The Death of the Mall as We Know It

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The Death of the Mall as We Know It

By Tim Denman & Jamie Grill-Goodman - 02/28/2017

The decline of the traditional mall is well documented. Traffic counts are down and long-standing cornerstones like Macy’s are struggling to remain profitable as consumers continue to shop online in increasing numbers, and the reason why is no mystery.

“Barely a day goes by where I don’t hear about a retailer that is doing X,Y,Z to respond to what Amazon is doing,” says  Oliver Guy, global retail industry director, Software AG. “We all know the bar is constantly being risen by Amazon. Everyone is responding but no one is trying to get ahead.”

While it is lean times for many mall-based retailers as they attempt to adjust to the post-Amazon reality, all is not lost. Ninety percent of sales still occur at the store level, and although that number is expected to drop to 85% by 2024 it will still account for over $7 trillion in revenue in the U.S. alone, according to EKN Research’s “State of the Industry Research Series: Changing the Retail Labor Model for a New Retail Environment.”

There is certainly still plenty of money to be made in brick-and-mortar and the mall is not going to be read its last rights anytime soon, but a realignment of the space is underway and only those malls that are able to provide shoppers with engaging experiences will survive.

Deborah Weinswig, managing director, Fung Global Retail & Technology believes the U.S. is oversaturated with shopping malls, with the top performers attracting increasing numbers of shoppers while the weaker sites continue to struggle. “Just 20% of malls categorized as Class A based on productivity, generate 72% of all mall sales,” writes Weinswig. “The current total of 1,221 malls in the U.S. according to the International Council of Shopping Centers simply is too many.”

Although developers might have overbuilt the American mall, leading mall owners like Simon Property Group and General Growth Properties are still highly profitable. Simon generated $5.3 billion from rent at its malls in 2015, with a massive 37% profit margin, according to Forbes. In fact, Simon’s revenue has grown every year since the Great Recession ended, and although the nation’s biggest mall owner is enjoying unprecedented success, there is certainly cause of concern. Investors have taken notice of the perilousness of the mall business ? the real estate giant’s share prices dropped 18% over the last eight months.

Redefining the Anchor

The traditional mall is a simple design. Food court, tons of specialty and apparel shops, a couple of kiosks sprinkled in and of course massive department stores at each end acting as beacons drawing in foot traffic and helping support the rest of the residents of the mall. General Growth Properties, the nation’s second biggest mall operator, reports that 70% of mall shoppers visit a department store during their trip to the mall, according to Forbes.

While department stores continue to be a staple of the mall experience many are not reaping the benefits. Macy’s for example has struggled to find success in the modern retail landscape announcing plans to close 100 underperforming locations. The mall’s traditional anchor is beginning to show its age and a new crop of destination locations are rising up to take its place.
 
“I think the excitement is gone from a number of these retailers,” says Ken Morris, principal, Boston Retail Partners. “It's sad, but you know who they are. They're the anchors that really are anchors; they're pulling that mall to the bottom."
 
"I think some of that's going to change in the next several months because there's going to be a lot of those anchors closing locations," he continues. "It will be interesting to see if they put companies like Primark, H&M and Zara into those locations."
 
One thing is certain, as these massive department stores close up shop, mall operators will have space to fill, whether that is with modern fashion stores, entertainment and dining options, or new anchor ideas such as grocer Whole Foods Market.
 
“When you look at mall growth it is tech companies like Apple that are doing the best,” says Karl Moats, director of product marketing, Amplience. “They require less staff and less overhead. In addition to retailers like Apple, I think you are going to see an increase in drug store and theaters and fewer apparel stores as the mall continues to evolve.”  

"To meet the needs of today’s shoppers, malls must deliver a personalized in-store journey blended with the online, mobile shopping journey and also consider incorporating experiential elements in order to drive new and return footfalls (i.e., cooking classes, Italian classes, store within a stores)," says Shelley Bransten, SVP of Retail, Salesforce.

The New the Mall Experience

The mall is certainly not dead, but it is in need of shot in the arm if it's going to regain its former glory. It is universally accepted that the malls and retailers that are going to thrive in this new reality need to provide shoppers with a differentiating “experience.” But what does that mean?
 
“For me the ones that are successful will be the ones who create a fantastic environment where people want to go and explore,” says Guy. “The stores where you see the lines of people waiting to get in are the stores that have a fantastic experience. For example, a Lego store opened in London and I was there between Christmas and New Year. There must have been a line of about 200 people waiting to get it. Most of the people weren’t waiting to go inside and buy something. If they wanted to they could buy it online. There were there for the experience.”
 
While the appeal of massive Lego displays depicting pop culture icons is not hard to understand, not every retailer and/or mall has the ability to create something so dramatic. A unique spectacle certainly helps draw a crowd, but a toned down, tech-enabled experience can also help restore malls to their former glory.
 
“I think malls need to invest in digitalizing technologies to help facilitate unified retail commerce,” says Robert Hetu, research director, Gartner. “They need to support whatever experiences consumer’s shopping behavior requires. Some consumers will continue to browse, others will seek speed and agility for execution of retail processes. Some investments are physical, I think traditional malls need more access points for example. Others are more tech enabled like virtual stores. They can also facilitate click and collect for consumers across all stores in the mall.”    

Brendan Witcher, principal analyst at Forrester echoes Hetu’s sentiments about the need to facilitate easier fulfillment. “The idea of walking around a mall all day carrying bags with me is challenging,” he says. “That's why a lot of malls are trying to find value in services like using a company like Deliv, where you buy the packages at the store, but then you leave them at the store and Deliv will come and collect them and deliver them to your house that same day. Malls themselves, as a business, have to find their own niche way of creating value for consumers that work with their digitally savvy and 'I need everything now' mentality."
  

Not Every New Experience is a Good One

 Thinking big and out of the box while developing malls and individual stores can lead to some major successes, but if developers overextend themselves or misjudge demand they can be left with a multi-million-dollar empty building. American Dream is a stalled retail and entertainment complex under construction in Bergen County, New Jersey at the Meadowlands Sports Complex. Once known as  Xanadu, ground broke on the site in 2004, but the developer, Mills Corp., ran out of money in 2006. The current developer is Triple Five, which owns West Edmonton Mall and Mall of America.

If it ever manifests, American Dream promises to be the future model of shopping and entertainment.  The three million square foot project would house anchor tenants Saks Fifth Avenue and Lord & Taylor, along with over 450 retail, food and specialty shops. In September 2016, Triple Five and Nickelodeon announced a Nickelodeon Universe theme park would join the entertainment offerings, which include Big SNOW America. The 16-story building most New Jersey residents would recognize, was built to offer year-round skiing, snowboarding and snow tubing, as well as a collection of retail stores surrounding the snow park.

Additional entertainment plans include an indoor DreamWorks Water Park; a 1,500 seat live Performing Arts Theater; 285-foot tall Observation Wheel; luxury movie theatres by Cinemex; Sea Life Aquarium & Lego Discovery Center; NHL-size Ice Rink; and an 18-hole miniature golf course.

According to a December 2016 report from Bloomberg, the latest expected opening date is fall 2018, but in February, WNYC NEWS reported the latest financing deadline has come and gone, once again raising concerns that developer Triple Five will not have sufficient funds to complete the project. If the economics don’t work out Triple Five would be the third developer to walk away from the entertainment and shopping complex.

Bloomberg noted that the American Dream aims to have floor space close to a 50-50 shopping-to-entertainment balance, while the current ratio at Mall of America and West Edmonton Mall is closer to 85-15. "It’s something, but it certainly doesn’t look like the country’s biggest retail construction project," said the report, noting that Triple Five said it estimates that the site is 25% complete. 

The American Dream remains just that at this point ? a dream. But if developers are able to pull it off and the project becomes profitable for both developers and tenants the concept of the mall as an entertainment hub will be alive and well and operators/developers across the nation will certainly take notice.

Where Do We Go From Here?

 With online revenue steadily increasing and in-store foot traffic declining at many brick-and-mortar locations, the kneejerk reaction for retailers might be to scale back or eliminate their physical presence, but that is likely not the answer. Physical retail is still the heart and soul of the retail experience and retailers and mall operators need to invest rather than pull back.

 
“Most multichannel retailers only exist online because of their physical presence,” says Hetu. “They will not all be able to translate to an e-commerce only presence. In fact when the close up shop in an area e-commerce tends to dry up for them from that area. It makes sense, out of site out of mind. If retailers that close stores take the savings and reinvest in other stores then there is hope. Investments need to include an exciting and diverse presentation experience. This will not be easy or cheap, but tired old displays, snagged carpets, broken fixtures, etc. are not going to keep them coming.”   

Focusing on one channel and abandoning another is not a realistic approach in today’s omnichannel environment, in fact it is the opposite strategy of retailer’s leaders. “Amazon is the original disruptor of brick-and-mortar,” says Moats. “And it is now moving into brick-and-mortar. There is a reason for that.”

As shoppers continue to navigate away from the mall, retailers and mall owners need to reinvest in the shopping experience to draw consumers back in. The challenge now and into the future is defining what that experience is, and finding unique and economically ways of providing it.