Macy'sThe idea of devoting floor space within one store to another company's brand and marketing has been tried in different ways over the years. One prominent approach is the Starbucks coffee shops that dwell within many Target stores. But nowadays, department stores are practically turning into mini-malls, with in-store shops dedicated to many brands, including some that might even be a competitor just outside the department store's doors.

The idea of the in-store shop has evolved from getting space on the floor and sharing marketing costs to a more formal relationship where brands lease floor space and create a shopping experience of their own, says Robin Lewis, CEO of The Robin Report, a retail industry trade publication and co-author of The New Rules of Retail due out in November.

"For the brands, they're immediately getting -- overnight almost -- hundreds of locations for very low capital investment. . .and of course, the department stores are gaining a whole other consumer market and/or a whole new product category," he says.

Finding "White Space" Inside Macy's


In other cases, retailers are using the branding of a purchased competitor so they can use the name to pull in new customers, such as Toys 'R' Us with FAO Schwarz and Best Buy (BBY) with Magnolia Audio and Video. That helps the stores leverage the former rival's consumer base (upscale shoppers for both FAO and Magnolia) and attract new shoppers, says Lewis.

Specialty store locations can generate sales of up to $300 to $400 per square foot annually, compared to roughly $150 to $200 roughly for a traditional retailer such as a department store, Lewis estimates. It's telling that Macy's (M) CEO Terry Lundgren recently appointed a new executive vice president of business development, Molly Langenstein, and charged her with finding "white space" in stores than can be filled in with in-store shops leased to other retail brands, says Lewis.

Macy's and J.C. Penney (JCP) have been aggressively adding in-store shops and exclusive brands. But other retailers are also looking at the practice, says Lewis. Someday, he says, we may see an Apple Store (APPL) or Victoria's Secret shop inside a Macy's, he says.

Here's rundown of some high-profile in-store shop deals:

Aldo (J.C. Penney): Penney announced a deal this summer with Aldo Group, a shoe retailer with over 1,500 stores around the country, to launch in-store shops aimed at 15- to 30-year-old shoppers. The first Call It Spring by Aldo shop is scheduled to open in Penney's New York City store this year, with another 100 stores by spring and 500 more openings by fall 2011. The deal includes men's and women's shops inside Penney's shoe departments, selling around 300 styles of footwear and handbags priced $29.99 to $69.99.

Destination Maternity (Macy's): The parent company of A Pea in a Pod and Motherhood Maternity expanded its relationship with Macy's this summer and became its exclusive maternity clothing shop. Under the new deal, Destination Maternity (DEST) will add more than 500 shops by the end of February, for a total of 615 locations in the U.S. They carry a selection of maternity and nursing apparel from both lines priced up to $200.

Edwin Watts (Sears): Early this year, Sears Holdings (SHLD) announced a deal with Edwin Watts Golf Shops to open 12 in-store shops at key locations in seven states, including stores in Hicksville, N.Y., and Falls Church, Va. The shops are designed to have the same layout and services as free-standing stores, including the in-store putting green and equipment fittings, carry similar products and are staffed by Edwin Watts sales associates.

FAO Schwarz (Toys 'R' Us): The specialty toy retailer was bought by Toys 'R' Us in 2009, and its new parent took advantage of the brand during the holidays, introducing a selection of FAO toys as a way to set itself apart from the $5 and $10 specials at big-box stores. This holiday, Toys is going big, with 10 pop-up stores and with FAO boutiques in all Toys 'R' Us stores around the country that will stay open year-round. The boutiques, set near the store entrance, carry a selection of about 85 popular toys at prices from $3.99 to $199.99, including FAO's signature teddy bear and a toy modeled after the giant keyboard at the Fifth Avenue store featured in the movie Big.

French Connection (Sears): Sears announced in September it will launch French Connection UK in-store boutiques at 500 U.S. locations starting in the first quarter of 2011. The line will start with clothes and accessories for women, men and children and will expand later to include swimwear, footwear, sunglasses, jewelry and housewares. French Connection had pulled back earlier this year as part of a reorganization and said it would close down all but six of its U.S. stores to focus on selling apparel in department stores.

Lush (Macy's): The British toiletries boutique couldn't find space to open a store in Chicago in 2005 and instead worked out a deal to lease a part of Macy's on Michigan Avenue. Now 37 of its 100 U.S. stores are in-store shops at Macy's stores nationwide. Ironically, in New York City, a Lush store on Broadway is located just down the block from Macy's flagship store on 34th Street -- not inside.

Magnolia Home Theater (Best Buy): The big-box electronics retailer bought Magnolia Audio Video, a longtime retailer of high-end electronics, in 2000 and now has more than 350 in-store Magnolia shops at Best Buy stores nationwide. In February, it opened a new concept, Magnolia Design Center, inside a Costa Mesa, Calif., Best Buy. That was followed by four other California locations and the company plans to open 15 more in early 2011. The design center works as a showroom for premium audio and video brands, and for design services such as home automation and outdoor electronics. It displays products such as a 103-inch plasma screen in setups that mimick the rooms in a (very upscale) home.

Mango (J.C. Penney):
The Spanish "fast fashion" chain had been trying to plant its flag in the U.S. market, but it found a way to leapfrog the process by joining with Penney. MNG by Mango shops opened in 77 stores around the country in August and will expand into 600 by fall of 2011. The shops have a selection of women's sportswear, accessories, handbags and shoes, starting at $9.90 for a t-shirt to $159.90 for a jacket.

Sephora (J.C. Penney): The French chain of cosmetics superstores is owned by the luxury conglomerate LVMH Moet Henessy Louis Vuitton (LVMHF), but that didn't stop it from going mid-market in 2006, when it joined with Penney. It's been a good deal for Penney, which continues to ramp up the Sephora outlets. Penney recently announced a store renovation plan that will bring the number of Sephora shops to 231 by year-end.

Sunglass Hut (Macy's): Luxottica Group (LUX), an Italian eyewear company that also owns brands such as Ray-Ban and Oakley, signed a deal last December that expanded the relationship between its Sunglass Hut store chain and Macy's into an exclusive arrangement. Sunglass Hut already had about 240 in-store shops under its previous deal with Macy's and plans to have another 430 open by spring 2011.

And more in-store shops are on the way, says Lewis. Next up: Experiential locations such as restaurants and event spaces in stores, he says.

"It's a matter of our old traditional department store mentality being broken down and replaced by people who have more of a vision," he says. "[They] envision the building they occupy as a mall owner would do, or a real estate developer."


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