Will Startups Be Shopping Malls’ Second Act?

It’s said that there are no second acts in American politics. Except that’s really not true — just ask Richard Nixon and Teddy Roosevelt. Some even say that Clinton’s second act could happen if his wife, Hillary, wins both the Democratic nomination and the presidency in 2016.

Luckily for innovators, that saying doesn’t hold much water either. Apple, the richest company on Earth, was the punchline of many, many industry jokes in the 1990s. (Our favorite from then: What’s the Apple Car like? It gets 150 miles to the gallon, costs 100k and only drives on 2 percent of the roads). Coke made Coke Zero after New Coke was totally rejected by people who liked their old Coke just fine, and Netflix is ever so grateful that people talk about “Orange Is the New Black” because they’ve more or less forgotten the Qwikster debacle of 2011.

Now, not every second act in business or politics is spectacular — or even passable. (Just ask Mitt Romney or George H.W. Bush). In business, second acts prove fatal because they just didn’t have the foresight to see or even anticipate the future and then act accordingly. Smith Corona didn’t do a bad job manufacturing typewriters — or Polaroid, cameras. In fact, “back in the day,” they were their category leaders. The world just moved on without them as innovations made their purpose obsolete.

Which leads to the curious case of the American mall — once a staple of consumer culture and the place where product discovery was done. The designs of malls made it impossible for shoppers to efficiently get to the anchor store that probably drew them into the mall in the first place. Up escalators and down escalators on opposite ends of the mall all but guaranteed that consumers had to walk past dozens of stores they never intended to visit — in the hopes of drawing them in to discover new things to buy.

These staples are now in an apparent state of decline — characterized by Forbes in 2014 as “a slow ugly death.”

A rather dramatic characterization of the death spiral that all platforms face when one side stops coming. In the case of the mall, that’s no or lower foot traffic. Fewer shoppers trapesing through the mall means fewer sales, and fewer sales means more stores that have a tough time making ends meet. Fewer stores making ends meet means malls have fewer stores to lure shoppers in.

Lather. Rinse. Repeat.

“The end result for the mall, though, is the same — vacant storefronts, which don’t exactly send such a warm and fuzzy signal to shoppers,” MPD CEO Karen Webster noted in a commentary documenting that she called the “coming decline of physical retail. Akin to the empty restaurant syndrome, no one wants to take a chance on eating in an empty restaurant, even if it advertises the best chef and a great menu. And no one wants to shop in a ghost mall.”

“So that faint whooshing sound you’re hearing? Yep, that’s the sound of the physical retail death spiral revving up.”

Webster went on to note that unlike typewriters and newspapers — which were made anachronistic by a new experience — shopping in the real word is not quite so easily replaced. There are many things about the digitized experience that consumers like, however, at present there are merits of physical presence that online shopping can’t quite match, including the experience and serendipity that consumers find in smaller retailers located in their home towns or vacation resort towns they might be visiting this summer. MasterCard’s SVP of Retail Insights says that while all retail sales are up — on average 4.3 percent — small retail is up 7.3 percent.

Physical shopping won’t go away — it will just evolve. An evolution that we’ve been in with some of the mixed numbers we’ve reported over the last year. Feet in stores are declining, but sales per shopper aren’t. Consumers still go to the stores, but they are doing it less frequently but with more intent.

So what does that imply about malls?

The most current projections say that in less than 10 years, by 2024, the number of U.S. malls will have diminished by 15 percent. Some will close; others will have been converted to a non-retail use.

But is that so bad — or is this anything that any other business won’t experience during that same period of time? After all, many companies consciously shed 10 percent of their workforce each year — cycling out the low performers to make room for new blood. Grocery stores cycle through a ton of new SKUs each year too, weeding out those underperformers to make room on the shelves for things that might attract more consumer interest.

Is the mall just evolving to keep pace with the times?

The Mall’s Second Act?

Many interesting potential lifelines have been written about in recent years.

Last week, Newsweek pondered “Could Walking Programs Save America’s Malls?” The article, however, was light on data about whether or not malls will benefit from the coming influx of baby boomers who walk their corridors an hour before opening for fitness reasons. Seriously Newsweek? Try taking that business case to a mall developer. Yes, please spend hundreds of millions so boomers have a place to stay fit.

Thankfully, there are other, less, well, nonsensical and more commerce-focused new uses for old malls.

With a twist.

Simon Property Group — the nation’s largest mall developer — is now turning to startups to reinvent the mall and the mall experience. According to a Wall Street Journal report, the company has dropped over $20 million in 18 startups — mostly in the last year-and-a-quarter via the Simon Venture Group.

So what does a mall developer invest in?

One recent beneficiary was Union Station — a startup, formerly known as Little Borrowed Dress, that is a fashion rental business focused on bridesmaids. The firm — which currently has a single showroom in NYC (and runs pop-up events nationwide) — also opens the door to developing a presence in Simon Malls.

“It’s a potential new retail category that Simon doesn’t have in its portfolio of retailers,” J. Skyler Fernandes, managing director of Simon Venture Group, noted.

The Indianapolis-based Simon Property has about $4.87 billion in annual revenue and currently operates nearly 200 malls, outlets and other retail properties. They hatched their venture fund last year as an attempt to gain better access to startups and are plunking down anywhere between $250K to $5M.

But that’s nothing really new for Simon. They were an early investor in Shopkick Inc., the shopping-loyalty app that was acquired last year by SK Telecom Co. for $200 million.

“We’re finding out where retailers have their biggest problems and then finding solutions, whether they are useful for Simon or for retail more broadly,” said Mr. Fernandes.

Simon has made two additional $1.5 million investments in Fashion Project, an online retailer that also allows consumers to donate gently used clothes and direct proceeds from their sale to the charity of their choice.

They’re not the only developer looking to fish in the startup waters. Westfield Corp.’s Westfield Labs is focused on finding, working with and investing in startups. Westfield recently put up dollars to fund Deliv Inc., a crowdsourced delivery service that connects available, vetted contracted drivers with retailers that need items delivered.

The as-needed drivers help physical store retailers go “omnichannel” — not to mention helping them compete with Amazon and other eCommerce players that have made fast delivery a competitive advantage.

“Fulfilling from the store is very interesting to us,” said Mikael Thygesen, Simon Property’s chief marketing officer and part of the team that vets potential investments, also noting that using stores as mini-distribution centers increases the value of physical real estate.

Westfield has also been experimenting in its San Francisco location with Bespoke, a 37,000-square-foot coworking, event and tech demo space housed right inside the mall. That big space is divided into three subspaces. A little under half of the space is taken up by conference rooms and offices for retail-tech firms. The rest provides an access point for cutting-edge online companies to gain access to the 20 million or so people who visit the Westfield Center each year.

The Bespoke center can accommodate as many as 1,200 people for events like runway shows, hack-a-thons, workshops or trade shows. It also offers a demo area where retailers and tech companies can debut products and do market research and, mall-facing rooms can turn into pop-up storefronts.

“If you’re an entrepreneur, you have a ton of channels (to test) online, but there aren’t many places you can do that easily offline,” said Kevin McKenzie, Westfield Corp.’s global chief digital officer.

A Good Investmnet

WSJ noted that corporate interest in venture funding has cropped up sporadically over the last 60 or so years when markets get hot — only to retreat rapidly when the cool.

Corporations jumped into venture funding in the late-1960s, mid-1980s and dot-com boom of the 1990s, only to retreat when the market soured.

“We’ve seen some element of faddishness about it,” Harvard Business School Professor Josh Lerner noted.

Lerner also said that in general “returns from corporate venturing programs have been substantially less than those of independent venture groups.”

But corporations have interests that exceed a direct return on their investment. Potential partners, cutting-edge technology and new business models are all also things that are highly valuable to a corporate investor — like, say, a mall developer looking to build out a long second act for its properties.

There are, of course, highly successful malls in the United States.

According to CNBC, the 10 most successful properties bring in ~$1,500 to ~$3,000 in sales per square foot. However, it is interesting to note that the vast majority of those malls are located in areas that draw lots of tourism dollars — Honolulu, Orlando, Las Vegas — or in shopping destinations — like sales tax free New Hampshire. The majority of top-tier malls in the U.S. tend to showcase luxury brands (known for an expanding — but limited — online presence) and serve an extremely affluent clientele.

The fate of the “typical” mall remains hazier as general interest among “average” shoppers seems on the wane. The mandate for malls and mall developers is to create an experience that draws shoppers in and keeps them entertained (and spending money).

And, that’s what their investments in startups are all about: Helping stores inside of those malls create the experience that will keep consumers captivated and act as a complement to the online experience that consumers rely on more and more for at least some part of their shopping journey.

It sure sounds like a much better strategy than catering to mall walkers.


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