Lessons from Failing Malls

A broad selection of major retailers located in shopping malls throughout the U.S. may include Target, JC Penny, Sears, Kmart, Macys, Nordstrom, Polo, Payless, The Limited, Abercrombie & Fitch, hhgregg, BCBG Max Azaria, Crocs, Gander Mountain, CVS, Chicos, The Children’s Place, Wet Seal, Bebe and American Apparel.
What do these retailers all have in common?

They have all experienced substantial drops in store sales, and many are located within malls that have suffered from sharply reduced foot traffic. For a few of these brick and mortar stores, the reduction in sales edges them closer into liquidation. For others, retail strategy is being frantically revised and the worst performing stores are being jettisoned.

The failure of some retailers causes the demise of many traditional malls, and with it goes the loss of retail sales jobs, local tax revenues, and a sense of economic despair for many communities. The combination of automation and e-commerce foretells a bleak future for the 15.9 million retail employees in the US. What to do with a surplus of unoccupied retail stores in malls (zombie malls) is a quandary that many communities and real estate investors ponder. The topic deserves attention in its own right.

Not all stores are in dire straits. Stores such as Walmart, Amazon, Costco and Ulta are doing very well. Among those who are shrinking, a few were built around fads or stylistic themes that have grown stale (e.g. Crocs, Abercrombie and Fitch). Some suffer from questionable management. For example, one huge Target store that I visited at 6:30 pm on May 16th had only one attended cash register (out of at least 20), no staff elsewhere within sight of its electronics area, and a least a dozen TV display models without visible pricing. That level of inattention tells a consumer that that Target does not want to sell TVs.

Head-on competition from TJ Max, Kohls, and Bealls has also weakened Sears, JC Penney, Macys, Target and Nordstrom, which aim at the same demographic with the same kind of merchandise at similar prices. Many smaller retailers in traditional mall locations have suffered a swoon in sales as the byproduct of reduced foot traffic.

To protect consumers from inclement weather and to make more efficient use of expensive land, some traditional malls provided multi-tier covered parking structures. And to encourage shoppers to linger in the mall, traditional malls offer “food courts” or communal spaces for Halloween, Santa Claus, Easter Bunny and other cultural attractions. The rent arrangements for mall space usually include a percentage of each retail store’s sales that subsidizes these promotional investments. Some retailers are regarded as anchor tenants and may be offered sweet deals, but some larger retailers feel that the mall’s overhead costs are too high, and anyway, they would attract customers for themselves.

Indeed, most retail buyers are aware that chronically low merchandise prices are available at the off-mall big box stores. They can check prices on the Internet before venturing out to make purchases. Big box retailers such as Kmart, Target, Walmart and Costco tend to avoid locating in traditional malls and instead align as a strip of stores along oversized parking lots. That large-scale strip mall layout offers parking somewhat closer (compared to that offered by traditional mall) to the store a consumer intends to visit, but it is not conducive to creating walk-by traffic for the other, smaller stores.

Some retailers have escaped the failing mall syndrome because they are known to offer price leadership (e.g. Walmart), or an appealing e-commerce and delivery framework (e.g. Amazon), or a unique selection of specialty goods (e.g. Dicks Sporting). The combination of advantages such wide selection of e-commerce, including groceries, and fast delivery is the current gold standard being pursued by Amazon and Walmart. Books, T-shirts and DVDs don’t spoil on anyone’s delivery trucks, but food can. For most items, Amazon has a delivery edge, but Walmart has hundreds of locations that will become its delivery advantage.

It seems that consumers have and will continue to increase their reliance on Internet for purchases. The payoff for consumers is strong. Mobile Internet is too useful to ignore whenever consumers need a comparison of the best features and prices. Retailers who fail to accommodate that need will fall out of the running.

In short, success in retail is becoming a story about e-commerce, not shiny floors, elevator music and perfume-spraying clerks.

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