Prestonwood Town Center. Prestonwood was an enclosed two-level mall built in 1979 on the affluent north side of Dallas. It featured five anchor tenants, including Neiman Marcus. As Dallas grew, new pockets of affluent shoppers emerged in nearby or adjacent areas. To address these developing trade areas, a few years later another upscale mall opened a couple of miles away. Then a huge regional center anchored by Nordstrom was built several miles north. Then plans were drawn up for a luxury- and fashion-oriented center a mere ten-minute drive from Prestonwood, enticing Neiman Marcus and Saks Fifth Avenue to relocate. Prestonwood closed in 2000 and was eventually demolished.
Third, many malls are actually doing quite well. The nation’s so-called A malls represent about 20 percent of locations but generate about 75 percent of total mall volume. With few exceptions, these 270 or so malls have stellar (and growing) productivity and low vacancy rates. To use another Dallas example, NorthPark Mall has among the highest sale productivity of any shopping center in North America and is anchored by what are reported to be among Neiman Marcus’s and Nordstrom’s top-performing stores. Hot brands like Peloton, Eataly, Tesla, and Outdoor Voices all have locations. Relatively few of these top-tier malls are being affected by the closing of anchor tenants. And specialty store vacancies are typically snapped up quickly, often by the DNVBs.
Fourth, while the closing of department stores is hitting “B” and “C” malls disproportionately hard, it’s not all bad news for mall owners. Many department-store anchors have been chronic underperformers for years. As long as these albatross tenants continue operating, the mall operator receives paltry rents from big chunks of their leasable space while generating little incremental traffic. In reality, the loss of some poorly performing retailers is often creating new, more profitable opportunities. One scenario is a transformation of tenant mix, characterized by a shift to more entertainment options, restaurants, and/or professional offices. Sometimes, nontraditional retail tenants (think Dick’s Sporting Goods or Target) become anchors.
This is not to say that some malls won’t die a painful death, never to return from the ashes. But the apocalyptic vision some forecasters paint is far from accurate. Most high-end malls will continue to thrive with an approach that looks rather familiar. Many others will evolve to be quite different, but will remain far from hurting, much less dead. Others will be radically repurposed—often through either a partial or complete demolition of the center—to a more lucrative multi-use development, which will likely contain some retail, but will be principally anchored by office, apartment, and restaurant tenants.
Under Demolished
In the US (and a few other markets), cheap debt and false optimism led to decades of over-building of retail space. Since 1975, retail square footage in the US has expanded at four times the rate of population growth.5 America now has over 23 square feet of shopping space per capita. Canada has about 16.4, while the UK, France, and Spain each have less than five. The number of malls in the US grew from 306 in 1970 to 1,220 in 2016, a fourfold increase during a time when the population grew only 1.6 times. Even if e-commerce didn’t exist, commercial real estate has long been overdue for a major correction. The seismic shifts of the last several years are merely accelerating it.
Such an abundance of retail space has exacerbated the troubles of those brands that are poorly differentiated—what I often refer to as the boring middle. Moreover, so much of retail has been highly promotional and discount oriented for many years. But with more competition fighting for limited business, price competition is exacerbated, in turn pushing margins down. Retailers that failed to navigate these changes, particularly those stuck in the middle, have been forced to close stores in droves.
The Stores Strike Back
A couple of years ago legacy retailers like Walmart and Best Buy were often seen as laggards, soon to be made progressively more irrelevant by Amazon and others. In fact, some analysts and “futurists” saw e-commerce reaching a 30 percent share of total retail by 20256—a prediction that now doesn’t look terribly prophetic—and many questioned why anyone would invest in physical stores. Yet a funny thing started to happen. Not only were many sizable retailers—including brands as diverse as Sephora and Tractor Supply Company—continuing to open many new stores, but a handful of savvy legacy retailers started using two really important strategies. These pivots have allowed a number of major players to not only mitigate the impact of, but actively participate in, the growth of digital commerce.
The first was correcting mistakes made, in some cases, more than a decade earlier. One of the most important facts lost in everyone’s hyper-focus on the growth of online shopping is that, according to Forrester,7 digital channels influence nearly three times as many physical store sales as e-commerce transactions. Unfortunately, many traditional retailers invested in e-commerce as a completely distinct sales channel and managed it (as some still do) as a separate strategic business unit. Not only did this wildly miss the reality of customer behavior, it caused brands to systemically make the wrong decisions about where and how to allocate their investment dollars.
Once these brands started to realize that digital was not only an online transaction channel but also a way to guide customers into their physical stores, they started to rethink what digital commerce really meant. Rather than fear digital, they started to harness its power. In practice this required greatly increasing their e-commerce capabilities to neutralize some of Amazon’s advantages. But it also meant understanding the critical role of digital in driving customers to physical stores and helping convert them once they got there. The more recent resurgence of Target is but one prime example of retailers that embraced this path.
The second shift allowing brands to regain their footing is how they view their brick-and-mortar operations. A brand that fundamentally regards its stores as liabilities seeks to optimize them for efficiency. That often begins a cycle of cost cutting and store closings. Conversely, if a brand sees its stores as assets, it must still work on improving its e-commerce and digital enablement capabilities. More importantly, it leans into making its stores more relevant by leveraging the many benefits of stores that online-only retailers can’t match: providing immediate gratification; being able to touch, feel, and try on products; allowing for free and safe product pick-up; obtaining sales help from a real live person; and so on.
Physical store spaces absolutely must transform for a digital age—in many cases quite radically. But the idea that all—or even most—of physical retail is doomed is clearly wrong.
CHAPTER 4
The Collapse of the Middle
“Bring out your dead! Bring out your dead!”
—MONTY PYTHON AND THE HOLY GRAIL
The extent of disruption varies widely depending on the retail sectors in which you compete. Some pockets of retail are already dead (or dying). For example, you probably haven’t gone to a video rental store in quite some time. You likely have a lot fewer bookstores near you than ten years ago. Bankruptcies, store closings and relocations, new winners and losers are par for the course in retail.
The question isn’t whether physical retail is dead, whether malls are going away, or whether e-commerce is eating the world. Instead, ask yourself: how do these changes affect you, your organization, and your brand—and, most importantly, what are you going to do about it?
Instead of an apocalypse, some major consulting firms, various pundits, and many industry associations have said we are seeing a retail renaissance of sorts. Dozens of disruptive new concepts have been created, exciting technology is being applied across a spectrum of categories, and even some old dogs are learning new tricks. That’s clearly true.
As we take a closer look, however, we start to see what I first explored in a 2011 blog
