A blend of luck, necessity and simple geography all played a role in Dartmouth-Hitchcock Medical Center's decision about a decade ago to feature an eclectic mix of retail shops within its sprawling new facility in rural New Hampshire.
Indeed, the hospital's expansive retail strip along "Main Street"--an airy, interior mini-mall that includes everything from a pizzeria and dry cleaners to a hair salon and full-service bank--was something of a necessity when Dartmouth developed a new, 225-acre campus nearly four miles from its old home in the center of nearby Hanover, N.H.
"We realized we were going to be somewhat isolated," says Rick Nothnagel, Dartmouth-Hitchcock's vice president of facilities management. "From that point on, it seemed like adding retail was a good way to create a somewhat different experience. It was definitely a departure from the norm. I would say it developed sort of . . . serendipitously."
Now, more than 10 years after Dartmouth-Hitchcock unveiled its 20,000-square-foot mall, hospitals like it around the nation are following suit, recognizing that a retail mix is a logical step in providing additional services to patients, visitors and employees.
Though the retail boom is limited for now, Nothnagel's creation has served as a model for imitators such as Northwestern Memorial Hospital in Chicago, which sent staffers on a field trip to Dartmouth-Hitchcock early in the planning process for a huge new facility in the shadow of the city's "Magnificent Mile" shopping district.
Like its predecessor in New Hampshire, Northwestern took the concept of a traditional gift shop to new heights by dedicating about 13,000 square feet of space to new retail outlets when the $580 million facility opened in May 1999 just a block east of Michigan Avenue.
Patients, visitors and employees at the not-for-profit hospital now can grab a cappuccino at a coffee chain, sit down for lunch at a deli, arrange a loan at a full-service bank branch or peruse the latest mystery novel at a small bookstore. There's also a 3,300-square-foot pharmacy, two conventional hospital-run gift shops and an ultramodern cafeteria that equals any high-end food court, featuring a range of culinary choices from fresh sushi and Chicago-style pizza to made-to-order deli sandwiches and Thai chicken salads.
"We made a conscious decision, really, that retail was going to be a big part of our strategy," says Jean Przybylek, vice president of operations at the 654-bed hospital. "As we did our planning, we incorporated this retail into the design, based on (surveys of) what kinds of shops and services our patients, visitors, staff and employees thought would enhance the environment.
"Our goal was to serve the community and to provide the best possible experience we could (through expanded retail outlets)," she says. "We couldn't do that ourselves--it's not our core business. There are places like Starbucks and Au Bon Pain that do this a lot better."
In much the same way that U.S. airports over the past decade or so rejuvenated their perennially sluggish commercial operations by adding a little spice and variety, Northwestern and other hospitals are recognizing the potential of upgraded, updated retail outlets, observers say.
"Typical gift shops are the tip of the iceberg (for hospital retail)," says Peter Plantes, M.D., vice president of business operations at VHA, an Irving, Texas-based network of community-owned hospitals that represents about 2,200 members. "Healthcare organizations of today are now coming to understand the importance of innovating around consumer trends--in terms of how they design their facilities, how they plan their space and what programs they use to address consumers' needs."
VHA, Plantes says, has been actively studying the expansion of this idea since 1997, gauging the potential by examining other industries that have adapted to consumer trends during the past decade.
Despite some clear examples of this trend toward retail, a dramatic expansion in retail isn't an easy or quick answer for every hospital. Even those facilities held up as success stories--including Dartmouth-Hitchcock and Northwestern--earn only a modest profit on these ventures.
"It's one more way to be user-friendly," Nothnagel says. "It's not appropriate for all environments, of course. It was never our intention or motivation to make money. But it's been a success."
Dartmouth-Hitchcock's retail operation, established as a break-even proposition run by a local real-estate developer who handled all the leasing, now turns a modest profit, Nothnagel says. After five years, the hospital assumed the role of leasing agent, charging about $30 per square foot for retail space. "It's a little better than break-even," Nothnagel says. "We're not making an awful lot of money. But that wasn't the purpose. It's a long-term investment that's worked out OK for us."
At Northwestern, the retail operations--which generate about $500,000 per year in combined revenue from rent--were never intended to boost the bottom line, Przybylek says. In this case, she says, convenience and customer service count a lot more than the drive for additional revenue.
"We knew there was a revenue opportunity," Przybylek says. "And we wanted to make a return on our investment. But the fundamental value we believed it would bring was in the support of our mission--that's where we've gotten the biggest bang for our buck."
Also, most hospitals with successful retail operations boast certain built-in advantages, including Dartmouth-Hitchcock's captive audience miles from the nearest town and Northwestern's choice location in the core of a world-class shopping district. Both hospitals incorporated their retail outlets in new construction.
For many older hospitals, confusing, mazelike corridors cut off the steady flow of customer traffic that is crucial to sustaining retail outlets, says Curt Whelan, vice president of Baltimore-headquartered RTKL Associates, the world's fourth-largest architectural firm and a major national presence in healthcare design.
"We're right at the beginning of this trend," Whelan says. "There are more on the drawing board than have been implemented. Hospitals and healthcare providers are more followers than leaders. They're waiting to see what's working--and what's not."
He estimates that about 80% of U.S. hospitals haven't yet considered expansion of retail outlets.
"I don't think this is going to be a really huge revenue stream for most hospitals," Whelan says of most retail expansions. "There are opportunities. It should be fundamentally self-funding, and possibly generate some income. But the whole issue, for most hospitals, is customer expectation--the increasing demand for convenience, as well as the issue of creating a work environment that helps you keep your staff happy."
The conservative hospital industry, observers point out, won't jump headlong into this trend until it is proven to be an unqualified success. Recognizing their limitations in terms of commercial creativity, many healthcare facilities are taking baby steps toward an expanded retail base by reinventing the traditional hospital cafeteria, providing coffee kiosks and offering frills such as video rentals in the gift shop, Whelan says.
Whelan's firm, which has worked with more than 100 healthcare clients, is the architect and lead designer of the new 204-bed Florida Hospital Waterman, a $129 million facility in central Florida just north of Orlando. The 450,000-square-foot hospital, expected to open in 2003, features a huge atrium and "mall concept" that funnels or directs all foot traffic back to the building's main spine--a central retail hub that will include a food court with an "open-cafe design" and a wide sampling of foods.
"The key issue," Whelan says, "is to control the environment--customize and merchandize."
While most successful retail ventures in hospitals depend on high traffic volume in busy central locations, Dartmouth-Hitchcock has thrived in an isolated locale. "In this rural location, we recognized we'd need to do something, so we went about asking patients, visitors and employees what they thought would be useful," says Gail Dahlstrom, director of facilities planning for the medical center, which employs about 5,000 and includes the 304-bed Mary Hitchcock Memorial Hospital.
Boasting about 20,000 square feet of leased retail space, the medical center includes a deli, pizzeria, a full-service bank, a convenience store, hair salon and a dry cleaners that features a shoe service and tailor shop.
At Northwestern, where customizing and merchandizing are something of an art form, officials have scattered retail outlets over three floors of two new buildings--a 16-story, 492-bed hospital and an adjoining 22-floor outpatient pavilion connected by a sky bridge and covered walkway. Besides being near a major shopping district, the 2.2 million-square-foot hospital employs about 5,700 people and attracts a daily stream of patients to the affiliated 900-physician multispecialty practice. It's a custom-made market for retailers.
The types of leases vary by the kinds of operations, Przybylek says. For instance, the Au Bon Pain restaurant, which is open 24 hours a day, pays a monthly rent along with a percentage of sales. The bank pays a monthly rent.
Don Barliant, owner of Barbara's, a small bookstore that features about 4,000 titles in about 850 square feet of space, says revenue in his little corner of Northwestern has exceeded expectations in his two years of operation. Barliant, who operates 10 bookstores--including outlets at New York's LaGuardia and Philadelphia International airports--says revenue at the Northwestern site has increased about 25% each year, and he's turned a profit comparable to the high-volume operations for travelers at his two busy airport locations.
Moreover, he says he pays about $2,250 per month to rent his shop at Northwestern--or a fraction of the price at a place like LaGuardia, which charges about $15,000 per month for about 1,000 square feet of retail space, Barliant says. The hassles over security concerns and high construction costs are other problems he doesn't face at Northwestern, Barliant says.
"It's been a wonderful location--it works for us," Barliant says. "I think there's lots of opportunities here. That's why hospital complexes can be very good for retail."
How high can it fly?
While some observers are comparing Northwestern's big retail renovation with the revolution that swept U.S. airports in the mid-1980s, Barliant doesn't hold out much hope that healthcare facilities will ever reach that level of commercialization.
"I've heard a lot of talk . . . but I don't see a lot of activity," he says. "The comparison with airports is a good one, to an extent. You have a location that has not exploited the full potential for retail development. It's a good idea. Where the comparison falls apart is when anybody believes the market (for hospitals) is as large as it is for airports. It isn't. There's nowhere near the same kind of foot traffic."
The budding renaissance in hospital retailing goes beyond the traditional. In fact, the great potential for durable medical goods--everything from canes and wheelchairs to prosthetics and specially designed workout attire--could be far greater than the relatively modest margins associated with regular retail ventures, Plantes and other observers suggest. Many hospitals are now trying to corral at least a portion of this growing business.
"It's an incredible opportunity," says Mindy Thompson, who heads Simply Retail, a Golden Valley, Minn.-based firm that is working with several healthcare organizations to design customized retail outlets catering to the specific needs of patients. "It's a $220 billion industry (in durable medical goods), but this money is being spent outside hospital facilities. It's cash leakage for a hospital."
Baylor University Medical Center in Dallas is a prime example of this idea, opening Ernie's Apparel Center about five years ago on the ground floor of the Charles A. Sammons Cancer Center. Ernie's, named for a cancer survivor and longtime Baylor supporter, provides protheses, special mastectomy bras, swimsuits, wigs and other products to oncology patients, and it uses proceeds to fund cancer research.
Despite the success stories, there's ample reason that adding retail outlets hasn't exactly caught fire. Existing hospitals often cannot renovate existing plants to accommodate new commercial centers.
"At this point," says RTKL's Whelan, "this is more of an enhancement for hospitals than a revolution."
Indeed, take the case of 643-bed Swedish Medical Center in Seattle, where retail outlets are only now enjoying modest success after years of financial difficulty, officials say. Retail outlets were included at ground level under city zoning rulings when the first attached medical office building was constructed about 15 years ago.
The facility now provides about 20,000 square feet of retail space on its campus, four blocks north of the central business district, says Don Audleman, senior vice president of Trammel Crow Co.'s national healthcare group, which works with Swedish and about a dozen other healthcare institutions.
Primarily on the street level of three medical office towers, Swedish's retail outlets include a local drugstore, a barber/hair stylist, a flower shop, two Starbucks shops, a Jamba Juice outlet, a Quizno's sub shop, a Hallmark card shop and Pallino's, a table-service Italian restaurant.
"It's paid for itself," Audleman says. "But it hasn't been a home run for anyone--the tenants or the hospital."
Like Northwestern, Swedish signs tenants under a straight lease arrangement, which includes a clause that mandates profit-sharing when sales volume exceeds a certain level. None of the tenants has been so successful that the hospital has received more than the basic rent, which runs about $22 per square foot, comparable to other retail space on the periphery of the central business district but still several dollars shy of what Swedish charges office tenants in the buildings.
Despite Swedish's location in downtown Seattle, about a half-dozen retailers--mostly small mom-and-pop operations--have failed over the past several years, Audleman says. Prospects have become slightly brighter in the wake of new development and a booming market in residential space. This "critical mass" has helped boost revenue, but concerns persist among retailers, Audleman says.
"There's a lot of people pushing this as the next hot thing who maybe don't have the experience with the fragility of the concept," he says. "It's a great amenity for employees and patients. But it's tough to make it work."
Yet Przybylek, far more sanguine, expects that the concept of greatly expanded retail operations in hospitals will catch on in a big way sometime down the road.
"In the past, hospitals never thought about putting retail in because people came to your building for such a specific reason," she says. "Over the last 15 years or so, you've seen a shift in what patients--and consumers--expect to find at a hospital. These days, they expect certain amenities: a TV with cable channels, an inviting room, control over their food choices. Because of all these new expectations, retail has become a natural evolution for hospitals.