A couple of months ago my wife and I were walking through the Steeplegate Mall in Concord, New Hampshire. It looks like most enclosed malls do, except that there were almost no people there – on a Saturday night. Not a good sign. As is my custom, I asked a mall employee about the dearth of customers. Her response shocked me: “Oh, it’s like this all the time.”
She went on to tell me that she started working there back in 2007, and that the mall went downhill after the recession, and never bounced back. That much was obvious. Based on my rough count, about 25% of the storefronts are empty, including one of the four anchor stores. The food court has only a Dunkin Donuts.
This is actually becoming a trend with enclosed malls across the country.
There was a time in America – covering close to 50 years – when downtown areas in cities and towns were becoming ghost towns, as enclosed shopping malls were being built all across the country. With their enclosed, temperature controlled buildings, trendy stores and general newness, the malls could easily outcompete the venerable downtown shopping districts.
But now it seems as if the same fate is coming upon the now ubiquitous enclosed shopping mall. Perhaps victims of their own success – or over-confidence – America’s malls are overpriced and running out of time.
The Basic Mall Business Model
I think that the problem has to do with the basic mall business model. It’s no longer working. It was hatched during a different time, a much more robust one. The enclosed mall concept itself was revolutionary, and that’s mainly what drew customers in. It was based around the traditional downtown shopping district concept, but in an entirely enclosed environment, and with a fresh and modern flavor to it. It didn’t take long before “shopping” became synonymous with “going to the mall”.
But the success of the model also contained the seeds of its destruction. Enclosed shopping malls catered to the well-to-do, and it’s reflected in the stores that populate them. Most are in the category of high-end boutiques, offering specialized merchandise that’s significantly overpriced. Two American retail icons, Sears and Macy’s, that once catered to the middle class, went upscale in both style and price as they relocated more stores to the malls.
I suppose the business theory was that people would pay more at a more favorable location. And for decades that model seemed to work. America was growing in prosperity during the 1960s when enclosed malls became a thing, right up through the late 1990s.
But then the dot-com bubble burst in 2000, and that’s the time when I believe that the country’s fortunes – or more specifically, those of the average person – took a downward turn. The malls ignored this turn of events, perhaps putting their faith in either a fundamental reversal of the downtrend, or pinning all their hopes on continued patronage by their core customer groups, the youth market and the top 10% of households.
It doesn’t seem to be working. Last year, Gap Stores closed their outlet at our local mall. I didn’t shed a tear, despite the fact that I was a loyal Gap customer back in the 1980s. Back then, Gap was selling inexpensive Levis for around $8 or $10 a pair, so it became the go-to store for blue jeans. But in recent years they’ve been selling them at $60 a pair.
Since I can buy Wrangler’s at Walmart for around $17 a pair, Gap fell off my itinerary long ago. I suspect that’s the case with a lot of other middle class consumers. The mall may be a pleasing place to hang out, or to make the occasional specialty purchase, but it no longer works for regular shopping sprees. That’s significant.
Amazon is a Factor, But the Basic Mall Business Model is Broken
Since lowering basic price levels is anathema to malls and mall chain stores, they’ve chosen to target a devil in their demise. It’s Amazon. No doubt Amazon is taking a toll too. After all, there’s almost nothing that’s sold at the mall that can’t be bought through Amazon for a lot less – easily.
But Amazon is also serving as a smoke screen that enables the malls and their tenant stores to ignore the rapidly changing demographics of America. If the average consumer can’t afford your merchandise, then you’re future isn’t good.
The more fundamental reality – even apart from Amazon – is that malls are attempting to sell their wares to a customer base that increasingly no longer exists.
As Go the Anchor Stores, So Go the Malls
Most of us hear little of the decline of the mall, and probably wouldn’t pay attention unless it affected the mall we actually shop at. But there’s no escaping the news stories surrounding the department store chains that exist almost exclusively in enclosed malls – Macy’s, Sears, and JC Penney. Reports of restructuring and store closings have become standard financial media issue since the recession.
That has powerful negative implications for shopping malls. “Anchor stores” as they’re known – the national brand name department store giants that exist in virtually every enclosed mall – are the life’s blood of the mall. They’re the stores that draw customers to the mall, rather than the dozens or hundreds of smaller stores that inhabit the spaces in between. As go the anchor stores, so go the malls.
It’s hard to find any enclosed mall anywhere in America that doesn’t have a Sears, a Macy’s, or a JC Penney’s, and many have two, or even all three. But here’s the latest dismal news on each:
- Macy’s: Macy’s is closing these 68 stores: Is yours on the list? (USA Today, 1/4/2017) – They actually plan on closing a total of 100 stores through 2018.
- Sears: Sears is closing 150 stores — here’s the full list (Business Insider, 1/4/2017) – Actually, it’s “only” 42 Sears stores and 108 KMart stores (side note: Sears has cut the number of stores it operates from 3,500 down to 1,500 since 2011).
- JC Penney: Sears and JC Penney Need to Close Over 300 Stores (24/7 Wall Street, 4/25/2016) – analysts suggest JC Penney needs to close between 200 and 320 of it’s 1,000+ existing stores.
Any mall that has one or more of these chains close up shop is in for a rough ride, if they can even survive the fall. The problem is that there are very few willing replacements.
The carnage is also extending to other popular non-anchor mall chains. In 2016 Time provided a list of common mall retailers that have shut down many locations in the past couple of years, including:
- Wet Seal: 500-plus stores
- Barnes & Noble: 223 (through 2017)
- Children’s Place: 200 (through 2017)
- Aeropostale: 175
- Finish Line: 150
- American Eagle: 150 (through 2017)
- Chico’s: 120 (through 2017)
- Gap/Gap Kids: 35
- The Limited: 240
Do you see the pattern? I have to say quite frankly that apart from Barnes in Noble (and Gap back in the 1980s) I’ve never shopped at any of these stores. I suspect many people haven’t or haven’t in recent years. All are over-priced, and sell merchandise that no one really needs. Yet enclosed shopping malls are filled with exactly these kinds of retailers.
Hint: You Don’t See Walmart, Target and Marshalls Closing Stores
OK, for the record, Walmart has closed a very small percentage of its stores, but it’s also been opening new stores. And I read somewhere that Target plans to shutter 13 stores, but is opening new ones as well.
Last year TJX Companies announced that it is planning to expand the number of T.J. Maxx, Marshalls, and HomeGoods stores from 3,700 stores to 5,600 in the next few years. This is a complete reversal of the trend that has overtaken the mall stand-bys.
But do you see the pattern here as well? Walmart, Target and Marshalls et al sell stuff the average consumer wants at prices he and she can afford. They’re living evidence of why the mall business model is no longer working.
The Youth Demographic Isn’t Coming Through Because it Can’t
In the 70s, 80s and 90s malls targeted the youth market specifically. But not only is America getting older, but it’s citizens are getting poorer. That’s perhaps more true of the youth market – the Millennial Generation (those in their late teens, 20s and early 30s) – than it is for the population at large.
The mall model was largely crafted to target the teenager or college student from prosperous families, who had liberal use of their parent’s credit cards. Now that the average household isn’t as well off as it was 20 years ago, and many have fallen an economic notch or two, the “Bank of Mom and Dad” that bankrolled billions of mall shopping sprees has also shut down in many families.
But that’s not the worst of it.
Student loan debt payments, high housing and health insurance costs, and a dearth of well paying, fully benefited full-time jobs have severely limited the financial fortunes and futures of the Millennial Generation.
Many, perhaps most, work in the “gig economy” – that universe of what are sometimes known as slash workers – i.e., the substitute teacher/hair dresser, or the bank teller/barista (I myself, as a refugee from the mortgage industry, was an accountant/blogger for six years!). You probably know some young people who are in that category. Everybody does. It’s the new normal, and it’s not to be under-estimated.
The problem is that millions of gig economy workers are not a strong base for the American mall business model. Ironically, the gig economy might mean more Millennials working at the mall – as yet another gig – than shopping in it.
The Danger of Relying on the “Top 10%”
This became a common business strategy in the 1980s with the advent of the YUPPIE (young, urban professional). It’s based on the idea of selling less volume at higher prices to a more “discerning” (read: richer) client base. In theory, it produces higher profits. The malls certainly bought into the strategy, pricing themselves to sell to the richest 10% of households – the upper and upper-middle classes.
But relying on selling to the top 10% is extremely risky for a number of reasons:
- Numerically speaking, it’s a very limited group
- Even top 10% households are affected by economic downturns – and they often react much more quickly than the bottom 90%, since they usually have more options
- Not everyone in the top 10% are free-spending
- The wealthiest households tend to be more prone to following trends – they quickly move from one trend to the next, so pinning them down is close to impossible
- The top 10% tend to be both more time conscious and more tech savvy, which helps to explain the explosion of online shopping and away from bricks-and-mortar stores
This is why I say that the malls are selling to a clientele that no longer exists. If the middle class is financially tapped out, the younger generation faces a more constrained future, and the top 10% can’t be counted on, then the reasons for the demise of the enclosed shopping mall become obvious.
The Future of the American Mall
Last year Time reported that more than one-third of America’s malls will close within the next few years. More specifically, it reported that 400 of America’s 1,100 enclosed malls will fail. Of those that remain, only 250 will “thrive”, while the rest will continue to struggle. There’s even a website dedicated to chronicalling the demise of the hundreds of enclosed malls that have already been shuttered across the country, appropriately named DeadMalls.com.
I’m not an expert on enclosed malls, but from where I sit, I think the only hope most of them will have is if they become more people-friendly, more price-conscious and definitely more relevant. That will mean aligning their formats and pricing to match the lifestyles, finances and preferences of the greatest number of patrons.
Up to this point, they’ve done a miserable job of doing that. In fact, the basic business model infers that the average consumer is entirely unnecessary to the mall existence. But increasingly, the mall has become a place to hang out – without necessarily buying anything, apart from the occasional designer pretzel or an overpriced candle arrangement. That’s not a winning business model.
The fundamental problem is that malls were built on high cost structures – high cost construction in high cost districts, requiring high rents from tenants, who must charge high prices to customers. Unless a mall is situated in the kind of wealthy locations that can support that business model, the cost structure will have to come down. Most likely that will happen through the default or bankruptcy of the mall owners, which is already happening in many locations.
Once that high cost structure has been broken, mall management will have to concentrate on bringing in more affordable stores, and ditching the over-abundant, over-priced boutiques. That might start with non-traditional anchors, like Target, Walmart and Marshalls. It may mean lower priced smaller stores, the kinds that once populated thriving downtown shopping districts, and that sell merchandise that people actually need and can afford. Movie theaters and gyms will likely help, since they can be big traffic generators.
These changes are actually happening at some malls, but they’re the exception. It’s likely that many more malls will close without ever making a serious transition to relevancy and greater affordability. That’s a tragedy too. The basic enclosed shopping mall concept is a solid one, but it’s been overtaken by unrealistic expectations, and unsustainable pricing.
What do you think – is there any hope for America’s malls? Or do you think they’re going the way of the American factory?