There has been a lot of press over the past few years concerning the demise of the regional mall. Headlines such as: “Mall Vacancy Rate at 8-year High”, “From Dead Mall to Amazon Warehouse”, “The Fall of the Mall”, and “And the Malls Came Tumbling Down” have become commonplace. There was even a hedge fund – Alder Hill Management LP – which was established to short sell mall debt. (The fund was shut down due to disappointing performance in October 2019 – I imagine they wish they’d hung on for a few more months). Furthermore, significant press has been lavished on the travails of the department store industry, including countless articles focused on Sears, JC Penney, Nieman Marcus, Stage Stores, and other anchor tenants.
One major consideration has been lost in all this press – the impact that mall closures have had on ancillary tenants. Over the past 30 years, scores of tenants have found regional malls to be an efficient means of expanding their brand across a particular region or throughout the country as a whole. Regional malls offered a safe, dependable expansion vehicle – so long as a mall had strong department store anchors and synergistic ancillary tenants, there was a good likelihood that a new site would be successful. Mall tenants didn’t need to worry about site characteristics except for which mall wing they were located on. They paid a high price for their locations – ancillary tenants carried most or all of the burden of common area maintenance charges given the lucrative lease terms that department stores were able to negotiate – but benefited from the dependable foot traffic provided by mall locations.
Those days are now gone. Scores of regional malls have been closed, and hundreds more are struggling. Ancillary tenants who traditionally leveraged regional malls as their primary deployment platforms are being forced to re-think their entire real estate portfolio. As a mall loses anchor and ancillary tenants over time, do the remaining tenants stick it out as long as the store is profitable? Relocate to a nearby strip or power center, ideally within the same trade area? Close and hope that some sales are recaptured by surrounding stores? Or simply close and exit the market?
The most appropriate strategy for a tenant depends on a range of factors, including:
- Relocation Opportunities – mall tenants always have the opportunity to relocate to other locations – a nearby strip center, power center, downtown street retail area, or freestanding site – to serve their customer base. There are clear benefits and detriments to each approach. Generally, non-mall locations are less expensive, but don’t generate the same walk-by traffic that a mall provides.
The question of whether a non-mall location works for traditional mall tenants depends on the individual tenant category. Niche specialty concepts (think mall stores specializing in baseball caps or novelty socks) may not have the ability to draw enough traffic independently to make a non-mall location work, while other retail tenants (shoes stores, jewelry stores, etc.) may be able to succeed in non-mall locations.
One key consideration in determining whether a non-mall location will be successful concerns the level of customer loyalty that a concept enjoys. Those concepts with high customer affinity, Apple stores being a prime example, will thrive in non-mall settings – one could argue that it almost doesn’t matter where they locate. The opposite would be the kiosks encountered when walking down a mall corridor – those are operators with little or no customer loyalty or name brand recognition.
- Proximity to Closest Store – how proximate is your closest mall store? If the mall in question is the Adrian Mall in Adrian, Michigan or the Sunset Mall in San Angelo, Texas, then there are no nearby mall stores that can capture a meaningful proportion of lost sales. On the other hand, mall stores in densely populated metropolitan areas may have other mall stores nearby – a significant proportion of closed store sales may be able to be retained by surrounding mall stores.
- True Omnichannel Capabilities – those tenants who have a strong omnichannel presence may be able to retain some of their revenue by shifting consumers to e-commerce purchases. For those tenants who don’t have a strong e-commerce presence, either because they haven’t adequately invested in it or because they can’t (try piercing ears through your computer or smartphone), this is not an option.
- Store-within-a-Store Potential – some mall tenants can attempt to replicate the mall environment by locating within other stores (such as Walmart, Target, and Meijer) which themselves generate the customer traffic that a tenant can draw from. While this strategy can provide some of the benefits of a mall location, it includes its own challenges.
Store-within-a-store locations in the front of a supercenter can operate similar to mall stores, while those located within the store present other issues – do they have their own checkouts or run through the front of the store? Do they have their own employees or leverage supercenter employees? Can they provide a true brand-differentiated shopping experience for customers, or do they become an offshoot of the supercenter brand?
The key to developing a successful non-mall strategy is to fully understand the aforementioned factors. The development and implementation of such a strategy is inherently challenging – understanding how non-mall locations will work; coordinating timing between mall lease expiration dates and the ability to secure new space; and accounting for the capital investment required for a potential relocation. However, in the retail world of the future – one that may see long-term impacts from the current pandemic, it is now an essential task for all mall tenants to consider.
For more information concerning how Intalytics supports mall-based tenants in evaluating non-mall opportunities, please contact us to schedule an initial discussion.