2004: a very good year

The year 2004 was the most "stable" year for the retail industry in quite some time. It was not a great year, but it was a very good year—a much-needed period of recovery after the economic weakness that followed the dot-com bust and coming to grips with the effects of terrorism and global unrest. The U.S. economy (GDP) rose 4.4 percent in 2004, the fastest pace in five years—lead by consumer and capital spending.

Retail sales boomed at the top, in the luxury tier, and steamed along at the bottom—the discount sector. But in the middle, department stores and other retailers struggled to make their sales figures. As 2004 came to a close, the Kmart/Sears merger topped the news, and speculation circulated about a possible joining of Federated Department Stores and May Co.

Financial analysts are guardedly optimistic about the outlook for 2005, speculating that increasing prices, lead by oil, may finally begin to take a toll on consumers' pocketbooks—particularly in the moderate and lower economic consumer segments.

A press release from the National Retail Federation (NRF) in early February uses words including "challenging," "difficult," and "cautious" to describe 2005. According to Tracy Mullin, chief executive for NRF, "Retailers are aware of the challenges they face in 2005." The NRF predicts 3.5 percent growth in retail sales for the year, compared to growth of 6.7 percent in 2004.

But while there are challenges, there are also opportunities. Retailers continue to expand their reach by opening new units at a steady pace—and launching new businesses, such as Abercrombie & Fitch's Ruehl and Chico's Soma.

With a significant reduction in the number of new regional shopping centers being built, stores are now exploiting open-air and village centers, off-mall locations and other options. All of this kept retail design firms busy in 2004.

There is also an indication that the era of store mass-standardization and chain rollout dominance is now falling out of favor. There is more demand for uniqueness: individualized designs and designs that feature customization for local communities. Both of these trends offer big opportunities for retail design firms that can tap into the new zeitgeist.



A look at the numbers

In DDI's seventh annual Design 100 survey, the Design 100 firms collectively reported design fee revenues of $585 million* for 2004. The top 100 retail design firms also reported that they executed a total of 286 million sq. ft. of new and renovated retail space during the year.

Design 100 firms collectively employed 16,202 professionals in 2004, the largest number of employees ever reported and a significant increase from the 10,228 employees reported in 2003. Sixty-three percent of the firms employed 50 or fewer people each, and 44 percent employed 25 or fewer people. Twenty-six percent of the Design 100 firms employed more than 100 people each, and 12 percent of the firms employed more than 200 people.

Slightly more than half of the Design 100 firms do no work outside their own country. Of American firms working abroad, Asia leads as the top work site, followed by Canada. The percentage of firms working in particular countries shows no significant variations compared to the prior year.

In spite of spiking interest in China, only 11 of the Design 100 firms worked there in 2004, compared to 10 firms that worked there in 2003—not a significant increase. This is the second year that Russia is included on the list, with 5 percent of firms doing projects there, about the same as in 2003.

Callison, of Seattle, is ranked No. 1 in the Design 10 listing of the Top 10 retail design firms ranked by revenue. Callison's reported revenue for 2004 was $54 million, an increase of $7 million over its 2003 revenue of $48 million. Carter & Burgess of Ft. Worth, Texas, fills the No. 2 slot for 2004 with reported revenue of $38 million, up by $3 million from its revenue in 2003. MulvannyG2 Architecture follows in third place with 2004 revenue of $32 million (down somewhat from its reported revenue in 2003 of $37 million). Pavlik Design Team, last year's No. 2 ranked firm, is in fourth place for 2004, with revenue of $30 million, a decrease from the $40 million the firm reported for 2003.

Combined revenues for the Design 10 firms for 2004 totaled $360 million, compared to $310 million for the Design 10 last year (this may be attributed to ties—which increased the 10 ranking slots to a total 13 firms). The Design 10 accounted for a collective 164 million sq. ft. of new and renovated retail space in 2004.

The top tier

No. 1, Seattle-based Callison continues to dominate the Design 100 ranking, as it has for the past several years. The company reported $54 million in retail design revenue in 2004, a significant jump from its revenue of $48 million in 2003, and the company produced 9 million sq. ft. of retail space. Callison's total revenue in 2004, from all sources, was $77.2 million. Well known for its design work for department store Nordstrom, the firm is now involved with new designs for Chico's FAS Inc., including the Soma prototype, and has completed projects for Williams-Sonoma Inc. and Washington Mutual financial outlets. Callison employs 475 people.

No. 2 in the Design 100 ranking is Carter & Burgess of Fort Worth, Texas.

Carter & Burgess reports retail design revenue of $38 million in 2004, and total revenues of $314 million. The firm was responsible for 27 million sq. ft. of retail space during the year. The company describes its most exciting retail project of 2004 as its design for Jordon's Furniture of Reading, Mass. Other clients include Circuit City, T-Mobile, the Gap, CVS Pharmacy, Auto Nation, Kay's Jewelers, PETsMart and others. Carter & Burgess employs 2, 432 people.

MulvannyG2 Architecture of Bellevue, Wash., ranks in third place, with $32 million in retail design revenue, and total revenue of $44 million. The firm executed 15 million sq. ft. in 2004. The firm specializes in core and shell design for the big box, discount and mass-merchandising sector and employs 342 people.



Design firms challenged to keep up with demand

The year 2004 was so good, in fact, that for some retail design firms, the biggest challenge was finding enough talent to meet the demand for their services.

"We hired 100 people because of the demands and growth of the company," says Paula Stafford, principal/board of directors, Callison, Seattle, which had its "biggest year ever" after 30 years in business.

After several lean years, some designers left the field, and now that business is growing, there is greater pressure on the finite pool of seasoned professionals that remain. "We're always looking for senior level designers, but there are not as many out there," says Stafford.

There is also fiercer competition for young recruits. "There is great talent coming out of schools today," she adds. "All design firms are looking at the best schools and pulling talent from them."

While those Design 100 firms interviewed enjoyed increased opportunity, this dearth of renewed resources is affecting overall growth potential. "We actually turned business away because we weren't certain we could provide the level of service and quality our clients expected if we didn't have the logistical resources," says Craig Hale, national director of retail stores at Carter & Burgess, based in Fort Worth, Texas, where business was "very good."

In order to serve their clientele more effectively, firms are becoming more and more diversified. "A lot of retailers are looking to make things simpler for themselves, so the more they can go to one resource for multiple services, they better they like it," says Hale. "We see great potential for fewer consultants with a greater number of services."

"Our current focus on style, cultural expression and community places is opening up new dimensions for retail," says Rod Bannon, Senior Project Manager at MulvannyG2 Architecture, Bellevue, Wash. "It's exciting to be part of an industry that is reshaping itself and the communities it serves through intelligent design."

The current state of the industry is also fostering a greater atmosphere of ongoing partnerships and strategic alliances between clients and designers. Firms are going beyond design to a more comprehensive marketing approach. "Many retailers believe that there is one easy solution," says Lynn Gonsior, executive vice president, Design Form, Dayton, Ohio. "Our challenge is to help them understand that there is no silver bullet. One size does not fit all. Going forward, we will continue to push retailers to think about their retail brand experience holistically."

"We're more of a design partner," says Stafford. "We have long-term relationships; [clients] know they can count on continuity. Our focus is on sustainability, in terms of sustaining our culture and brand."

Carter & Burgess, which has eight divisions, from engineering to retail design, "takes a truly pragmatic" approach to its business, says Hale. "We bring together other divisions and groups to provide specific services."

While retailers were doing more design projects in 2004 than 2003, Gonsior says, "but the projects were very focused. Retailers are realizing that they need to be more strategic with their store designs, focusing on customer-centric solutions," she says. "Retailers need to have an uninterrupted brand across all channels. Offering seamless, flexible options allows shoppers to interact with the brand on their own terms and deepens the customer connection."

"In the next decade," says Bannon, "we will continue to explore retail as theater. More retailers will tailor their brand to local markets. And all of us will start a more diligent search for simple, authentic ways to create, identity and evoke emotion."

But there is also room for growth in developing new clientele. "There is a trend toward launching new brands, as well as expanding into new markets," says Stafford, who notes the trend even among non-traditional retailers. "We find service providers searching out design firms," she says. "They want to create a better experience for their customers."

Going forward, there is a sense of optimism in the industry. "We feel really, really good about where we are," says Stafford. "We're very optimistic, especially in retail. When times are good, clients need to do stuff to build their position and take advantage of consumers' spending; when times get bad, they have to do things to get customers, and reposition themselves for the good times."

"Design Forum is optimistic about the retail industry," says Gonsior. "We're seeing growth across all categories."