As seen in the San Jose and Silicon Valley Business Journal, Nov. 23-29, 1998 (page 29)

By John Wallace

"Location, location, location," the standard advice to anyone opening a retail business, remains truer than ever in the late 1990s -- but this adage has acquired new complexity. Choosing a physical business space has become relative. Today, new business locations succeed or fail partly because of where they are, and partly because of the company they keep.

One of the keys to effective retail development is "tenant mix." Simply put, the idea is that certain businesses work well together under certain conditions. Some tenant mixes make obvious sense, such as locating a florist next to a greeting card store. Other groupings of retailers are more novel, and some seem to defy logic.

For example, conventional wisdom argues against locating a bagel shop that sells coffee next to an espresso shop that sells baked goods. Yet this pairing has proven wildly successful in several West Coast cities -- because this tenant mix reflects an understanding of the customers' mood.

The regional chain Noah's Bagels has found that locating next to Starbucks Coffee does not cannibalize sales but actually boosts business for both stores. The reason is that upscale customers value choice and enjoy making last-minute meal decisions. In one Bay Area suburb, the owner of a fading coffee shop feared the worst when Noah's and Starbucks opened next door. Instead, his business improved. These three shops have created a "breakfast zone" with an enlarged trade area and increased frequency of customer visits.

These days, most restaurant owners see the value in locating near other restaurants. But it is only recently that restaurants have begun locating near multi-screen cinemas and bookstores. These retail entertainment complexes, which Californians first witnessed in Irvine, have spawned ever more elaborate versions with everything from computer game centers to art galleries.

Again, such retail combinations create a critical mass. They expand the trade area for each business as the complex becomes known as the regional "place for a night out."

Successful retail combinations are no accident. Yet accidents occur all too frequently in mixing tenants. The most common mistake is to think in terms of externals, such as the amount of foot traffic generated, rather than assessing the shopper's purpose and mood. One of the best examples is the typical supermarket, which can draw a high volume of retail traffic into an area and be a boon to surrounding stores. But for some retailers, it can be a disaster.

The fact is that shoppers enter a supermarket with a mission. They want to buy certain commodities and head home to get the fish in the refrigerator and the ice cream in the freezer. They will probably not be tempted to stop at a nearby furniture store where shopping is slow and con-sidered. Nor are they likely to want to compare shoes at several stores. The purpose of a super-market trip is more utilitarian -- and so is the mentality. This is why dry cleaners and banks, butchers and bakers, all can benefit from supermarket clientele, providing that they offer quality or selection that the market doesn't.

So, the key to mixing retail tenants lies in tuning into the shopper's mentality. A major regional California mall famed for upscale de-partment stores decided to bring an upscale supermarket into the complex. The demographics were right, but the mentality wasn't, and the market has not done well. For attitudinal and practical reasons, supermarkets (even posh ones) appeal to an immediate community.

When AT&T entered the retail arena in the early 1980s, it opened stores in all types of shopping centers across America. Some stores did well, others didn't, and eventually the reason became clear. For AT&T, the best retail neighbors turned out to be department stores, rather than supermarkets. People buy phones rather in-frequently, about as often as they might visit a department store in a big regional mall to purchase fine china or decorator lighting fixtures. And regional malls are where AT&T finally located its stores, shutting down retail outlets that were faring poorly in local shopping centers anchored by supermarkets.

Retail combinations that expand the shopper's options can create synergy, and those that don't often fail miserably. Consider the powerful retail orbit of Home Depot. Specialty nurseries, ware-house stores and carpet outlets successfully complement Home Depot in some locations. But paint stores, for example, find it almost impossible to compete with Home Depot in price and quality, and some have gone bankrupt trying. On the other hand, a nearby specialty store that stylishly displays, say, upscale blinds and louvers probably can beat Home Depot in selection and quality. As the shopper's options expand, so will the trade area.

One problem with tenant mix decisions is that they must be correlated with all the other traditional retail site factors such as rents, demographics, seasonality and so on. Today, when many people are entering the retail world for the first time, balancing these disparate considerations can be a major challenge. Still, it's a challenge worth tackling, because retail synergies have become one of the keys to winning in today's market.

John Wallace is co-founder of Wallace & Steichen Inc., a real estate and retail consulting firm based in Palo Alto. He can be reached at wallsteic@aol.com.