The Slow And Steady Demise Of Brick-And-Mortar Retail…What’s A Mall Owner To Do?

online shopping crushing retail malls

The drumbeat of online shopping that’s replacing the consumer heading out to the mall started slowly, but has picked-up year after year until now it’s reaching a crescendo!

The talking heads on business news and in the newspapers dwell on the fact that the shopping mall, once anchored by some of the biggest and strongest names in retail, are becoming an endangered species as chains once considered necessities have become something of an afterthought.

After all, who among us has not marveled at the ease and convenience of a few key strokes that magically result in a package arriving at our front door or office in a day or two?

So if this trend of internet shopping is going to grow over time, what’s to become of commercial real estate reliant on dinosaurs that may soon be extinct? Not to mention the lenders that have theses brick-and-mortar behemoths as collateral for the loans they made!

Commercial Landlords Trying To Fight Back!

An excellent article written by real estate analyst Bob Brown, summarizes the issues and then examines some of the ways commercial landlords are going about trying to stem the tide of brick-and-mortars decline!

The Decline of Classic American Retail, the Mall, and How Commercial Landlords are Fighting Back

Summary: “…landlords are fighting back vigorously. To combat the internet invader with its generally lower price points, mall owners are embracing creativity, diversity, and perks to lure back their precious clientele, and rekindle enthusiasm in the mall as a place that has become an iconic American tradition in a very short time span…

The first secure retail transaction over the web was conducted by the Internet Shopping Network in 1994. Within a year, Amazon and eBay launched their history making online shopping sites. In the following decade, as the new e-commerce industry worked out its growing pains and potential customers began acclimating to the new retail revolution, shoppers did not, in fact, surge into the new market in significant numbers.

As hard as it is to believe from our perch in 2017, online sales only accounted for a mere 2.4% of all retail sales in 2004 – a full ten years after internet shopping began. But just six years later, in 2010, online sales almost doubled to 4.6%. By the end of 2014, that number had jumped to 6.6%. And by the end of December of 2016, e-commerce had vaulted to 8.3% of retail sales according to the U.S. Commerce Department. And if we eliminate auto sales and fuel from the equation, online sales represented 11.7% of all retail. So, while the vast majority of all retail sales still take place at brick and mortar locations, the trendlines are clear: retail sales on Main Street and at mall locations are dropping.

The exponential growth of the online sector has devastated many of America’s hallmark retail establishments. Following on the heels of thousands of store closings in recent years, 2017 appears to be the worst year yet for traditional retail. Just as a sampling: Sears plans to close 42 stores this year, Macy’s about a hundred, Staples 70, Kmart 108, JC Penny 138, RadioShack 552, and Payless 552. And America’s second largest drug store chain, CVS, plans to close 70 stores this year. Additionally, The Limited recently closed its remaining 250 stores. And Bloomberg reports that Bebe is closing all its remaining 170 stores.

All told, according to a March 2017 article in Business Insider, 3,500 chain and department store locations are expected to shut their doors in the next few months alone.

Two statistic stands out from all the rest: According to Cushman and Wakefield, visits to malls declined by well over 50% since 2010, forcing landlords to lower rents dramatically, particularly for the anchor stores. And secondly, according to Bloomberg, while December 2016 total retail sales grew by a healthy 4.4% compared to a year earlier, “Department store sales fell by 7.2%, marking the 23rd consecutive month of year-over-year declines…” Even the upscale Neiman Marcus Group recently withdrew its plans to go public amid declining sales.

Developers who built hundreds of malls per decade from the 1960s to the 2000, have only built nineteen new ones since 2010, according to a recent report in Fortune Magazine.

Do these grim statistics portend massive mall closings throughout the country? Perhaps. But landlords are fighting back vigorously. To combat the internet invader with its generally lower price points, mall owners are embracing creativity, diversity, and perks to lure back their precious clientele, and rekindle enthusiasm in the mall as a place that has become an iconic American tradition in a very short time span.

Leading the charge is The Simon Property Group, the nation’s oldest and largest mall operator. Back in 1960, the Bronx born, Melvin Simon, teamed with his two brothers, forming what Fortune Magazine humorously refers to as, “A trio of machers.” They soon became known as “The Marx Brothers of malls.” The brothers essentially invented the department store anchor model for the indoor mall.

Their underlying concept was to charge the anchor/department stores a very low rent per square foot, relying on them to be marquis attractions. The idea was a win-win for all concerned. While the anchor stores paid very little rent, the smaller stores received foot traffic that they could hardly have dreamed of. This increase in customers, and hence sales, was more than enough to justify the higher rents they paid. It may surprise many that even today, the typical mall department/anchor store pays only $4 per square foot in annual rent, while the average of the non-anchor tenants paid $42.22 per square foot as of the third quarter of 2016, according to the real estate analytics firm, Reis.

Simon’s son, David, the current CEO, is now carrying on the family tradition of innovation, and is a key player in the reinvention of the American mall. Let’s look at the Simon Property Group as a microcosm of what mall landlords are doing to re-balance the playing field, stanch further losses, and begin a reinvigorated upward trajectory.

When entering their Roosevelt Field shopping complex in Garden City, New York, the shopper is not greeted by the ubiquitous, but tired, “You Are Here” directories. Instead visitors are drawn to attractive, sleek screens where the malls’ trendier emporiums are given the most prominent spots. Those screens also inform the shopper of app-based loyalty programs which can land a customer a reserved parking spot, among other perks. The mall is tastefully furnished with plush leather couches, flanked by charging stations for cell phones.

As part of a $300 million renovation, the mall has enhanced its full-service, sit-down restaurant experience. The “food court” has been upgraded and renamed, “The Dining District.” Plastic plates and utensils have been replaced with silverware. The design and furnishing of the eateries reek trendiness, rather than the plebian, drab cafeteria style of the past. During the past five years, The Simon Group has allocated $200 million for new, stylish restaurants in its malls across the country.

Throughout the Roosevelt Field mall, elegant signage nudges shoppers to the new luxury wing, opened just last year, anchored by and named for the ultra-modern, state-of-the-art Neiman Marcus store which offers its own valet parking. The new NM Café is tastefully designed in a casual, understated, contemporary style with muted lighting and modern décor.

The Simon Group is hosting dazzling events, such as “Influencer powwows” hosted by eminent fashion columnists and stylists. Neiman CEO Karen Katz told Fortune Magazine recently that, “They’ve stepped-up the quality of their events. They’ve done such a great job of promoting Neiman Marcus in the Simon branding within the mall.”
Another major Simon Group property is the King of Prussia mall outside Philadelphia (the second largest mall in the U.S.), which added fifty stores in 2016. But this investment is just part of the $2 billion the group plans to invest in their malls across the country.

To succeed in their goals, the firm has been diligent to stay ahead of trends, quickly replacing struggling brands with trendsetters. Non-retail attractions such as high-end fitness centers and movie theaters have been added, as have gourmet grocery stores. At the College Mall in Bloomington, Indiana, Simon  recently replaced the Sears store with a Whole Foods, an Ulta (a fast growing, trendy chain of beauty stores which carries cosmetics, fragrances, and skin care brands), and other smaller niche outlets. Simon and the other top line, proactive mall operators (General Growth Properties, Taubman Centers, and Macerich) are planning frequent concerts to draw the younger age demographic. Supervised play areas for children are another area set to enhance the mall experience.

Additionally, these landlords are placing much greater emphasis on one key advantage they have over the online competition: personal shoppers. The guy who questions his own taste and is not up to date on the latest fashion statements, yet wants to buy his wife a special birthday or holiday gift, will not find much help on the Amazon website. A personal shopper can go a long way toward building enduring customer loyalty.

As department stores contract, The Simon Group has new ideas about exactly how an anchor store should be reimagined. In recent years, Apple stores have been lured to serve as anchors – presently 55 Simon malls have an Apple store, while 15 have a Tesla store. Studies have shown that the presence of these retailers can drive overall mall sales up by 10%. Of course, these stores are offered a highly preferential rent.

Clearly, The Simon Group is not rolling over to the e-commerce shopping revolution. Rather, they are vigorously fighting back through renovations, innovations, and a general reconfiguring of the mall experience to bring it in line with modern tastes and trends.

Last June, at an investor conference, David Simon, said: “You are going to see, at the end of the day, the better malls will get bigger, better, and more diverse, and some of the other fringe retail will suffer.”

For those still convinced that Amazon is the wave of the future, and that brick and mortar retail stores will soon become a relic of the past, consider this: According to The Wall Street Journal of 2/2/17, and numerous other news outlets, Amazon plans to open 400 physical bookstores across the country, the first of which has already opened in Seattle. The internet behemoth recently added stores in Boston, Chicago, San Diego, and Portland. In New York, two stores are slated to begin operations this year in prestigious locations – the first will be located inside The Shops at Columbus Circle and will open this summer; the other will be planted directly across from the Empire State Building.

For those who accept the conventional wisdom and are ready to write the epitaph for America’s malls, it may be worth considering that the future of American retail may not be as clearly defined as is presently assumed.

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