Retail's White Elephants

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i l’ s te hants Once considered shopping meccas and fixtures in teens’ social scenes, mid-market malls across the U.S. now are struggling to keep their doors open. Here’s how developers are leveraging insights on evolving consumer behaviors to reinvent the bricks-and-mortar retail experience.

By Christine Birkner | senior staff writer

 cbirkner@ama.org

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Tw e n t y o r 3 0 y e a r s ag o, shopping malls w e r e t h e p l ac e to be.

Suburban teenagers and their parents flocked to them in droves. New mall openings were heralded events. When the Mall of America opened its doors in Bloomington, Minn., in 1992, offering more than 300 stores, at the time, and numerous entertainment attractions within 4.87 million square feet of retail space, it drew visitors from around the world. The mall still reportedly draws an average of 40 million domestic and international shoppers each year, but in 2014, the mall’s four-person tourism department, responsible for promoting the mall’s offerings overseas, invested in a concerted promotional push in an attempt to lure more lucrative Chinese shoppers to compete with retail-heavy cities such as New York, Chicago and Los Angeles.

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But those are rich mall owners’ problems. While higher-end malls and manmade shopping wonders like the Mall of America are still doing well, many retail pundits are sounding the death knell for the traditional, mid-tier mall, and the statistics are, indeed, grim: A major enclosed mall hasn’t been built in the U.S. since 2006, and since 2010, 25 enclosed shopping malls have ceased operation and an additional 60 are on the brink of closure, according to Green Street Advisors, a Newport Beach, Calif.-based real estate advisory firm that tracks the mall industry. In 2014, 15% of U.S. malls were 10 to 40% vacant—up from 5% in 2006—and about 15% of U.S. malls will fail or be converted into non-retail space in the next 10 years, according to Green Street.

“The selling point of malls, when they were originally built and when they started to grow in the ’60s and ’70s, was a volume thing: ‘Come to the mall because we’ve got more retailers than anyone else in town. It’s one stop, 150 retailers.’

That’s not as big of a selling point anymore,” says Christopher Zahas, managing principal at Portland, Ore.-based urban planning firm Leland Consulting Group Inc. “People don’t care if there are 150 stores if they don’t want to shop at most of them.”

Mall developers are working to turn their fortunes around, adding new technologies and investing in omnichannel initiatives to blend online and in-store shopping. They’re focusing on experiences, adding more high-end restaurants, movie theaters, live entertainment and rotating art exhibits to lure more potential shoppers. Specialty malls, such as malls that appeal to Hispanic consumers, and mixed-use spaces, which blend traditional mall retailers with grocery stores, apartments, outdoor plazas, dining and entertainment, also are transforming the way people shop. As consumers move away from the cookie-cutter shopping malls of the past, developers are adapting to the shifting retail landscape to help define the future of the bricksand-mortar shopping experience.

DIGITAL MEETS PHYSICAL

Mall developers must contend with consumers’ changing shopping habits, of course, and the

problem isn’t just where people are making purchases but how they’re doing so. The number of U.S. consumers shopping online has increased from 163 million in 2009 to 201 million in 2015, eMarketer reports. And while 90% of retail sales still happen in bricks-and-mortar stores, according to A.T. Kearney Inc., a Chicago-based global strategy and management consulting firm, shoppers are buying fewer items and spending less time per trip.

Instead of wandering through a mall for an afternoon, consumers often are researching products online first and planning their trips in advance, picking up a few items, and leaving.

Seventy-three percent of U.S. consumers research clothing, footwear, toys, and health and beauty products online before buying, according to PricewaterhouseCoopers. From 2009 to 2013, the average number of annual shopping trips for U.S. consumers dropped 3%, Nielsen has found.

“On the successful properties, traffic is flat or up, but the number of store visits is down,” Scott Morey, executive vice president of Chicagobased mall developer General Growth Properties Inc. (GGP), which operates 120 malls across the U.S., primarily luxury malls located closer to wealthier neighborhoods. “People normally visited five stores per property and now they’re visiting three.”

And online “pre-shopping” behavior will continue, says Nikki Baird, managing partner of Retail Systems Research, a Miami-based retail research and advisory firm. “It creates more focused trips, and fewer trips. We don’t need as many stores to be successful on the store-based side of things as we used to, and they don’t need to be as big as they used to be.”

In an October 2014 PricewaterhouseCoopers survey, U.S. consumers said that they buy products online instead of in-store for the following reasons: lower prices and better deals (52%), the ability to shop 24/7 (47%) and the ability to shop from home (40%). On the other hand, U.S. consumers said that they shop in-store versus online because they can get the product immediately (56%), they’re able to see, touch and try merchandise (55%), and there’s instant gratification (23%).

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Mall developers therefore are investing in omnichannel efforts, which blend online and in-store targeting. GGP’s omnichannel efforts include in-store pickup and texting programs, and it also is experimenting with beacon technology. In 2014, GGP began offering sameday delivery and 100 retailers have signed up, including Macy’s.

“There’s still value in physical stores,” Morey says. “If an online retailer opens a physical store, their online sales go up three to five times. The reverse also is true: When Macy’s closed physical stores, online sales in that market were down. If stores can have a cross-channel offering, they’re going to see more share of wallet.”

In October 2012, Century City, Calif.-based Westfield Corp., which owns 40 shopping centers in the U.S. and U.K., launched Westfield Labs, a San Francisco-based initiative with a 70-person team focusing on leveraging social, mobile and digital tactics to blend the digital and physical shopping experience. “Our CEO realized that the world of retail is changing fast, and quite dramatically. Westfield wanted to build a team around this,” says Lindsey Thomas, global vice president of Westfield Labs.

Mobile marketing tactics are crucial for malls, as research shows that more consumers want to use their mobile phones while shopping in-store: 11% of consumers in PricewaterhouseCoopers’ study said that purchasing items via a store’s app or on their mobile phones would make their in-store shopping experiences better. In 2013, Westfield Labs partnered with eBay to launch digital storefronts in San Francisco, New York and New Jersey from which customers could browse products from retailers such as Rebecca Minkoff and Toms Shoes, and buy them using a mobile device. The screens also displayed products from nearby stores with directions on how to find them. In May 2014, Westfield began testing Dine on Time, an app-based local food delivery and pick-up service for the food court and restaurants at the Westfield San Francisco Centre mall.

In March 2015, Westfield Labs launched Bespoke, a 35,000-square-foot co-working, demonstration and event space located on the

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fourth floor of San Francisco Centre that includes interactive displays with robots and products from the tech startups that have offices there.

“In San Francisco, we’re in a city where you have tech entrepreneurs and some of the best fashion brands,” Thomas says. “We wanted to bring them together … and give our customers an interactive space where they could test products that they otherwise couldn’t get their hands on.”

Westfield Labs also is experimenting with “way-finding” technology, which allows customers to download an app to map their

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Open-air malls with outdoor spaces will play a huge role in the future of retail, experts say.

Image courtesy of General Growth Properties.

shopping experiences. “It’s about letting consumers know that we’re able to make shopping trips as painless as possible,” says Beth Ann Kaminkow, Westfield’s CMO. “We’re thinking through the purchase journey from the consumers’ and the retailers’ vantage points, and making sure that they have the tools and technologies to interact and engage. We recognize that physical spaces still matter for the consumer.

We make it easy for the majority of the sales to happen in-store, but the store isn’t there just to sell. It will become less important whether the

actual sale is taking place in one of our locations, and more important that one of our locations is triggering the building of the brand and the desire to purchase these products.”

Data is an increasingly crucial marketing pillar for all brands, and mall developers are no different. Westfield provides its retailers with customer data collected from opt-in apps and customer credit card data through partnerships with Visa and American Express. “Retailers want to see numbers. We provide the retailer insights around how people are shopping, whether they’re

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In 2014, 15% of U.S. malls were 10 to 40% vacant and about 15% of U.S. malls will fail or be converted.

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coming with a specific mission in mind, whether they’re looking for curb-side pickups or if they click and collect, or whether they’re likely to be upsold when they enter the store,” Kaminkow says. “It’s being able to connect all of those dots for them. It used to be more of a landlord relationship with our retailers, but now we’re moving beyond that to a true partnership.”

A BETTER EXPERIENCE

Macro-level experiences are just as important as micro-level experiences to keep malls viable, meaning that mall-based entertainment can help as much as the in-store shopping experience, Baird says. “It’s about working retail into an environment in a more integrated way, as opposed to requiring [the shopping, itself,] to be a destination.”

GGP is focused on improving its restaurants and food courts, and is adding more movie theaters and kid-focused entertainment. During the 2014 holiday season, it launched Adventure to Santa, a 2,000-square-foot cottage featuring Shrek and Santa Claus with a motion-based, virtual sleigh ride, in five GGP locations across the country. Customers could schedule appointments for Santa visits either online, or through a designated app, eliminating the need to wait in line. “We got visitors from farther away than we’d ever had before because of it,” Morey says.

Year-round, GGP emphasizes guest services such as gift-wrapping and same-day free delivery.

“If it’s raining, we ask our guest services people to walk people to their cars with an umbrella,” Morey says. “It’s about making the visit more pleasant and taking negative parts out of visiting the mall.”

Adds Jesse Tron, director of communications and media relations at the New York-based International Council of Shopping Centers (ICSC): “Experience is one of the biggest buzzwords our members talk about. You’re seeing non-traditional tenants: rotating art exhibits, dinosaur exhibits for kids. If you mentioned these ideas to a leasing person 15 years ago, they would’ve laughed at you. It’s so important now to create a different kind of atmosphere when you’re a large-format shopping center.”

“We provide the retailer insights around how people are shopping, whether they’re coming with a specific mission in mind, whether they’re looking for curb-side pickups or if they click and collect. …

It used to be more of a landlord relationship with our retailers, but now we’re moving beyond that to a true partnership.”

- Beth Ann Kaminkow, Westfield Corp.

THE NEW PLAYERS

The construction of traditional malls might be on the wane, but a growing trend is mixed-use development, which blends traditional retailers with apartments, grocery stores, restaurants and entertainment, and appeals to both aging baby boomers looking for centralized living and younger consumers who want easy access to shopping and amenities without the congestion of cities.

“Consumers really are looking for something more interesting, for shopping and dining experiences, and they’re looking for the social aspect, versus a traditional mall, where you go, shop and leave,” says Edan Della Mea, marketing director of CityPlace, an open-air, walkable, mixed-use development in West Palm Beach, Fla. “In a mixeduse space like CityPlace, you can go and shop, work out, see a movie or go to Publix and get your dinner.

It’s really a true live/work/play environment.

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Mixed-use properties also have a larger trade area than a typical mall, and when you have that, people usually stay longer.”

CityPlace has 36 retailers, as well as a Publix grocery store, an LA Fitness, a church, an IMAX theater, apartments, and live music on the plaza on weekends, and attracts about 7 million visitors per year. The development keeps a 60-40 ratio of shops to dining, apartments and other properties.

“We’re attached to an office building, which adds more traffic during the week,” Della Mea says.

“We’re also a tourist destination, which drives traffic on a typically slow Monday, Tuesday or Wednesday. Anything to do with driving traffic keeps retailers happy. They know that people are going to come to LA Fitness five days a week, so they might stop by H&M, too.”

CityPlace hosts art festivals, charity walks and cycling events throughout the year. “We have a $4 million fountain that dances to water, we have a staging area for live bands and we have beautiful lighting with lots of seating areas,” Della Mea says.

Mixed-use spaces are going to play a huge role in the future of retail, says Robin Lewis, CEO of New York-based retail consultancy The Robin Report and co-author of The New Rules of Retail: Competing in the World’s Toughest Marketplace.

“People would rather shop streets and boutiques, and that means that the old, regional malls are giving way to mixed-use, walkable downtown villages. It’s no longer the big, cement indoor mall that you have to travel 30 minutes get to.”

Leland Consulting Group’s Zahas agrees.

“If it has more of a street presence, there’s a greater connection there. Adding housing is also a great strategy. It integrates more with the surrounding community to up the authenticity factor. On the whole, the shift is toward mixeduse, food-oriented and open-air [malls] with outdoor streets.”

Specialty malls, such as shopping centers oriented toward specific consumer groups, are another trend that could play a role in the future of the mall experience. The Montebello, Calif.based Legaspi Co. has seven specialty malls in markets around the country—with traditional retailers as well as doctors’ and dentists’ offices, hair salons, money-wiring services and entertainment—all built to resemble small

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“A” malls, which are located closer to wealthier neighborhoods and contain more luxury stores, such as the Natick Mall in Natick, Mass., are expected to fare well over the next few years.

Mexican towns in an effort to target Hispanic consumers. The malls average about 4 million visitors per year, says José de Jesús Legaspi, founder and president of The Legaspi Co. “Because the doctors and dentists are there, the whole family comes as a unit. Our loyalty factor is very high and we tend to attract consumers from afar. We sometimes bring in people from 20, 30, 60 miles. It resonates, too, with non-Hispanics because the family unit is the main focus of our effort.”

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Image courtesy of General Growth Properties.

DROPPING ANCHORS

Along with changes in consumers’ shopping behavior and preferences, mall developers also must contend with economic challenges.

Regions of the country that bore the brunt of the economic downturn, such as the Rust Belt, experienced the bulk of mall closures, ICSC’s Tron says. “Some areas are so hard-hit, economically, that it’s hard for retail to thrive, period. The population has shrunk or the jobs have dried up, or incomes haven’t grown. These

consumers aren’t shopping on the Internet.

They’re shopping nowhere.”

Adds The Robin Report’s Lewis: “The economy is growing sluggishly and that’s going to continue.

We’re over-stored and over-websited. We have 46 square feet of retail space for every person in this country. By comparison, Europe has about three square feet per capita.”

Real estate developers assign asset value grades to malls. “A” malls, which are located closer to wealthier neighborhoods and contain more

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Pundits are sounding the death knell for the traditional, mid-tier mall, but higher-end malls such as the Grand Canal Shoppes in Las Vegas are still doing well.

luxury stores, make up the lion’s share of mall value in the U.S. and are expected to fare well over the next few years, while the prospects for “B” and “C” malls, which are located in middleand lower-income neighborhoods, aren’t as promising, according to Green Street Advisors.

Indeed, the old adage of real estate—location, location, location—holds true for bricks-andmortar retailers, and mid-market shopping malls don’t offer the prime real estate, Morey says. “ ‘C’ malls are losing retailers because they’re not getting the traffic that they should. If you’re in Chicago on Michigan Avenue, or on Fifth

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Avenue in New York, you can’t replace that.

People are always going to shop there. Having a good property in a good location is what retailers are looking for. If you’re in a certain market and have the right retail mix, you’re in a great position.”

J.C. Penney and Sears, two traditional “anchor stores” that often made up the bulk of square footage in mid-market malls, closed many stores around the U.S. over the past few years, which didn’t help their former landlords. “Middle-level malls, with J.C. Penney and Sears, are getting killed,” says Howard Davidowitz, chairman of

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Davidowitz & Associates Inc., a New Yorkbased retail consulting firm. “We probably have 400 great malls in America, and what makes them great is high-level anchors: Nordstrom, Neiman Marcus, Saks and Macy’s. They appeal to people with money, and that part is critical because the middle class has shrunk dramatically.”

In 2012, GGP bought out its former Sears anchors and replaced them with Bloomingdale’s or Nordstrom stores, and some GGP malls have grocery stores such as Whole Foods and Trader Joe’s as anchors, Morey says. “With grocery stores, you add frequency of visits. People tend to grocery shop more often than they shop for apparel.” GGP’s earnings increased in the third quarter of 2014, and tenant sales were up 2.8% in 2014.

Other mall developers are buying back closed J.C. Penney and Sears stores, and either splitting up the space and re-leasing it to multiple tenants, or razing empty stores and building outdoor spaces, Tron says. “It allows them to diversify the tenant mix and gain revenue. There’s actually a good opportunity there.”

GOING LOCAL

Diversifying the tenant mix also should include incorporating more local, small-town brands and retailers in the malls of the future to respond to consumers’ preferences. “Younger generations want more authenticity and Main Street retail,” Zahas says. “People really want a more authentic, community, urban experience, and malls can’t do much to provide that.”

Westfield is working to change that perception by including more local brands in the retail mix, Kaminkow says. “We don’t want all of our locations to have the same mix, so we sprinkle in local brands or brands that are up-and-coming. We’re also looking at what used to be the dreaded kiosks and trying to make them more artisan and local. We’re trying to draw in more experimental stores, ones that are curated and special, to make you feel like you’re in a farmers market or an international market space, where you’re exposed to things that feel one of a kind.”

Some GGP malls have grocery stores such as Whole Foods and Trader Joe’s as anchors, Morey says. “With grocery stores, you add frequency of visits.

People tend to grocery shop more often than they shop for apparel.” GGP’s earnings increased in the third quarter of 2014, and tenant sales were up 2.8%.

Economic pundits who are proclaiming that the end is near for mall-style retail are being too general or far-reaching with their proclamations. Mall-style shopping isn’t dying—at least not yet, Kaminkow says. It’s just that, like many industries in a constrained economy, the mall spectrum is narrowing, and bifurcating. Yes, there will be fewer mid-tier malls, and likely fewer malls overall, but there’s still a place in the retail spectrum for malls with offerings well-suited to their areas’ socioeconomic demographics, she says. “For the right players, there’s going to be a really strong role in the physical retail environment.

The malls that are going to win market share are going to understand what people want and give it to them in experiential ways. … We have an opportunity now to have a convergence of the digital and the physical, and to build social connections in a physical space, which people are still craving.” m

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