cents off their total bill for each plastic grocery bag they bring to the store and reuse.

What It Needs

In searching for the perfect location for future stores, Sprouts is looking for locations with a population of 80,000 within the designated trade area, with 35 percent or more of the population having a four-year degree. The average household size typically is three people or less, with some exceptions.

“Our ideal location is a well-positioned and signalized intersection serving a highly educated customer with above-average income,” Sullivan says. Because of its emphasis on value, Sprouts attracts more than just the traditional health food store customer.

The prototype size is 25,000 square feet, but Sprouts would consider spots ranging from 21,000 to 28,000 square feet.They prefer building to suit and a 15-year lease with four five-year options.“We are flexible with space and types of centers, as long as we have functional parking and access,” Sullivan says. Sites they would consider include free-standing locations and pad spots on 2.3 acres, with a minimum frontage of 130 feet.

Real estate deals typically take about 60 days to meet with approval, and involve Sullivan and the director of real estate.