These trends have propelled the growth of our company. Most of our centers are located today in upscale areas, and are full of retailers who are engaged in selling luxury design and fashion products to a much larger customer base than they could have imagined.
But while consumers plainly see the value of the distinctive offerings, stock analysts don’t. Now, so you don’t think I’m always this rude, I should explain that one question stock analysts always ask me is, “How long will it take, Mr. Taubman, for Wal-Mart to kill every department store and fashion mall in the country?”
Before answering, I always turn the tables. I ask: “How many of you, men and women, are wearing an item of clothing purchased at Wal-Mart, raise your hands?” Over the last twenty years I must have asked my Wal-Mart question more than a hundred times to untold numbers of confident, well-dressed analysts. No one has ever raised a hand.
Then I ask my second question: “Raise your hand if a friend or anyone in your family has ever purchased an item of apparel at Wal-Mart?” Again, zero. Twenty years, not a single hand.
Hands down, Wal-Mart is the most powerful retailer in the world and the largest company of any kind on the planet. So why aren’t they in the fashion and design business? Sure, the company has made deals with designers to create product lines that are sold exclusively at Wal-Mart. But that has not drawn shoppers. Beyond good design, there are other, more intangible aspects of fashion merchandising we can’t overlook. As Marvin Traub pointed out, taste and image have a lot to do with it. Most consumers appreciate and trust the taste level of Michael Graves, Martha Stewart, and Karl Lagerfeld. Millions of dollars and years of proven success have defined such fashion brands as Polo, Coach, Louis Vuitton, and Gucci in the minds and hearts of shoppers around the world. That didn’t happen overnight.
Wal-Mart is also a powerful brand. It stands for many important promises, most having to do with price—an attribute less critical to fashion. The down-home, mass-merchandiser, low-price-every-day image that makes Wal-Mart so successful at what it does runs counter to what shoppers expect from Neiman Marcus or Saks. Can you picture the typical senior citizen Wal-Mart greeter standing at the entrance to a Polo store asking if you’ve seen the latest newspaper sale circular? To a fashion-conscious shopper, that presents serious threshold resistance.
Stock analysts aren’t the only ones who overestimate Wal-Mart’s ability to eat into the business of department stores and specialty retailers. Several years ago I participated in a real estate industry panel with Sam Zell, a successful commercial real estate developer (and a fellow University of Michigan Wolverine). “There is no place left for the department store,” Sam confidently proclaimed, before going on to predict the absolute retail dominance of Wal-Mart in the United States. Now, Sam knows a lot more about office buildings than he does about retail properties. And the fundamentals of the two businesses are very different, as are the roles of the developer.
Major mall development is an operating business. The economics are based on a business opportunity—the ability of a merchant to produce sales volume by serving a specific market. The developer provides the environment—physical, locational, promotional, operational—to optimize the merchant’s performance. It’s a long-term commitment that, if all goes well, yields long-term rewards and continues to add value for both merchant and developer.
Office buildings, by contrast, are a commodities business. Price is usually more important in determining the success of a property than other factors such as location, design, and access. In fact, prestige, ego, civic responsibilities, or even personal quirks may drive the development decision. I once asked an executive with a national retailer why his company had chosen an out-of-the-way site for a new headquarters building. He explained that the CEO had rejected multiple locations recommended by his real estate and marketing departments in favor of a site five miles from his home and ten minutes from his country club.
If you are an employee in a major corporation, chances are you will show up for work at the office Monday morning despite the highway gridlock, lousy parking, and uninspiring views. Try adding those inconveniences and turnoffs to a retail location, and you’re looking at bankruptcy. They’re fundamentally different businesses, and that’s why most successful developers stick to one or the other.
In the 1980s, the Taubman Company became involved with some mixed-use projects. In Charleston we created Charleston Place, a hotel, conference, and shopping complex in the heart of one of America’s most historic downtowns. And in Manhattan, we were partners with Solomon Equities in 712 Fifth Avenue, a Kohn Pedersen Fox–designed fifty-two-story luxury office tower in the heart of Midtown at 56th Street. At the base of the building, which opened in 1990, are three historic Fifth Avenue townhouses, which we preserved (with the help of the architectural restoration firm Beyer Blinder Belle) to the delight of the city’s very demanding Municipal Arts Society (once headed by Jacqueline Kennedy Onassis). We renovated these structures, which were once home to such legendary retailers as Cartier and the Rizzoli bookstore, and leased them to my friend Les Wexner, who had just purchased Henri Bendel.
There are real estate developers who excel in multiple property formats. Donald Trump is one of the very few high-profile practitioners with success in the commercial, retail, residential, and recreational segments of our business. He’s intelligent (he got a lot of his real estate smarts from his father, Fred, whom I knew pretty well) and has branded himself in a unique way. The Trump name adds interest, excitement, and most important of all, value. Donald’s golf course properties are planned and executed beautifully, as are his office towers and luxury residential projects. And he’s a television star!
Sam Zell, who has enjoyed great success with office buildings, is not so multitalented. So when he made his uninformed pronouncement, I had to challenge his retail expertise. I looked at his shirt and asked my favorite question: “Sam, did you buy that shirt you’re wearing at Wal-Mart?” Sam’s shirt could have been purchased at Wal-Mart. I know double-needle stitching when I see it. Rather than raise his hand or counter my point, Sam simply glared at me for the rest of the session. I think if we weren’t both Wolverines—and I weren’t about a foot taller and a hundred pounds heavier than he is—he would have hit me.
Now, it’s possible that Sam and other high-powered, well-paid Wall Street types just don’t want us to know they shop at Wal-Mart, or are hesitant to admit that they know people who do. I would argue that such a defensive response is just as negative for any retailer hoping to be known for fashion merchandise. Embarrassment is not an enviable brand promise! Don’t get me wrong—Wal-Mart has and will continue to kill certain retailers and certain malls, legitimately so. Malls featuring a mix of me-too stores carrying generic, lower-priced merchandise are directly in Wal-Mart’s crosshairs.
That’s one important reason why Taubman malls have always been focused on luxury and fashion merchandise. For any retail enterprise, the farther away from Wal-Mart you are, the better! And you can’t get any further away than the world of fashion.
So what about off-price outlets that carry designer goods for less? Don’t they offer all the magic of fashion merchandise at much lower prices? If Wal-Mart isn’t going to put the higher-end malls and department stores out of business, won’t the discount malls at least do some damage?
It’s time for another universal truth: There can be no off-price without full price. In other words, what makes the purchase of a 100 percent cotton Polo tennis shirt for $30 so special is the fact that somewhere else a Polo tennis shirt is selling for $75. Close Polo’s mall shops and take Polo products out of the men’s department at Neiman Marcus, and you destroy the entire enterprise, including the appeal of the off-price outlets.
A quick story to illustrate this very important point.
Years ago, there was a successful line of affordable silverware marketed as Wm. Rogers silver. The company’s silver-plated flatware, which came in a broad selection of styles, from colo
nial to contemporary, was sold exclusively in jewelry stores. Young couples would sit across from the jewelers, learning about the various designs and determining the right pattern for their lifestyles. Like most consumers, the young couples lacked confidence in their ability to make such important purchase decisions without assistance from a knowledgeable salesperson. The jeweler conveniently played that role (chances are, the couple was buying their wedding rings and registering many of the wedding gifts they wanted at this same jeweler).
In the late 1960s, management decided to strengthen sales by also offering their product through the E. J. Korvette discount chain. Customers could purchase the flatware for almost 30 percent less than they would have to pay in their local jewelry store. At first, Wm. Rogers silverware flew off the shelves. The company was pleased with this new mass distribution channel.
Of course, the jewelers were not so pleased. Increasingly, young couples would come into the jewelers for the helpful tutorial, then go across town to Korvette’s and purchase at discount the pattern they decided on with the patient jeweler’s assistance. Within months, jewelers stopped devoting any counter space or sales time to Wm. Rogers. Couples could try to get some help from the clueless Korvette’s sales people (if they could get their attention at all), but in the truest sense, they were on their own. Samples of the various patterns were routinely stolen off cheap-looking display boards.
Within a very short time, Wm. Rogers ceased to exist. The company learned the hard way that there can be no off-price without full-price. Once the jewelers abandoned the product, Wm. Rogers silver became just another discount brand, not the special heirloom purchase newlyweds felt confident about making.
So how does a retailer maintain a sustainable balance between its full-price and off-price merchandise? In the days of the dominant, massive downtown department stores, the answer was as close as the basement. These merchants had enough room right in their stores to offer last season’s and other stale merchandise on the lower level of the building. This outlet level allowed the department store to clear out the upper floors for new merchandise, while controlling the presentation of their marked-down items. The lower-level display space was far less opulent, and there were fewer salespeople on hand to assist. But shoppers could be confident that the store stood behind every purchase, and manufacturers could be confident that the store was still presenting their brands appropriately.
As department store companies built smaller, basement-less suburban branch stores, there was no space for these outlet operations. Recognizing an outstanding opportunity, chain discounters like Marshalls and T. J. Maxx took over the distribution of this off-price merchandise, paying the department stores cents on the dollar. Manufacturers, as you might guess, were far less comfortable with this arrangement. The further away from their control the merchandise got, and the deeper the discounts became, the more difficult it was to maintain a strong brand image. The delicate balance between full price and off-price was spinning out of control.
That’s when manufacturers and department stores decided to open their own branded off-price outlet stores. Outlet malls sprang up in the 1980s and 1990s, usually comfortable distances from traditional mall properties, featuring such attractive outlets as Saks’s Off 5th, Neiman Marcus’s Last Call Clearance Center, Nordstrom Rack, and numerous manufacturer stores. The retailers felt good about these new locations, just as they felt good decades earlier about the off-price operations in their basements.
But the challenge remains: The delicate balance between full price and off-price must be maintained. Knowing just when the balance goes out of kilter is more art than science. But as many retailers have found out, paying attention to the recipe is critical to the survival of even the strongest brands. This reality may be the single most important governor of the future growth of Costco and Sam’s Club.
TEN
Sold!
Throughout the early years of my career, as I made enough money to look beyond the basic needs of my family, my passion for art grew into a pretty substantial art collection. In the 1950s, I was a regular visitor to the Green Galleries on West 57th Street in New York, where a rickety elevator took you to the fourth floor. There, dealer Richard Bellamy proudly introduced you to fresh works by the likes of Robert Indiana, Jasper Johns, and Francis Bacon. I started buying modern artists like Frank Stella and Robert Rauschenberg. Later, I bought from Leo Castelli.
Much of what I collected I purchased on credit, and I studied hard enough to develop a good eye for quality. As my business became more successful, I became a regular customer of art dealers and auction houses around the world. At the same time, I was honored to serve on the boards of the Whitney Museum of American Art in New York, the Smithsonian Institution’s Archives of American Art, and the Detroit Institute of Arts, where I have proudly fulfilled the responsibilities of arts commissioner of the city of Detroit (the closest I ever want to come to elected office, for more than twenty years).
So I was not entirely in the dark when I received an interesting phone call in the spring of 1983—just weeks after I completed the sale of my stake in the Irvine Ranch—from David Westmorland, former chairman of Sotheby’s, international auction house. The Earl of Westmorland explained he had heard from a mutual friend, David Metcalfe, that I might be interested in promising investment opportunities. He asked if I would be available to meet with him regarding Sotheby’s, and offered to come to Detroit at my earliest convenience.
Of course, David Metcalfe had already introduced me to another wonderful opportunity in my life. About a year earlier, David, who provided insurance services to the Taubman Company, called me to arrange an interview for a young woman named Judith Rounick. I had seen Judy at a few dinner parties but had never had the chance to speak with her at any length. All I knew was that she always was the most beautiful woman in the room.
We met for lunch at La Côte Basque in New York for what was intended to be a discussion of her career direction (Judy was in the middle of a divorce and wanted to pursue new interests). She was very intelligent and all business. I was mesmerized. She had grown up in Israel, spoke several languages, and was the mother of two children. She carried herself with extraordinary grace and, of course, was the most beautiful woman in the room. I’m sure my advice, like my concentration, was worthless that day. All I could think about through lunch was the next time I could see her.
At the time I had been divorced for five years. Reva and I had grown apart, mostly because I had buried myself in my business and spent far too much time away from home. Reva was a terrific mother, and I had been a far better father than husband. Sure, I missed more than my share of parent-teacher conferences, student plays, and football games, but I included my children in my life whenever I had the chance. My son Bobby fondly remembers “taking picnics on construction sites,” and Billy remembers “attacking” my briefcase whenever I came home. And I’m confident my daughter, Gayle, developed her love of art during our many visits to museums around the world. Whenever I’m asked to identify my greatest accomplishment, it’s always the same answer: my children.
In 1977, with little animosity, Reva and I decided to go our own ways after twenty-nine years of marriage. At the final divorce meeting with our respective attorneys, I turned over documents declaring my net worth. It was a pretty substantial number. Reva’s reaction confirmed for me that we were making the right decision. Examining the papers, she turned to her counsel and said, “He’s always showing off. He’s not worth anywhere near that amount.” Reva was not a negotiator.
After five years as a bachelor, I was convinced that I would never marry again. And then everything changed at La Côte Basque. Judy and I dated for a couple of months, but I could never convince her to visit me at my home in Palm Beach. I think she thought that was too much of a commitment so soon in our relationship. She even turned me down when I invited her to attend a small dinner party for Henry Ford II at Estée Lauder’s Palm Beach home. After I called Estée (one of
the most successful, talented women in the world) to explain that I would be coming alone, she immediately asked for Judy’s phone number. I figured that it wouldn’t hurt to get a character reference from Estée Lauder. And it worked. Judy agreed to accompany me to the party. After that weekend, I was determined to keep her in my life. We were married four months later.
So when Lord Westmorland called with the Sotheby’s opportunity at the recommendation of David Metcalfe, I agreed to meet. I can’t say that I was immediately enthusiastic. Sotheby’s was surely a venerable company and an outstanding brand. Samuel Baker, the uncle of John Sotheby, held his first auction of books in London in 1744, which makes Sotheby’s older than the United States of America, not to mention older than its archrival, Christie’s.
Despite its dominant position as one of only two truly international art auction houses, Sotheby’s had been regularly operating in the red and was embroiled in a contentious takeover battle with American investors Marshall Cogan and Stephen Swid. (The company had gone public in 1977.) Sotheby’s insiders—publicly expressing outrage with more than a touch of anti-Semitism—had taken to calling the unfriendly raiders “Toboggan and Skid.” One of the company’s senior experts promised to resign if a sale to the Americans were consummated; another threatened to commit suicide. How would these Brits feel about a Jewish shopping center developer from Detroit?
The meeting at my home in Bloomfield Hills with the very distinguished Lord Westmorland went well. The board was not pleased with Cogan and Swid and did not agree with their vision for the company. Business reforms and cost reductions put in place by Sotheby’s new chairman, Gordon Brunton—an executive on loan from the successful Thomson publishing empire—were showing results. And the company was looking for a white knight (the same role I would be thrust into with Woodies).
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