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Spectacular sales alone not enough to attract retailers

Many deem doing business on the island too expensive


June 3, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

Sales per square foot in Puerto Rico shopping malls are higher than those of stateside malls, but the high cost of doing business on the island and low household income levels cause major retail chains to wait years to decide whether to come down.

In fact, big-name retailers such as Staples have been looking at local sites since 2001 without making any decisions to finally open. Best Buy eyed the local market for years, too, before deciding to go to Plaza del Sol.

Class-A malls in Puerto Rico have average sales per square foot between $300 and $400, while stateside they usually don’t surpass $300. A local mall like Plaza Las Américas is said to have tenants boasting sales per square foot of up to $1,000 (CB March 3). Occupancy rates, which average over 95% locally, are also better than in stateside malls. Still, retailers take a long time to decide on coming down or not.

"We went down there to study the market, but it’s very expensive [to do business there]," an executive for a stateside dollar-store chain said. Although he didn’t confirm the chain had scrapped hopes of coming to Puerto Rico, he hinted there wasn’t as much interest as before.

Mary Ann Savarese, vice president of mall leasing and management corporation RD Management–with nine malls on the island and some 200 stateside–agreed it costs a lot to do business here, more than in the mainland U.S. "Tax issues and permitting make it difficult for retailers to come to Puerto Rico," she said. She also said rents in local malls tend to be expensive, offsetting the high sales per square foot.

Currently, many retailers and shopping-mall developers are waiting for the government to issue the necessary permits to begin construction of sites. The problem, many say, isn’t waiting for a permit–the problem is the uncertainty, which on many occasions lasts years of not knowing if they will finally obtain them or not.

That’s not all. Being successful in the local market requires retailers to advertise, which Savarese also deemed expensive. "Advertising is expensive, but you must do it. Even companies that don’t usually advertise [in other markets] must do so in Puerto Rico." She added that this is needed so the local consumer can get to know the brand.

In addition to the high cost of doing business, locals’ lower income levels–at least according to official figures–also make retailers think long and hard about opening stores here, according to Savarese. While dollar-store chains are known to seek markets with household incomes between $25,000 to $60,000, and some big-box retailers a $40,000 average, local household income falls below those brackets. According to the 2000 U.S. Census, Puerto Rico’s median household income stands at about $14,412, only 68% of the U.S. median.

"Salaries in Puerto Rico are low, and the cost of living is very high," Savarese said. "Low-income housing in Puerto Rico costs about $100,000. That’s midincome housing, really." However, it is also known that the island’s underground economy is what fuels, in large part, locals’ high consumption rate. A study research-firm Estudios Técnicos did this year revealed that the island’s underground economy translates into almost $10.5 billion a year.

Still, despite the high cost of doing business here, many retailers remain interested. That, however, doesn’t mean they can open quickly. One video-store chain executive who is looking to open some stores on the island already has been to Puerto Rico several times. He explained he wants to directly supervise the entire process of establishing those stores.

"It takes four to six trips to Puerto Rico before deciding on multiple locations," Savarese indicated, adding that retailers prefer to open various stores almost consecutively to establish a solid presence on the island, rather than opening just one store to see how it goes.

Once retailers have decided to come to Puerto Rico, there are some pointers they can use to ensure success. Savarese recommends they hire the best marketing person they can find, as it is important to deliver key phrases that resonate with the local market. She also advises to hire buyers who are knowledgeable of the local market and understand the styles worn locally, in the case of apparel retailers, and local preferences in general.

"If you overcome the differences and difficulties you can be very successful," she said. It is no wonder big-players such as Bed Bath & Beyond, the Home Depot, Office Max, and Marshalls are continuing to expand locally.

This Caribbean Business article appears courtesy of Casiano Communications.
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