Retail

Is The Physical Shopping Mall Dead?

To paraphrase the German philosopher Nietzsche: The mall is dead, we killed it by shopping online.

The data has been marching in for years — occupancy rates at the nation’s malls are falling, as is foot traffic and consumer interest. Derided as a dated relic of a previous era in retail, the indoor shopping mall in all but a few cases seems to be a diminishing and dying business line — the canary in the coal mine that told physical retailers that the great digital revolution was coming.  

But the fall of the mall at the hands of commerce is not quite so perfectly wrapped up a narrative as it might appear on first glance. Some of the bleeding has stopped, or at least slowed in recent months as mall operators have found new ways to leverage and use the spaces.

And those spaces, it turns out, may end up being useful for retail, and from a rather unlikely source: online merchants looking to set up a toe-hold in the real world without making a commitment to operating a full-time physical presence.

“This is an interesting, new concept for us,” noted Simon Malls CMO Mikael Thygesen.“These online retailers don’t see brick and mortar as competition but as an ingredient in their growth strategy.”

So could the online merchants that killed the mall now be part of its second act? The odds are long, but not all the signs are as bad as they’ve been.

Notable Headwinds

Which isn’t to say that malls are not under pressure in the U.S.; they most evidently are, given that as a retail form they are just not expanding in this country. A new enclosed mall hasn’t opened in the U.S. in about decade.

“The one key here is that new supply has not been abundant. We have about 6.5 billion square feet of retail in this country, and we used to build an average of 2.5 percent to 3 percent of that a year. We’ve been averaging only 0.3 percent over the past three years,” shopping mall developer O’Connor Chairman and Chief Executive Glenn Rufrano recently told The Wall Street Journal.

And the holidays in 2015 seemed to affirm, again, the mall’s ongoing and intractable problem — given the choice between the physical and digital world, American consumers are picking the digital one.

While the trying times of the indoor shopping mall are cleared here in the United States, the fall of the mall may just be an international phenomenon, albeit brought on by different reasons.

The last few years, for example, building malls in China has been a rather booming business. Of 10 cities worldwide that created the most shopping-mall space in 2013, nine were in China. As of 2014, about half of the mall space under construction in the world was in Chinese cities.  

But as the Chinese economy has slowed down in the last 12 months — and the fortunes of its retail-enthused middle class have cooled some — national  enthusiasm for the indoor mall bas ebbed rather dramatically. The $200 million Shanghai Pentagonal Mart, built in 2009 — which was designed to exactly match The Pentagon housed in Northern Virginia — is, according to the BBC, now Shanghai’s sixth largest abandoned building. It’s not that the city does not lack for retail space, but merchants quite simply cannot afford the rents in the Pentagon.

The mall, here or abroad, is in trouble, and like the newspapers and typewriters rendered obsolete before, it seems to heading down the spiraling path to nowhere which Karen Webster started describing in early 2014.

“The no stores => no shoppers => no interest from new merchants to set up shop => no shoppers => no sales => no merchants => empty mall dynamic is set in motion. 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,” Webster wrote. “So that faint whooshing sound you’re hearing? Yep, that’s the sound of the physical retail death spiral revving up.”

Two years further down the path, the situation from many angles looks even more dire. Digital commerce is now 10 percent of retail sales in the Unites States, and mall anchoring retail chains like Macy’s are shuttering massive numbers of locations, which most experts believe will lead to even greater mall fatalities.

“How difficult is it to replace Macy’s?” asks Howard Davidowitz, chairman of retail consulting firm Davidowitz & Associates. “It’s almost impossible. The department store business, it’s the worst segment in retailing. It’s the highest cost operator, they’re not growing, and they’re in a world where the customer is looking for a great deal.”

But, as mall operators nationwide are realizing, the goal may not be to just replace Macy’s, but to reimagine what to use the space for on the whole.

Second Acts For American Malls

An interesting factoid popped up in December of this year: that mall vacancy problem was starting to turn around a little.

According to a report on property data from the International Council of Shopping Centers (ICSC) and the National Council of Real Estate Investment Fiduciaries (NCREIF), occupancy rates at U.S. shopping malls (which includes super-regional and regional malls) were 94.2 percent for Q4 2014 — a level not seen in 27 years.

Under the broader auspices of shopping centers, occupancy rates were at 92.7 at the end of 2014, the report showed. The figure represented the highest level in that category since Q2 2008.

ICSC additionally found that mall sales productivity reached an annualized total of $475 per square foot — a number that has thus far seen annual growth since 2009, when it was $383.

And those figures were followed by some bullishness on malls, albeit from a somewhat expected source: Simon Malls CEO David Simon, who noted that he doesn’t buy the reports on falling foot traffic as presented.

“Most of the folks that quote numbers are based on algorithms, so it’s not real data like we have,” Simon said. “No. 2, it is derived from certain stores, so it doesn’t necessarily equate to mall traffic and it gives you store data, but not mall traffic data — and that’s the distinction that is really important to make.”

These remarks it should be noted, came in the context of a down earnings report. Nonetheless, Simon pointed to rent prices on the rise, and increased consumer spend per visit as evidence that the widely dismissed mall has some life left in it yet.

“The consumer is going to a few less stores because they’re doing a little less browsing, because they’re more informed prior to their visit,” he said.

Simon also noted that physical stores are now part of a total commerce plan, wherein brick-and-mortar retailers are part of a push to increase sales online.

And Simon is looking to ride that trend with a new operational group directed at bringing online retailers to malls in the form of showrooms, pop-up shops and full-retail stores.

“These young companies need organic traffic to sustain growth, and one of the ways to do that is to have a physical presence,” said Simon Malls CMO Mikael Thygesen. “It reminds people of your brand and lets them experience it in a way you can’t online. They’re really putting dollars behind this channel.”

And, echoing Simon’s statements, Thygesen notes that the mall’s next phase is evolving as retailers are changing their total strategies around sales.

“As we see a fusion of channels, attribution becomes both more difficult and less important. Five years ago, we were thinking about how much value the store is generating for you. The point is, any sale is influenced by mobile, the Web and the store, and a lot of retailers are recognizing that the store is figuring in the sale. It just doesn’t really matter how.”

So can the digital, mobile and online retailers that killed the mall now be part of the story of its salvation? Simon is clearly betting on it, but the proof will be in the foot traffic. These days, that story is still pretty bleak — though it may be worth watching how and if it can be turned around.

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