Going into the vital fourth quarter, malls are caught between a rock and a hard place: Retail vacancies are rising, and shoppers are thin on the ground.
Whether the vacancies are causing shoppers to be scarce or the reverse, the two trends are converging to jeopardize the future of many of the nation’s 1,200 malls.
Mall vacancies stand at a seven-year high of 9.1% in the third quarter, nearing their peak from 2011, according to The Wall Street Journal. And with all eyes on the Sears death watch, it will add several hundred anchor locations to the vacancy rate.
While WSJ also reports that many landlords are eager to open up those spaces for new tenants, they need to be careful what they wish for. Remodeling those spaces for new uses and finding tenants to fill them may not be as easy as they hope, not to mention require big investments.
The list of mall retailers closing shops this year only continues to grow:
- Ascena Retail Group (Ann Taylor), at least 268 stores
- Best Buy cell phone shops, 250 stores
- Brookstone, 102 stores
- Chipotle, 65 stores
- Foot Locker, 110 stores
- Fresh Markets, 15 stores
- Gap and Banana Republic, 200 stores
- GNC, 200 stores
- Crew, 20 stores
- Lord & Taylor, up to 10 stores
- Michael Kors, 100-125 stores
- Starbucks, 150 stores
- Subway, 500 stores
- Teavana, 379 stores
- Victoria’s Secret, 20 stores
Not to mention the 256 Bon-Ton stores, eight J.C. Penney and 11 Macy’s stores that are closed or closing soon.
Fewer stores simply means less reason to shop at the mall.
Oliver Chen, managing director retail and luxury sector at Cowen and Company, a financial services firm, puts the mall traffic decline at about -5%.
RetailNext data, provided by Cowen, shows an even bigger decline in overall retail traffic, averaging -7% from January 2017 through August 2018 monthly year-over-year.
All malls aren’t feeling the pain equally, says Nick Hernandez, managing director of retail service at Transwestern, a full-service real estate company. “The Class A malls are strong, but when you get down to the B and C tier, they are deteriorating. It’s a case of the good continue to be good and the not so good continue to deteriorate at a faster pace than before.”
Chen concurs with that assessment but says the most vulnerable B and C malls are mainly located in markets served by multiple malls. He further predicts that 328 malls — roughly 30% — will likely close or be re-purposed over the next decade.
Regardless, the rising retail vacancy rates and declining retail traffic add up to one thing – a potential death spiral for malls big and small, good or bad. Nobody is immune from the broader macro-trends in the consumer market.
Retail visionary Rick Caruso, developer of Los Angeles’ The Grove, has a warning: “The indoor mall is an anachronism that is going to continue to fail because it is disconnected to how people want to live their lives.”
Shopping and buying have been disintermediated
The most important cultural trend impacting retail today is that in just the last ten years or so, coinciding with Amazon’s growth and propelled by Bezos’ keen strategic vision, the age-old model where people had to go to the store to buy something has been cut.
Back in the day, and it wasn’t really that long ago, when you needed or wanted something, you had to go to the store to find it. Yes, there were other alternatives, like catalogs, but basically retail stores had a lock on shoppers.
Not anymore. Now the decision to go to the store is a decision to go shopping, because buying something – anything – is faster, easier and infinitely more convenient done online.
Online shopping’s greater convenience is the tailwind that will enable it to capture more and more dollars, which Cowen estimates to reach 30-40% of retail spending in the foreseeable future. The result is retailers will face “persistently negative mall traffic.”
That has turned the decision to go shopping into a conscious one where you actually want the experience of shopping. Thus all the talk about experiential retail, which many pay lip service too, but too few have really thought through how stores must change in light of it.
Malls are in the cross hairs of this trend, since they were conceived, designed and built around the old shop-to-buy model. They were and remain primarily a collection of stores, with a smattering of restaurants and entertainment thrown in, but basically they exist for people to come there to shop and buy. That remains the primary experience they offer.
As a result, the challenges malls face are greater than that for an individual retail tenant in the mall. Malls have to do more to entice shoppers to come. They carry the biggest load to create experiences that people want to have.
As Ken Nisch, chairman of the retail design firm JGA says, “Retailers have to give people something to do, then they will shop. But shopping can’t be the thing to do.”
Creating a new concept for the mall
Cowen’s Chen advises the nation’s most prominent retailers about how to navigate the new shopping environment, the rise of experiential retail and the transformation of the shopping experience. His advice centers on Cowen’s 3C’s for retail: Convenience, Curation and Culture.
If Cowen’s 3C’s applies to one retailer, how much more so to a collection of retailers, i.e. malls.
Make it convenient
People are busy. People are stressed. Two-career families are common, especially among the more affluent households who have the most money to spend. Nobody wants to add another thing to their crowded “to do” list.
And most of all time is money. Some shoppers will trade off their time to save money, but the most attractive customers for mall retailers, the affluent, are much more likely to pay more to save time. And increasingly thanks to the internet, they can do both simultaneously.
Convenience is predicated on taking the friction out of shopping. Chen asks malls to think on these lines, “Is the shopping experience personally friction-less and does it minimize task time which can then be reinvested at the leisure of the customer?”
This convenience factor explains the growing popularity of the outdoor mall model where customers can drive up and park near the store they want to go to, get what they want, then spend the rest of their time strolling the center to discover and explore other things and experiences.
Indoor malls require customers to find parking in crowded decks, enter through but a few entrances and navigate long often complicated pathways requiring maps to find what they are looking for. Convenient they are not.
“Nearly 80% of people shop at Amazon,” Chen says, “So that is their base level expectation for speed and convenience.”
Walmart’s success with the “car pickup” for purchases made before coming to the store is an example of one way to eliminate friction for shoppers.
Since many malls already have convenience hurdles embedded in place, they will need to make up the difference with the other two C’s.
Curate for relevance
Curating the right tenant mix is critical for malls. If the retail apocalypse has taught us nothing else, it is that malls need to be custom curated for the local market. Today if you go into an enclosed mall in Pennsylvania, Texas or California, you see basically the same selection of stores. That is ridiculous.
“Our approach to curation is to simplify to amplify,” Chen explains. “A lot of the most relevant retail concepts today do the work for the customer in narrowing the assortment and helping the customer make decisions and save time.”
One ripe opportunity to spice up the tenant mix can be found among the growing number of digital-native brands, narrowly focused on specific curated assortments, looking to open stores.
Real estate firm JLL puts the demand at 850 new stores over the next five years, but Transwestern’s Hernandez thinks that the actual number may be much greater.
“This whole movement is in its infancy,” Hernandez says. “The digital-native brands have discovered that to make a true connection with the customers they need to meet them face-to-face. It legitimizes and authenticates the brand.”
For these digital-native brands, the physical store becomes both a customer acquisition point and its enables awareness and exposure to the brand, Chen points out.
“To become a truly great brand, you need physical plus digital. We’ve moved beyond omni-channel to all-channel retail. Making a personal connection at all points in the pre-purchase, purchase and post-purchase journey is critical,” Chen adds.
Pop-up shops too play a vital role in the new curated mix for malls. They help emerging brands test the waters and incubate new retail concepts. Popups also keep the mall fresh and vibrant giving customers new things to see and experience.
Create a culture for the community
To me this C – Culture – is the crux of the challenge and the biggest opportunity for malls. Chen describes it as a mall’s need to “become part of the fabric of the community again,” not just a place to shop and buy.
“The future of retail is communities and thinking about what it means for people to be part of a tribe in the context of retail. Malls have to be made locally relevant again in their communities,” Chen says and points to Selfridges in London as a retailer that thinks about culture, art and theater, “just as much as selling stuff, if not more so.”
“The success of retail and success of malls in the future will be about people,” Chen continues. “Malls have to enable people to interact with other people. This will bring malls back to life and help people live a better, more joyful and fulfilled life.”
Just look around. Why shouldn’t malls have places designed for people to interact and share beyond just restaurants?
What about libraries, museums, historical societies? What about meeting halls for community groups? What about education centers where community colleges and vocational groups can train the next generation of workers for jobs in the community, including service jobs in the malls? What about offices for government agencies and elected officials where community members can come and be heard?
Surely malls can’t command rates for these community service centers like they do for retail, but such places would knit the mall into the community in a way that would help people and ultimately help its retail tenants.
On the horizon
Chen sees malls can play a part in the movement toward health and wellness which is an interest of the young, middle-aged and seniors in the community. Not just with gyms and fitness centers, but with medical and dental services, as well as athletic gear, leisure clothing and food including healthier food choices in the food courts.
And now that pets have become full-fledged members of the modern American family, everything people need, their pets need too.
Expanded services businesses also fit into a community-based mall concept, beyond nail and hair salons, to include the practical like dry cleaning, tailoring, shoe repair and insurance to the luxury like interior design, landscape and travel services.
In his in-depth 200+ page study, Experiential Retail: The Store Must Do More, Chen writes about the store, but I am inserting “mall” to replace “store” in the following excerpt. This should inspire you to think bigger, bolder and more comprehensively into how the mall must change to be relevant in the future:
“We believe the store [mall] is much more. The store [mall] can be a place for consumers to be inspired, to be educated, to be entertained and to socialize. In addition to the shopping task, discovery, inspiration, socializing, entertainment and aspirations are important mindsets and the store [mall] needs to do more to address these dynamic needs of the new customer.”
More Info: forbes.com