Traditional malls lose ground to shoppers' vast alternatives
Once stomping grounds for loitering teens and serious shoppers, many malls are decrepit relics of the 20th century.
Yellow liquidation sale signs, waterless fountains and empty hallways are representative of the trajectory malls are seeing.
Closings are expected to hit 50 percent within 15 to 20 years, adding to the billion square feet of vacant space, retail analyst Howard Davidowitz said.
The original model for the shopping mall, a colossal suburban structure with big-box retailers as anchors, no longer attracts shoppers.
Instead, consumers are looking for established town centers or downtown areas in walking distance from their homes — if they're not shopping from their phones or laptops.
Developers are satiating consumers' wants by building artificial downtowns as an alternative to the traditional mall.
In the 1950s, commercial developers aggressively reached out to the new class of suburbanites with strong buying power, opening one-stop centers for maximum convenience.
By the 1960s, the retail industry brought money from major cities into suburban markets, displaying a large shift in retail that peaked in the 1990s and early 2000s. Now there are more than 200 American malls and shopping centers with at least 250,000 rentable square feet, according to real estate information company CoStar Group.
“The typical U.S. mall, unless it is completely reinvented, will be a historical anachronism — a 60-year aberration that no longer meets the public's needs, the retailers' needs, or the community's needs,” Rick Caruso, the CEO of real-estate company Caruso Affiliated, told the audience at the National Retail Federation's annual convention in January.
For Simon Property Group, the open-air model, with its downtown vibe, has been profitable. Simon's outdoor centers incorporate mixed-use development, from high-end retailers and restaurants to office, apartment and hotel space.
Revenue for Simon, the nation's largest mall operator, has grown in the past four years; the company built five outdoor malls in 2013, two in the United States.
But the trend isn't keeping consumers' dollars in the mall arena.
Bike shops, local offerings and green grocers such as Trader Joe's and Whole Foods appeal to the younger generations, and until recently, malls haven't offered those options to consumers, according to the Urban Land Institute's 2013 study on Generation Y buying patterns.
“Smaller formats are more suitable for time-conscious shoppers, many of whom may just be looking at goods they will ultimately buy online,” according to the study.
Showroom models are popping up within urban spaces, where consumers can try on a product and have it delivered in-store or to their door, without the option of purchasing it immediately.
Although the concept of showrooming has been around — think fiddling with a phone at Best Buy before ordering it online through Verizon — reverse showrooming spins the idea.
Shoppers can stop by pop-up boutiques for online-only retailers and try on items before heading to the computer and purchasing them.
Gwyneth Paltrow's lifestyle blog Goop is the latest to open a pop-up store in Brentwood, Calif., taking cues from retailers such as Warby Parker and Bonobos who pioneered the “clicks-to-bricks” strategy.
“Stores of almost any size and scale encourage you to see (a product) and buy it,” even if it's not in the color or size you need,” said Maureen McAvey, senior resident fellow at the Urban Land Institute.
The personalization aspect of shopping is gaining more traction, especially online, where analytics can recommend options for the consumer.
“Consumers are more willing than ever to share their information with retailers,” Keith Mercier, an associate partner at IBM's Retail Center of Competence, told MarketWatch. “But there's expectation that if I share, you are going to personalize the information I receive. That expectation is increasing. The opportunity for retailers is: How do you capitalize on that? There's potential traffic and sales opportunity.”
In the technology market, applications and subscription services such as Style for Hire and Bombfell offer the feel of a personal shopper without having to leave the couch.
The online component of shopping not only changes the market for consumers, but also takes away business from traditional retailers, McAvey said.
E-commerce giant Amazon.com Inc., for example, had a 21.9 percent increase in net sales in 2013.
Big-box retailers are most vulnerable to online shopping, because consumers can find the commodity item they need at a lower price than in-store, likely accounting for store closures, McAvey said.
While malls experienced a nearly 50 percent decrease in foot traffic during the 2013 holiday season, according to the Wall Street Journal, online retailers don't share the same concerns.
Online purchases constituted 5.8 percent of American retail sales in 2013, nearly tripling from 2004, according to the Census Bureau.
Large indoor shopping areas rely heavily on department stores, but big-box retailers can't anchor malls as they did in the past when they're competing against online prices and convenience.
Before Macy's acquired several department-store chains in 2005, including May's, Kaufmann's and Hecht's, they were all fighting for a prime corner.
Now, Macy's, Nordstrom, Neiman Marcus and Saks are at the higher end, with J.C. Penney and Sears struggling to contend.
Department stores aren't the only retailers struggling.
The teen market in brick-and-mortar locations is declining as online-focused retailers such as Brandy Melville and Shopbop become prevalent, said Ki Bin Kim, director of real-estate investment trust equity research at SunTrust Robinson Humphrey.
“In our view, teens didn't suddenly stop shopping; they are simply spending a significant portion online at very well-run online fashion retailers,” he said.
Teen retailer Abercrombie & Fitch Co. said it expects to close 60 to 70 stores in the United States during the fiscal year through lease expirations.
Other stores targeted to teens such as American Eagle Outfitters and Aeropostale have experienced store closings and deep sales declines.
Aeropostale's shares have tumbled 70 percent in the past year, and the unprofitable company plans to close 175 stores within the next few years.
Teen-focused retailers haven't been able to compete with the rising popularity of stores such as H&M and Forever 21, where shoppers can purchase a dress for $15 or a sweater for $8.
“We're seeing so many people buy through multi-channel shopping,” where teens can purchase everything in one place, including mainstream adult brands, McAvey said.
Athletic apparel stores like Lululemon Athletica have cornered the teen market but weren't popular or in existence five years ago, she added.
That leaves malls weaker. Attractions such as ice rinks and indoor roller coasters aren't drawing consumers anymore, and niche stores and food courts are dying.
Even movie theaters haven't been able to bring in consumers but are operational on ticket costs.
The declining foot traffic accounts for the disintegration of the food court model, replaced by restaurants in many malls. Food court staples Sbarro and Quiznos filed for bankruptcy in March.
“There's far more array of food choices at most malls, and you're seeing places encouraging experiences: spin, hair salon and spas, massage and health-oriented places,” McAvey said.
Mall owners are turning to restaurants because that is something the Internet can't do, said Stephen Lebovitz, president and CEO of CBL & Associates, a real estate investment trust.
The average distressed or closed mall was built in 1983 and has a vacancy rate of 50.6 percent, according to CoStar data.
Those vacancies make up approximately 1 billion square feet of vacant retail space, according to Edward McMahon, chairman for sustainable development at the Urban Land Institute.
“Over the last 20 years, we have built retail space five times faster than sales,” he said.