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Turning Mall Anchor Stores Into Fulfillment Centers: Seriously?

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You know you are hearing bad business news when it’s published on a Sunday in August when most folks are probably on vacation. Still, the Wall Street Journal managed to push this piece of news out and get a lot of attention. Simon Property Group, Inc., the largest mall operator in the United States is in talks with to take over space left by bankrupt anchor tenants JC Penney and Sears. Amazon’s goal is to turn them into distribution/fulfillment centers.

As I said in a comment on RetailWire Monday, “Well, this is a good way to kill off the mall concept once and for all.” And yes, I believe it is.

I am going to say some things most of you likely know, and give some advice I hope you’re already taking, if your stores are located in any of these malls. For the rest of our readers, I hope to explain the mall model and how it was supposed to work.

Retailers build mall-based business models because they presume that the mall operator will drive traffic to them, and they therefore will not have to spend as much on marketing. It is a trade-off many specialty stores have been willing to make. As we have discussed before, in the days BC (before COVID), malls were already in trouble. There were several contributing factors:

  • Retailer mergers, acquisitions and growth created a situation where malls became a sea of sameness. Generally walled off from the communities they serve (yes, there are exceptions) with the same chains in almost every one, you could not be sure if you were in Dallas or Boston. To their credit, mall operators tried to attract new renters, but the cost of entry was too high for many.
  • Frankly, mall operators got lazy. While in the 1980’s and early 1990’s they were destinations where kids could be “mall rats” and hang out, families could go listen to nascent music legends like Debbie Gibson and Tiffany (oh man, I am so dating myself), or even just sit and listen to soft piano music, by the late 1990’s the anchor stores were expected to drive all the traffic and mall operators focused more on providing services like telecommunications to their tenants. These services were not always what retailers wanted, but they generated nice funds for companies like Simon.
  • Of course, we all know that a portion of retail sales had already moved online. BC, somewhere close to 15% of sales were being consummated through eCommerce. That implies that at least in the US (and from what I’ve seen, in Europe), there were around 15% more stores than retailers once needed. Grocery seemed to be the only retail segment somewhat immune, more because those retailers did not quite know how to make money at eCommerce than because there wasn’t any demand. But any way you look at it, we were over-stored. Even the Great Recession of 2008 did not cull the herd enough.
  • Sears and JC Penney, as major mall anchors were already going through some terrible identity crises. I can’t even talk about the destruction of Sears anymore, but I can say that JC Penney was in trouble even in the days before Ron Johnson showed up to do whatever he did there. They were losing their draw. And Macy’s, which did relatively well for a time after dissolving all the banners it bought was starting to lose its luster as well.

That’s where we were. And then along came COVID. Malls were locked down like every other non-essential retail operation. And retailers could not or would not pay rent for empty buildings. Now the malls are re-opening. We know some retailers are folding their tents. But this begs the question, “Why should a retailer care if anchor stores are turned into industrial facilities?” And the answer is in the mall model. If the anchor of a mall becomes an industrial facility, what’s the draw? Why would a customer come? To return their Amazon purchases? Meh. And why should retailer leases remain as they were?

Typically, mall leases consist of at least three core parts: base rent, percentage rent and common area maintenance (CAM). Percentage rent means that mall-based retailers pay a percentage of their sales to the mall as a “reward” for the traffic it draws. Well, an industrial facility doesn’t exactly draw customers beyond the curiosity of seeing what it looks like just once. And why exactly would Amazon pay any CAM to the mall operators? It isn’t using the common areas. That means other retailers will pay a larger share.

In this age, who can afford that? This is simply a terrible idea.

I understand everyone needs to make money, and people need to shop. Still, when people go shopping in what appears to be an industrial zone, they expect to pay bargain basement prices. That adds pressure to retailers as well.

The long and the short of it is, this will fail. I think we have to bull our way through the pandemic and return to the plan retailers and mall operators had before – turn malls back into real destinations that are part of the community. Yes, 2020 is a lost year for all retailers except grocers. Yes, Walmart has exerted dominance we haven’t seen in well over a decade, and mostly have technology to thank for their great earnings during the early worst days. But one of these days, the pandemic will end.

So, my retail friends, I encourage you to take a stand against this idea. Simon can com up with a better idea. This dog isn’t going to hunt. Perhaps retailers and mall operators should sit down and brainstorm together. Why would you give your prime space to a company that’s hurting every single other store in your mall? And change the character of the mall at the same time?

It’s just wrong.

Newsletter Articles August 11, 2020