Apple Upsets the Department-Store Cart

The latest threat to the shopping-mall hierarchy is an unlikely one. But Apple is challenging the dominance of department stores. The technology giant isn't branching into clothing or furniture. It is, however, expanding its presence in malls. That is a territory where department stores have long been treated better than other tenants because they attract shoppers.

Often, such so-called anchor tenants pay little or no rent. But Apple has arguably become an equally important attraction, thanks to a consistent string of blockbuster products. Indeed, Apple stores have overtaken many traditional anchors by revenue. In Apple's fiscal year through September, it had sales of $34.1 million per retail store. Macy's much larger stores generated $29 million on average in sales last year, and J.C. Penney, just $16.1 million, estimates Michael Exstein of Credit Suisse. And yet, Apple isn't getting anchor privileges. Steve Sakwa of ISI Group estimates Apple pays $50 to $80 a square foot in annual retail rent. For a store with 6,000 square feet, Apple would pay as much as $480,000 annually. That compares with the $439,000 per leased store that J.C. Penney paid last year, Exstein estimates. Department stores are often 20 times larger than an Apple location. For now, department stores are unlikely to lose anchor status. Landlords are struggling to keep large spaces filled, and many leases last 30 years. The bigger headache may be for landlords who benefit from Apple. Simon Property Group, the country's largest mall owner by revenue, has Apple stores in 20% of its locations, says Cedrik LaChance of Green Street Advisors. Smaller rival Taubman Centers has Apple stores in 65% of its malls, he says.