Apple's fleet of Apple Store retail locations bring in so many visitors, they have begun replacing department stores as the main traffic driver to malls in the U.S. The Wall Street Journal reported that Apple has been able to use its industry-redefining sales to drive lease terms that are far more attractive than other retailers.
Specialty retailers typically pay rent around 15 percent of their sales on a square foot basis. Department stores that "anchor" malls have historically driven mall traffic—people go to the mall to shop at the department stores, and many of them also visit other retailers. That's how the shopping mall ecosystem has worked for decades, but Apple is disrupting that equation.
The 5th Avenue Apple Store in Manhattan
The 2%
According to The Journal, Apple has driven bargains on its rent as low as 2 percent of sales, less than 1/7th of what its nominal peers pay. Apple is able to do this for two reasons: the first is that Apple earns more sales per square foot than any retailer in history, dwarfing even Tiffany's. 2 percent of a lot can be much more than 15 percent of a little—and in Apple's case it is.
The second reason is that Apple Stores bring lots of people in through the door, and Apple's management has been able to leverage that to drive hard bargains.
"As department stores close, Apple is replacing them as the main driver of traffic to the mall," Raymond Cirz, chairman of real-estate valuation and consulting firm Integra Realty Resources, told The Journal.
Alyssa Gates, director of real estate for Lush Fresh Handmade Cosmetics, said, "We're aware of the lift that Apple brings to a property. It acts like a department store."
Free Lunches
But those department stores often get free rent, contributing only a little money to help pay for upkeep on common areas. Apple doesn't get that same deal because Apple Store customers are somewhat less likely to shop at other stores than department store customers.
"There are a lot of people who go to Apple and leave,” DJ Busch, a senior analyst at Green Street, said. "Apple doesn’t promote cross shopping as much as healthy department stores do."
At the same time, and perhaps ironically, Apple's success is sometimes used to drive up rents for those very same retailers. Overall productivity (i.e. sales) in a mall are often used in rent formulations, and Apple accounted for some 14 percent of sales in 45 shopping malls in 2013. In New England, Apple alone accounts for as much as one third of all sales at some malls.
That means higher rent for specialty retailers, whether or not they benefit from Apple's awesome customers. Ms. Gates of Lush Fresh Handmade Cosmetics counters this by asking for Apple's sales to be excluded from her own own rent calculations.
Yep
All of this is merely another example of how today's Apple disrupts every market it enters, and that includes the retail industry. It pays to remember that when Apple announced its first retail store in 2001, everyone predicted failure, just as they did when Apple entered the digital media market, the cellphone market, the tablet market, the watch/wearables market, and as I write this, the automobile market.