Where Have All the Malls Gone?

Where Have All the Malls Gone?

Charles Keenan

Charles Keenan

Charles Keenan has written about payments since joining the American Banker as a staff reporter in 1997, a time when automated teller machines were appearing just about everywhere but people's living rooms thanks to the relaxation of surcharging rules.

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At first glance, it might seem like the internet is killing malls. Yet the truth is that brick-and-mortar retail is here to stay, and the struggles of certain stores reflect shifts in consumer demand and location of the real estate, rather than Amazon and other online retailers siphoning off business.

There's no dispute internet sales are growing fast, and some of the traffic has moved away from stores as a result. E-commerce in the second quarter of 2017 represented 8.9 percent of the $1.26 trillion in retail sales in the United States, according to the Census Bureau, up from the 8-percent share for the same period a year earlier. Internet sales were up 16 percent, compared with 4.1 percent for total retail sales.

Moreover, there have been plenty of retailers struggling: Macy's, J.C. Penney and Sears have closed stores in bunches. Companies filing for bankruptcy protection over the last two years include familiar names such as The Limited, Radio Shack, Toys R Us and Payless. No doubt this is hurting malls. In fact, over the next five years, as many as 25 percent of the nation's 1,100 shopping malls will shut down, according to a report this year by Credit Suisse.

Yet the struggle of malls is not primarily due to the internet. For one, many malls no longer hold the ideal portfolio of stores that appeal to consumers. The reality is that retail changes over time, and it's just the normal cycle of business, noted Sam Judd, a managing partner at Asana Partners, a real estate investment company based in Charlotte, North Carolina.

"Retail concepts have come out of nowhere, grown, flourished, declined and either reinvented themselves or gone out of business," he said. "That isn't anything new; it's just a little bit more [visible] with big department stores that are closing."

Changing preferences

While some chains struggle to survive, plenty of retailers are on the rise — and taking coveted market share with them. H&M and Sephora have siphoned off share from two key areas of department stores: apparel and cosmetics.

Brick-and-mortar retailers that are growing the fastest include a wide range of categories. CST Brands, an owner of convenience stores, had sales growth of 29 percent last year over 2015, according to the trade magazine Stores. Gelson's Markets, a grocery chain, was up 26 percent; Ulta Beauty, a cosmetics retailer, was up 24 percent. All of these brands have been opening stores.

The shift in retailing is not only from disruption, but also from a change in fundamental demand for products, away from consumer staples and more toward electronic products and durables, says Kurt Jetta, founder and chief executive officer of TABS Analytics, a retail and consumer analytics firm based in Shelton, Connecticut.

Think of the $999 iPhone X that debuted in November. Among middle and low-income consumers, whose wages over the years have stagnated or declined, much of the money to make electronics purchases comes at the expense of other basic consumer categories, such as apparel and housewares.

"There's just so little appreciation for demand shifts," Jetta said. "It's easy to say 'It's all e-commerce.' Then when you dig into the data, you almost never find it. You find that there is something much bigger."

One of those bigger things is the effect of Walmart. Historically, when the retailer has focused on particular categories, such as groceries, cosmetics and pharmacy, its competitors have lost share.

Walmart remains the king of retail: Its revenues of $486 billion in 2016 were nearly four times those of Amazon's retail divisions ($124 billion). "It doesn't take much growth for them to have an outsized impact on everybody else," Jetta said.

The Changing Preferences of Consumers

Physical retail's appeal

Amid the chaos, real estate developers see opportunities. Asana, for example, prefers to buy portfolios of underperforming retail properties in areas of high levels of household income, population density and education. That includes areas such as Old Town Alexandria in Virginia, Charlotte's booming South End in North Carolina, and the Deep Ellum section of Dallas. These locations include storefronts on streets, close to neighborhoods — unlike their megamall counterparts. "If you can walk to something, you are likely to go there, versus if you have to get in your car and drive," Judd said.

That mentality fits into the trend of a net migration to American cities, driven by millennials. This group has preferred living closer to work and retail, instead of engaging in long commutes from the suburbs, where housing per square foot is cheaper.

In this trend toward urbanization, brick-and-mortar retailers will continue to hold an edge in terms of profit margins versus their online counterparts, since consumers essentially subsidize the labor and transportation costs of physical stores. "They are the ones picking the order; they are the ones taking the order to their house," Jetta noted.

So malls aren't going away — some will change, and others will close. Physical retail will continue to thrive as long as consumers want to leave their houses. Payments executives still need to worry about internet issues such as card-not-present fraud, but rest assured that not all shoppers will migrate online tomorrow. The numbers simply don’t show it.

The statements and opinions of the writer do not necessarily reflect those of TSYS.

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Charles Keenan

Charles Keenan has written about payments since joining the American Banker as a staff reporter in 1997, a time when automated teller machines were appearing just about everywhere but people’s living rooms thanks to the relaxation of surcharging rules.

His work at the American Banker included writing about credit and debit cards, merchant processing, and bank stocks. He later freelanced for the Banker and industry publications such as Banking Strategies, Bank Director, Community Banker, and U.S. Banker. He also writes about investing, insurance and health care, and is based in Los Angeles.

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