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Malls May Have A Vertical Future

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Last week, mall operators Simon Property Group and Brookfield Property Partners entered into an agreement to buy the retail business of J.C. Penney. It’s not the first deal for a bankrupt retailer Simon Property Group has entered into this year – more like the fourth – including Brooks Brothers, Lucky Brands, Forever 21 and others.

Along with partnering with Brookfield, Simon has found a long-term partner in Authentic Brands, which has been scooping up ailing retailers for some time. As I’m sure most of you know, their joint venture is called SPARC, Simon Properties Authentic Retail Concepts.

Many are trumpeting this as the end of malls as we know them. I think it may be the only way they survive and thrive in the future.

For one thing, the acquired retailers’ cost structures change dramatically. According to the NY Times, SPARC retailers pay no base rent, just percentage rent, (a percentage of their sales), to the landlord. This is the best kind of synergy. Aggregate costs fall because there is one less middleman to pay. Just like private label product offers higher margin than landed goods, so too, “private label stores” offer higher earnings opportunities than other brands.

And one thing we can say for sure, it’s a far better solution than turning anchor stores into Amazon Fulfillment Centers. That idea, which in my mind fell into the category of “What were they thinking?” would have led to zoning wars, community battles, and reduced the “value” of center mall locations even more. This would have caused even more vacancies. I mean, what retailer besides an outlet store wants to locate in an industrial area?

Of course, there’s no reason there can’t be a mixture of traditional retailers and the “verticalized” stores that belong to the mall operators. That’s the ideal scenario. And absent a miracle, given the background of Authentic Brands, mostly bottom fishers of once iconic retail names that have fallen on hard time, one doesn’t expect this will be an “A mall” experience. However, “A” malls in many cities were doing well before the pandemic and mall operators were making significant investments in making all their properties much more destination-like and fun. Certainly, the pandemic put a hold on many of those investments, but one day the pandemic will end.

I do know that some smaller cities were in danger of becoming mall deserts, with the bankruptcies of both Sears and JCP. I do believe that when we finally come out the other side of this awful pandemic and its associated recession, Simon and its retail brands will have a real opportunity in front of them.

Of course, all these financial maneuvers don’t change the fact that the acquired retailers need merchants. They will have to offer merchandise that customers can both afford and want to buy. That was part of their original problem, after all. Still, a lower cost structure, primarily associated with rent that is solely based on a percentage of sales should give them runway and time to find their stride, re-establish brand equity and draw in customers.

None of this is going to happen tomorrow. I don’t see a “ho-ho-ho” happy holiday season ahead. But if we look ahead to 2022 (did I really just write that?) and a presumed end to the pandemic, the opportunity could be profound.

Is verticalization a solution to mall operators’ problems? It’s certainly a significant step, in my opinion.

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Newsletter Articles September 15, 2020
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