February 1, 2003 - From the February, 2003 issue

Caruso Offers Instructional Lessons On The Grove's Success

In November, over 30,000 people showed up for the Grove's first annual Christmas tree lighting celebration. In its first year of its operation, more people will have visited the Grove than Disneyland in that same span. In a time when shopping malls are losing money, the Grove is attracting people at an astonishing rate. What separates the Grove from other shopping malls? How did the Grove adapt to its location next to the historic Farmer's Market? Rick Caruso, CEO of Caruso Affiliated Holdings and the developer of the Grove, recently addressed the USC School of Policy and Planning to discuss the planning of the Grove and shopping mall development in today's market. TPR is pleased to present this excerpt of Caruso's presentation.

To share how we developed the Grove, I'm going to back up and tell you where we started. Also, I'll touch on how you manage through these urban projects; how all the different pieces come together--the political side, the financial side, the entitlement side, and the community side. All of these pieces have to fall in line. Lastly, and I don't mean to sound arrogant, I'll address how we become successful at doing this where other developers have had less success. What were the key elements for us, particularly at the Grove?

So let's talk about where we started. One of the things we value is a great sense of place. In retail, a great sense of place is the most important thing you can create. There isn't a class that you will take anywhere in the world that's going to teach you that-it's got to be in your gut. And being in your gut means, when you go some place, you say to yourself, "Hey this is nice, this is comfortable, this is clean, I feel safe, I feel happier being here." And that has been the premise of our company. One of the recent projects that we've done is the Promenade at Westlake-it redefined what a strip center was.

So, we started combining tenants together that heretofore hadn't been combined. We took a market, we took a bookstore, we took theaters, we took restaurants, we took quicker food restaurants, clothing stores, and we mixed them all together. The typical market setup has been a market, a drug, your dry-cleaner, your shoe repair, and a couple little stores, and that has been about it. When you go to some of the great downtowns-and that's always our model-it has a variety of uses. So, why aren't we building projects with a variety of uses?

The Grove is a project that was endlessly discussed for at least 20 years. It lies in the heart of Los Angeles, next door to the Farmer's Market, which is a very beloved landmark. The Market had basically declined in business, fell into a little bit of disrepair, but the real estate was incredible.

We triumphed with a crazy idea-a downtown, built post-World War II, which had gone into disrepair and is now coming back to life. And, the main thing for us was, we didn't want to turn our back on the Farmer's Market, which most other developers wanted to do. We wanted to embrace it, and we wanted to look at it as an anchor. Even though the Market was not in the best shape and the business wasn't as great as it could have been, I knew that I had an asset there that I could never replace. And it was drawing around four-to-six million people a year, even the way it was. So I had a built-in market there.

I also had a lot of identity, and daily consumer traffic-I always look for daily use. The Farmer's Market is a market. You go there and you buy your produce and your vegetables, your meat and your chickens, and everything else that you want to buy. So, the downtown concept and the Farmer's Market started driving our design. We wanted to complement the Market and not compete with it.

Wanting to develop in the middle of a very dense urban community, we had to go to that community and do what our philosophy promises: ask them a very simple question. "What would you like to see?" As a developer, the number one rule that we live by is leave your ego at the door, don't think you know more than the community around you, and ask them what they want.

Now, we also asked another question. Who is our customer at the Grove? Our customers are the tenants at the Grove-Nordstrom, Barnes & Noble, the movie theater, Haagen Dazs. Their customer is my guest. Treat that person as your guest on the property, if you want to have successful retail. We have done that on every one of our projects and it is the simplest rule in the world. If you have somebody come over to your home, you would probably ask, "What would you like to drink?" You wouldn't say, "Have a Coke." When we go into a community, we want to learn about what the community needs. But, more importantly, I want to give the community ownership of the project. If the community is invested in it, when we go through our entitlement process, they're not going to fight a project that they helped design, and advised re tenants and lay out.

Outreach done, we then faced the approval process for the Grove. Initially everybody was scared we were going to destroy the Market; everybody was scared that we were going to destroy the neighborhood. But their fears were transformed into support because the Grove had become a community asset, because we had been around to every homeowner group, we had talked to everybody who wanted to talk about it, and we had gotten their input. And there are a couple of people here from the city and the planning department, and they can correct me if I'm wrong; we ultimately didn't have one objection when we went through the approval process.

The other key point is, once the community supports your building the project, it does not abandon them. And we spend an enormous amount of time, and money, supporting the local community around us. We get involved with the parks - we just donated scoreboards to Pan-Pacific Park. We adopted 3rd Street School across the street from us and helped rebuild their library for them. We provide parking for one of the local Jewish groups that has a parking problem. You've got to be part of the community because you're taking something from them, so you've got to give something back.


Now, what we also did at the Grove, and I think the most important thing regarding operations, is we committed to taking the level of customer service one notch higher than is customary. The standard that I set for our people was, "Listen, we're going to operate just like a five star hotel" - it's never been done before. Here's the idea: we're going to have a trolley and we're going to have conductors on it that are dressed like the great old conductor, and we're not going to charge people to be on the trolley. The simple promise in our projects is, if I can make the children and the mothers happy, I got them. If I can create an environment where I can sit and read the paper and the kids can run around as in the park, then my wife can go shop all she wants and spend the time she wants with my tenants.

We thus have a concierge service. A lot of malls say they have concierges, but you can go to our concierge and ask for whatever you want, doesn't have to be at the Grove. You can call up and you can say, "I need plane tickets to go to New York"–somebody did this–" and I need to rent a flat for 30 days." Also call our concierge and say I'd like to have dinner at Morels at eight o'clock, I'd like to go to the movies at nine o'clock or ten o'clock, we'll have your tickets waiting for you, we'll hold your seat, valet parking will know you're coming, and it's all set up for you. It doesn't cost you a dime. The Wall Street Journal did this blind test about two months ago, and the concierge at the Grove was rated number one in the country.

We also empower everybody on the staff. We went through an extensive training program; we hired the same group that trained everybody at the Ritz-Carlton, and we had them train our landscapers, the gardeners, the housekeeping people that clean the place, the conductors, the concierge, and security. They went through all this training and we empowered them; we said "If you see a problem on the property, we're going to give you a budget to solve that problem, and you can issue a $25, $50, or $100 gift certificate on the spot. Apologize for the problem, give them the gift certificate, say you're sorry, and ask them to come back to the Grove." Overwhelming success.

We spend an enormous amount of money doing tree lighting, and jazz concerts, and Menorah lighting ceremonies, and all of those things that make our property not feel like a shopping center. It feels like a part of the town, it's sort of part of the fabric of the town, and that's really what creates value. I would argue with you, it would be very tough for someone else to build the Grove, in a similar area like this, because most real estate companies aren't equipped to do it. You need to come to it from the standpoint that you're not restricted by all the commonly accepted rules, because the rules would tell you, don't build this expensive common area, don't build a park, don't build a million and a half dollar fountain that dances and sings and all these kinds of things. What people forget about is, all the money that I'm putting into that space, a mall is putting into air-conditioning for its inside corridors. They've got escalators moving people between three levels, you know, I don't have to do that.

The beauty of the Grove is, we made it look like a downtown. We made it look like there were buildings that were there historically, and then we broke the rules and we made no two buildings look alike. And the reason we did that is because I believe great retailers should not only retail from within, but the exterior of their buildings should be part of that retail experience. It should let you know if you've been there, this is the Apple store, and it looks like Apple. This is Barnes & Noble, and it looks like Barnes & Noble. You create more value, and tenants will pay you more money for that. It's tougher to do, it takes more staff, it costs more money to do, but in the long-term world of the real estate, it's the right thing to do, because you want that retailer to succeed. You've got to give that retailer every tool they can use to succeed, because retailers always have a choice, developers don't.

The Market, to bring this story full circle, is up 200 percent in volume. We've got people there that have been there 30, 40 years that are making more money today than they ever have. Families come to relax on the park. I figure, if I can get people on our property to do nothing else but to come and read the paper and hang out, I've got them; that's where they're going to go and shop. That's why I built a park, that's why I built a fountain. And you know what? The park brings revenue, because we lease out that park for private parties. So we're not that stupid. These are all things that can happen. We have premiers here now. There are so many things we can do. We have a tree lighting ceremony, and the challenge that we gave our people is, we're going to rival Rockefeller Center. If Roc Center has an 80-foot tree we get a 100-foot tree. We convinced KTLA to televise it, and we hit a million households. We had 35,000 people there. That's because it's part of the community, part of the fabric.

So that's the quick story of what we do, and why we've been able to do it where we think other people have fallen down. And it's really a matter of just being a little more sensitive, a little bit more practical, living up to your commitments, and making sure the customers, who are your tenants, are successful in building that track record.

I think that you've got to go with your gut. The numbers are important, and the lease terms are important, but all of it is worthless if you don't build the right project. And then you get a sense of joy, that not only can you make money and be profitable, but you can actually give back to the community at the same time. And I'll tell you if you talk to the people that I work with every day, there is an enormous amount of work, and long, long hours to build these projects, and it's very complicated. But, when that first holiday came and the place was decorated, we had our people with tears in their eyes. For the community, it's sort of a sense of wonderment and a sense of place. That's what we do. Very simple.


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