Forever 21 And The Future Of The Mall

Forever 21

Imagine that you owed your bank or landlord a lot of money. Now imagine that said bank or landlord decided to buy you out. That’s what happened Monday (Feb. 3) as two top mall owners and a brand management company gathered together to buy troubled retailer Forever 21 at the discount price of $81 million.

The retail chain — which filed for bankruptcy in September — said in a court filing Sunday it reached an agreement with Simon Property Group, Brookfield Property Partners and Authentic Brands Group. The sale of Forever 21’s assets includes its side brands, such as beauty store Riley Rose, and its eCommerce platforms, according to the filing.

Because of the bankruptcy filing the move isn’t a shock. But it begs the question: Why would the landlords buy the tenant? Neither Simon nor Brookfield has commented specifically. But speculation around the buyout deal says it was made to stop Forever 21 from shutting its mall stores, many of which are anchor tenants. So it makes sense that the landlords are keeping it open, especially at $81 million.

The deal focuses yet another harsh light on mall-based shopping. Overall foot traffic numbers are dropping. A recent UBS survey of 2,500 consumers, found that the percentage of respondents who go to a mall specifically to shop at a department store fell from 25 percent a year ago to only 20 percent now.

“Shoppers say they increasingly go to the mall to eat at the food court or just hang out instead of visiting a big box store,” UBS analyst Jay Sole told The Motley Fool. “Since the mall is no longer the place consumers discover fashion, it makes sense the reasons they visit the mall are changing.” The number of consumers who specifically go to the mall to eat is still only a modest 7 percent, though that’s up from 4 percent at this time last year.

The mall problem has been compounded by bad results from those anchor tenants, of which Forever 21 will remain. Macy’s, JCPenney’s, Kohl’s and Victoria’s Secret did not keep up with positive spending trends over the holiday season. Part of the problem is the general mall malaise that has been exacerbated by department store sales drops, eCommerce market share and the Amazon effect. Some of the problem can be laid at the feet of steep discounting.

Poonam Goyal, an analyst with Bloomberg Intelligence, told the LA Times, “The deals we saw on designer product (on down) were shocking and reflected the extent of dislocation, particularly in the department store segment, which carried over to select mall-based retailers and online retailers as well that were forced to compete on price for the same merchandise.”

Outside of purchasing the problem, as Simon and Brookfield did, some new thinking has developed around malls, not surprisingly from developers that are not ready to give up the concept. In fact, Dallas-based mall developer EMJ Construction recently published its three factors for mall success in the current market. Its first tenet is to “Think like a theme park,” recognizing that customers are seeking an experience complete with coordinated themes. Second, “Think outside the [big] box,” as malls can gain value by replacing vacant big-box anchor stores with open-air environments that create a sense of place. And finally, “Think two steps ahead,” with a maintenance budget and upgrades that allow for anticipating the next move.

“Because times have changed, the mall is no longer the center of the retail universe,” says Jacob Wadlington, business development director with EMJ Construction. “However, with a strategic vision and commitment, they can remain a viable destination with great potential.”

From any view, malls are changing. The future of them probably lies somewhere between the Forever 21 buyout and the strategy laid out by EMJ. But anchor tenants are for the most part not healthy right now. Until that situation is sorted, expect more closures and buyouts as the one-time center of retailing adjusts to a new status as a destination.