The struggles of brick-and-mortar retailers have dominated industry headlines over the past few months with an unprecedented number of store closings announced. However, while the bad news has come from all corners, specialty retailers as well as general merchandisers, it has been department stores that have perhaps attracted the most headlines.
Besides losing their department store anchors, however, many malls are also hollowing out from the inside. For instance, the list of big store closure announcements recently includes not just Macy’s, J.C. Penney, Sears, and Kmart, but also Wet Seal, American Apparel, The Limited, Payless and Gander Mountain, among others. This speaks to how broadly the retail sector is now impacted by consumers moving away from traditional retail channels and formats. In the not-too-distant past, it was only book, music, office supply, and electronic retailers that shrunk drastically or liquidated. Today, the pain has now spread to larger categories, including clothing, sporting goods and furniture. While these latter categories have relatively low online penetration (approximately 20% each) they have been among the most disrupted by growth in online sales over the last year.
While convenience is certainly a key reason shoppers opt for online, it is also affecting how consumers visit physical store locations, including those in malls. Shoppers are limiting their time in stores, focusing on finding what they need and exiting quickly. Some retailers are capitalizing on this trend: There is an expanding breadth of products offered by convenience formats like drug stores and discount retailers, and many retailers are investing in updating store layouts to meet the needs of consumers who want to get in and out in a hurry. Perhaps it was for that reason that Target recently launched its prototype store format in Houston that included a separate entrance dedicated to shoppers only planning to buy a handful of items. This is at odds with the traditional model for malls where anchor tenants drive traffic, and specialty retailers rely on shoppers taking the time to make additional purchases.
Another source of pressure for retailers is the decision by many consumers to dedicate a greater “share of wallet” to non-retail discretionary categories such entertainment and meals. According to US census data, overall spending in traditional retail has remained flat over the last decade while entertainment spending has grown more than 50%, highlighting a trend in consumer spending, shifting towards acquiring experiences rather than acquiring more goods.
So, what do these developments mean for retailers and mall owners, and what steps can be taken to address the continuing challenges posed by changing consumer behavior?
The challenges faced by owners and operators require, among other things, a heightened focus on a long-term strategic vision supported by in-depth analysis and detailed data analytics. The continuous improvement process should focus on areas such as store operational effectiveness, product sourcing and vendor management, SG&A optimization, and assortment optimization & inventory effectiveness.
The simple fact is that structural change is required, and both retailers and landlords need to adapt.
For retailers, a viable solution must involve revisiting the way brick-and-mortar stores are positioned to maximize selling productivity as part of an integrated omnichannel strategy, and to ensure that store formats are optimized to the changing needs of consumers. Certain retailers have changed their format to create a buying atmosphere that is more experiential, appealing to the consumer visually and making the purchasing decision more interactive.
Sephora and Ulta, for instance, have embraced the interactive buying experience, allowing customers to touch, test, and interact with the product, creating a compelling buying experience. However, at the same time it should be noted that it can be a real challenge to fund these costly investments, particularly at a time when many retailers have limited liquidity.
Overall, the reality is that with today’s significant declines in retail volumes through traditional channels, additional store and mall closures will need to be part of the solution. For starters, REITs and landlords can minimize the bleeding by working collaboratively with existing tenants to structure lease terms that make sense for the current retail environment and location-specific foot traffic.
However, it is also essential that landlords proactively respond to vacating anchor tenants by finding a creative replacement that maintains, or even improves, traffic. Certain mall owners have been successful replacing anchor stores with discount retailers or converting the space to accommodate multiple vendors.
On the other hand, a reduction in the gross lettable area that is dedicated to retail may be required. Repurposing the space for dining and entertainment, which are grabbing a larger share of consumers’ wallets, or converting floor space to other mixed uses, might be viable solutions.
Given industry headwinds, and the relatively long lead time required for landlords to adapt their portfolios, it is imperative that retailers optimize how their stores interact with consumers, how they use data to improve processes, and how they work collaboratively with landlords.
Only then might there be some new life in the mall after all.