The New Math for Mall Retailers
"The vast majority of traditional enclosed malls will need to be reinvented as something other than monolithic, single-use properties."
Holiday retail sales results are in.
All retail sales (excluding autos, gasoline, and restaurants) increased four percent in November and December 2016 versus the same period in 2015, according to the National Retail Federation. There was a 13 percent increase in online sales, continuing a long-term trend of annual double-digit increases.
Sales at clothing and accessories stores increased by two percent while sales at department stores declined by seven percent. Meanwhile, online sales of clothing and accessories (including catalogs) grew by 19 percent last year.
Ten years ago, online sales of fashion goods accounted for slightly less than 10 percent of the category’s overall U.S. revenues. According to eMarketer, this percentage should reach 23 percent in 2017.
Given these trends, it is no surprise that hundreds of department store (Macy’s, Sears) and fashion specialty store closings (American Eagle, Chico’s, The Children’s Place, Finish Line, Men’s Wearhouse) and bankruptcies (The Limited, American Apparel, Aeropostale) have been in the news lately. Mall stalwarts such as Claire’s, True Religion, Nine West, and Rue21 are also considered to be candidates for bankruptcy in 2017.
Leading department store chain Macy’s plans to close 68 stores, including locations at the Mall at Tuttle Crossing and Eastland Mall locally, while Sears, its co-anchor in many malls, will close 17 stores (but none locally).
Up to 4,000 U.S. locations for the 12 fashion specialty chains listed above could be impacted by bankruptcies and store closures. Declaration of bankruptcy is often the only way for these retailers to close unprofitable stores due to lease covenants. Note that even the brands listed above, including The Limited, will still be available via e-commerce channels, even after all their stores close.
Each mall fashion store location will typically pay about $150,000 in rents and other occupancy costs such as common area maintenance (C after AM) charges per year, meaning that closures for just those same 12 chains could reduce gross income at malls across America by as much as $600 million per year. From the chain’s perspective, a single online fulfillment center can serve as many customers as 100 retail stores.
Cost reduction has become a key consideration in the fashion industry because of rampant discounting which has led to margin erosion. According to Chain Store Age, two-thirds of all mall purchases were sold using a markdown in 2016.
Regardless of cost impacts, the shift from selling clothing and accessories in stores to selling online would make no sense if it was not in sync with consumer behavior. Now, the largest single merchandise category for e-tailing with over $75 billion in revenues last year, clothing and accessories retailers were initially slow to adapt to the Internet because their customers wanted to try on items to see how they looked and fit before purchasing them.
But over time, many factors have methodically dismantled barriers to the online buying experience, including:
- More selection of products at all price and quality levels – Amazon alone now offers 33.4 million clothing, footwear, and jewelry products, an 83 percent increase versus one year ago.
- Fast, free/cheap delivery and buy online/pick-up services to provide instant gratification.
- Easy, generous return policies to reduce the risk of getting stuck with poor-fitting or shoddy merchandise.
- Gradual increase in customer satisfaction levels with online purchases that have led to repeat behavior.
The rate of growth has actually accelerated in recent years for online apparel purchases, while starting to level off in many other online retail categories, such as electronics. By 2030, when most Millennials are in their 40s and the next generation of teens and young adults is more obsessed with technology, we will be purchasing the majority of our clothing online.
This, of course, will have major economic and land use implications, particularly for Central Ohio. The vast majority of traditional enclosed malls will need to be reinvented as something other than monolithic, single-use properties. Each property and the market it serves will need to be evaluated to identify redevelopment strategies.
Meanwhile, new logistics facilities supporting e-commerce functions will be needed, including fulfillment centers, parcel hubs and sortation centers, parcel delivery centers and urban logistics hubs, and pickup locations and freight stations. Drone delivery systems and driverless cars are in their infancy and are expected to spawn entire new industry sectors in addition to growth in more traditional delivery methods.
Historically, two of central Ohio’s strongest economic sectors have been retailing (home to several national fashion chains such as L Brands, Express, Abercrombie & Fitch, DSW and others) and distribution (Columbus is within 500 miles of 48 percent of U.S. population, #1 in the nation). Inevitably, as retail sales transfer from retail stores to e-commerce and delivery, so will jobs.
However, it is unlikely to be a one-to-one correlation. Today’s logistics systems are more digitized and highly automated than ever. Robotics and artificial intelligence are replacing human labor at an accelerating pace. Unfortunately, the shift to e-commerce is likely to result in fewer net jobs in our overall economy. This is just one example of future job scarcity due to technological innovation that many economists are predicting, regardless of who our President and other leaders are.