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What will retail look like if half of department stores close?
Many department stores and malls were struggling well before most Americans became familiar with the term coronavirus. A new report, however, says that the situation is in the process of going from bad to worse with a dire forecast for both retailers and landlords.
More than 50 percent of department stores in malls across the country will be shuttered by the end of next year, according to a recent Green Street Advisors webinar. Around 60 percent of U.S. malls currently have department store anchors.
“A lot of the disruption we were expecting to see over the next five to 10 years, is being pulled forward to the next two years,” said Vince Tibone, senior analyst, retail at the commercial real estate advisory firm.
Department store operators with high debt levels (Neiman Marcus and J.C. Penney) are most frequently mentioned as candidates for bankruptcy, while even those typically considered to be in stronger financial positions (Macy’s and Nordstrom) are struggling in the face of mass store closures.
One of the possible “knock-ons” that Mr. Tibone sees from anchor stores closing is that it will trigger co-tenancy clauses in lease deals with other retailers operating in malls. These provide non-anchor tenants with rent relief or a lease opt-out in the case of anchor space going unfilled for an extended period of time.
Mr. Tibone said filling anchor space becomes incredibly challenging in an environment “where demand for space (from retail and non-retail sources) is virtually non-existent.”
Many retailers have withheld rent payments as they try to maintain liquidity as stores sit idle. Empire State Realty Trust, which owns the Empire State Building and 13 other properties, collected only 46 percent of its retail rents in April, according to a Wall Street Journal report. SL Green Realty, the largest office building landlord in New York, collected only 65 percent of its retail rent during the month.
The decisions by some states to lift stay-at-home restrictions offer some hope at a period of time when stores and landlords share a sense of urgency in getting back to business. Simon Property Group, the largest mall operator in the U.S., is set to reopen 49 of its properties in 10 states between May 1 and May 4.
- U.S. Cross-Sector Update: Navigating Today’s Uncertainty – Green Street Advisors
- Two Big New York City Landlords Highlight Rent-Collection Woe – The Wall Street Journal
- Will shoppers go to the mall because Simon says it’s okay? – RetailWire
- Are retailers and landlords destined to head to court over rents? – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: What do you think will be the repercussions if half of all department stores close the end of 2021? What will the greater retailing industry look like five years from now?
Poll
BrainTrust
Shelley E. Kohan
Associate Professor, Fashion Institute of Technology
W. Frank Dell II
President, Dellmart & Company
The downward spiral of department stores has just been greatly accelerated by the pandemic. There are so many alternative sources for everything department stores sell, the demise of a significant number of them will hardly impact consumers. The far greater impact will be on mall operators and property managers who rely on the massive square footage department stores occupy across the country. The reckoning for department stores was coming — now it’s truly here.
This culling of weak players from the market is, to be brutal, exactly what’s needed in an economic sense. The sales captured by unproductive stores that add little in terms of innovation or dynamism can be allocated to other players that make much more productive use of capital.
However, behind this dry analysis, there is the tragedy of lost jobs which affects thousands and thousands of workers. That is a tragedy that needs to be recognized.
There is also a knock-on impact for malls, especially second- and third-tier locations which will not be able to fill the void left by giant retailers vacating. This will have an impact on all other retailers trading in those locations and will weaken those malls still further. Eventually many will close; again that’s probably economically sound, but it has a human cost.
I think we may see a quantum change in how many malls fall into those lesser categories: “good malls continue to do well” has been a common and generally true claim these past few years. This experience may put that narrative to the test.
I doubt we will see half the stores close by the end of 2021. However we will see many stores close. This shutdown of all businesses has caused severe damage, and no one knows how significant the impact will be because this is still not over. That said, Americans are resilient and have short memories. Just as we bounced back after 9/11, I believe we as a nation will once again prevail, it’s just going to take time. And with every bit of “bad,” we always find something “good.” I predict that in the “new normal,” we will see more innovative approaches and concepts in retail that will bring us forward to a new retail industry.
Walter Cronkite used to say, “And that’s the way it is.” not “That’s the way it might be” or “that’s the way it could be.” It’s like we are halfway through a nursery rhyme. The wicked witch shows up, we close the book and start ruminating, “now how could she kill the prince … stab him in the eye with his own sword, poison him, etc.?” When in reality you just turn the page and see where the story goes.
I’m over most Forbes posts and others like this with their one-note narrative. I’m not Pollyanna but I’m tired of Voldemort. Balance people. Balance. Real challenges yes but it’s bordering on Y2K hysteria.
Well said, Bob. Well said.
The pandemic has only accelerated what was going to happen to department stores anyway. Department stores as a concept are not necessarily doomed. The number of physical department stores is too large. One must remember that the department store concept emerged as part of the mall of the past. One could buy almost anything in a department store. One person, always a man, opened one store, in one city with the population density to support it, he put his family name on the front door and maybe he opened a few more stores in his geographic region. The number of locations that really qualify for that model is not large and those stores won’t be here tomorrow.
As long as we don’t have a vaccine for this virus, we’re going to hold meaning-of-life style discussions about how retail will look going forward. Everything “normal” about retail is up in the air, and customer behavior is dramatically different. I would love for RetailWire to run a challenge, soliciting predictions for 2021.
I’d go for 2022, to discuss how life will look after things settle out.
Some of the nameplates that have been struggling (J.C. Penney, the remnants of Sears, Lord & Taylor and others) will likely go out of business sooner rather than later because of the sudden disruption to their business. But these closures have been in the cards for a long time. I expect the survivors to include Macy’s, Kohl’s, Nordstrom and not many others in the department store space. (I don’t know enough about Dillard’s or Belk’s financial prospects to pass judgment on their futures.)
I’m old enough to remember the wave of consolidation that struck the department store industry in the 1980s and 1990s following a period of LBOs and overexpansion. Anybody remember ADG, Allied Stores, Federated, May Company, BATUS Retail, Marshall Field’s and so forth? Macy’s was the only traditional store left standing with a national footprint, and it has had to deal with too much square footage; the impact of COVID-19 will happen even faster as online, off-pricers and discounters continue to gain share.
The day of the department store is 50 years in the past. Mr. Seesel, wow — a blast from the past! For those youngsters who do not know, the wonderful names mentioned by Mr. Seesel all had a unique and different culture and feel!
Associated Dry Goods was an excellent and genteel company with the crown jewel as Lord & Taylor, with many other wonderful stores!
Allied Stores Corporation was a great and well run company with Jordan Marsh as one of the top dogs! (Bonwit Teller was a part of that organization before being sold into disaster with Hooker).
Federated was, for the most part, the best store in its market. Such great names as Rich’s, Lazarus, A&S, Bullock’s — oh and the top dog was Bloomingdale’s, a brighter and more vibrant Marvin Traub version compared with today.
Marshall Field’s was BATUS and then Dayton Hudson, and was a great store up to the very day of its demise! The May Department Stores Company was a terrific middle of the road retailer, fairly beloved in all of its markets, with great names like The May Company in LA, Kaufmann’s, Famous Barr, all well run and in touch with their markets and customers.
Macy’s under Mr. Finkelstein was a great, smart, exciting store. There were also Mercantile Stores too!
All of that — hundreds of stores, and thousands of jobs are gone! All consolidated and folded into Macy’s efficiency, and sameness (I still Hope that Macy’s survives for the sake of all those employees!).
And with the internet now available, those stores are sadly no longer needed. But for a while it was great and fun and very competitive!
First of all, the examples of Empire and SL Green are extreme due to their dependence on office workers (who are not in the office) for traffic. That aside, there is no doubt that the demise of department stores will be accelerated by the current shutdown. How mall and other property owners respond will determine the ultimate configuration of those locations and their tenants. The current pivot to entertainment malls may accelerate after social distancing fears ease with the availability of vaccines and treatments. But the axiom will still hold: There are better times and worse times to be a landlord — but it is always better to be a landlord than a tenant. Malls as we know them will surely evolve but don’t write the obituary for REITs and other landlords just yet.
Every trend that was present before COVID-19 got accelerated during the crisis, and this is one of them. What we’re about to witness is a great culling of the way-too-big herd of physical U.S. retail in hyperspeed. The best malls will survive, the marginal will not and, right now, there are a LOT of marginal malls with marginal anchors. I see this culling as a good thing and believe that it was inevitable anyway so, the sooner the better. Let’s move on to 21st century retail and leave the mistakes of the last century behind. All ahead full power!
You’re spot on, Lee. We were already over-stored and alternatives to traditional department stores and malls have long been gaining dominance. Darwinism will prevail and only the mighty will survive. (By the way, for the weak, their demise was inevitable — the circumstances we are facing simply accelerated the process.)
I believe there will be a rush to vacate “C” and “D” mall locations but the top “A” and “B” sites will seek to replace the department store anchors with new non-traditional ones. Mall operators need to adopt a strategy similar to the
town center concept where they have enticed chains like Whole Foods and Wegmans to be the anchors. Other options are to convert some of this space to micro-fulfillment centers and entertainment venues. A mall is the theater of retail and the stores within are the productions, the plays, the movies, its entertainment and a place to make impressions that can’t be done online. The mall isn’t dead but must evolve to match the customer’s journey.
There’s about to be a whole new competitive race for market share. With all that space closing and inventory evaporating, the customer will shop elsewhere in the surviving malls, go to another mall/strip center, or convert part of their shopping to e-commerce. The surviving malls and retailers could actually have more robust business per store than before COVID-19. E-commerce gets a bigger slice of the pie and engaging brick-and-mortar retailers will thrive. It will be devastating for those stores and brands that close. It will be devastating for the thousands of employees involved. It’s going to be a gut-wrenching couple of years. But five years from now re-purposed mall space will give our communities a whole new look and feel.
The retail landscape will have fewer chain stores, an increase in smaller store formats, a wave of mom-and-pops and different experiences for shoppers.
Over the last few decades with many mergers and acquisitions, the department stores have too many locations in duplicate markets and there is an abundance of apparel, a high category for this segment, saturating the market. This disequilibrium of supply and demand has come to head with stores closing. Some retailers will be looking for various liquidity measures to keep the business running and will close underperforming stores thereby providing sustainability to the other profitable stores. Rents will ultimately drop which will allow for a new breed of stores to emerge, many niche and unique brands. Malls will create multi-use areas as have been seen in the recent build-outs like American Dream including shopping, dining, entertainment and events. Creating community environments and some inclusive of vertical neighborhoods (like New York’s Hudson Yards) will be the new normal for shopping centers.
There are going to be fewer departments stores – it was already going that way and now it will move at a faster rate. With that being said – there is still a need for places to showcase multiple brands/categories in one location. Expect to see more Neighborhood Goods/Showfields types of concepts emerge where a concession base or revenue share model is in place. And expect these concepts to be less transactional and more experiential to gain customer loyalty.
One word: online.
With hundreds of anchor tenants closing it would look like, and be, a dire situation. Remaining tenants who in large part depend on the traffic generated by anchors can raise an ugly issue for landlords: the “dominant tenant clause,” which can be found in in their smaller store leases. Simply put, if the anchors fold out, the other retailers can exercise the clause to attain rent reductions or release the lease and leave the property. Neither case is good news for mall owners as landlords, and it will lead to mall executives offering great deals to the anchors to stay. It could get ugly.
If-then scenarios just play to fear and anxiety. We’re not there yet. There are about 25 or so major department store businesses in the U.S., making up about $130 billion in market size and currently declining at a rate of ~5 percent per year. Even if a few go under it won’t be a dramatic change to the retail landscape – and certainly 50 percent going under this year is unlikely. Five years from now, we’ll see a smaller set of department stores – maybe contraction of about 25 percent to 35 percent. Still a multi-billion dollar sector of retail, and still with many well-known brand names. Too much down thinking will bring you down. (Stats from IBIS.)
The retail landscape will look significantly different, however, the evolution while years in the making is only being accelerated by the COVID-19 pandemic. Shopping malls and department stores have not been the go-to destinations they were in past decades, and customer preferences have changed significantly. The evolution of retail has moved to a digital-first immersive model, where the physical stores are positioned as showrooms to drive experiences, and not always to sell products.
Unfortunately, the day of reckoning has arrived for the mass merchandising department store operating model. Department store traffic and sales have diminished over the years. There is simply way too much retail space, merchandise, and a lack of experience to drive customers back to the department store.
Welcome to the past, when we were discussing what happens to all that vacated retail space. Seems like it filled back pretty soon after the initial scare. This time I think it will be different. There are many more factors other than retail involved. Everyone is involved now. We are all affected somehow. Maybe it’s that we can’t go to our favorite restaurant or department store. Many more of us are laid off or furloughed and many of those furloughed could be laid off. There will be more people deciding to spend less money for a long time after this pandemic moves behind us.
Many of my colleagues have commented today and in previous discussions that the pandemic has not caused the trend but accelerated the inevitable.
I don’t know what the future of retail is going to look like, but we know it will be different. Department stores have not always been the center of retail. And within the category of retail, the department store leaders have changed. Every retail leader and retail concept has changed over the last 100 years. It will continue to change. To hold on to the concept of department stores as if they existed forever and to believe that it is really important that they exist in the future is naive at best. Their time came and their time has gone. Other alternatives are replacing them for the consumer.
Today there is very little reason for a department store to exist.
Isn’t Target a department store?
I guess it is a matter of definition. If Target considers Walmart its key competition, then it is a mass merchant. If the consider it to be Macy’s then they are a department store. For my last company, my two biggest customers were Walmart and Target, not Macy’s and Target. As a matter of fact, Macy’s wasn’t even a customer.
Yes, department stores were already in decline before the coronavirus struck. Yes, the pandemic has accelerated the downfall of department stores. But accelerate it by 50 percent by next year? I don’t believe that the downward trend will come to a close so quickly. We will have fewer department stores – think J.C. Penney, what’s left of Sears, Lord & Taylor, and many of the regional brands. The fact is that how consumers shop has changed, and retail must evolve with them. That was true before the pandemic and will continue to be true post-pandemic. Consumers do not need department stores in their current format to make the purchases they need and want. I find it helpful to look at other countries around the world to see how department stores evolved there. In most other countries, department stores exist in the major cities and in far fewer numbers. They are true destinations for their shoppers and they provide an amazing variety of product categories that our U.S.-based department stores have long since abandoned. Let’s face it, our department stores are largely apparel and home furnishings stores and not much more. Consumers have many, many choices in those categories. Even in apparel, the choices are abundant. So department stores must still ask themselves, why should customers shop with us? Until they answer that, they are delaying the inevitable. However, brands like Macy’s have such a deeply embedded history with Americans, I cannot imagine they will not survive. But their footprint will be different, there will be fewer of them and, certainly, fewer C and D malls containing them. It’s a natural culling of the herd of retail and needs to occur. Some of it will occur in the next year, but most of it will take longer as consumers are not simply going to abandon these stores 100 percent when they re-open. It will still be a slow decline, not a rapid one.
This is not the first time department stores have been projected to disappear, yet they are still here. Early on, the only place you could buy a TV was the department store. Today they do not sell electronics. Department stores are continually evolving with new categories and customers. Just like you don’t try to beat Walmart at Walmart’s game, today you don’t try to beat the internet.
Department stores will likely be smaller with greater customer service. They will sell products that don’t really work well on the internet. These will likely require some form of customization. Another area they will excel in will be selling better and best quality products on the internet. Also they will provide a shopping experience the upper middle class and above wants.
I would discount anyone’s five-year predictions today. They are irrelevant, as the world is moving too fast for anyone to tactically and effectively plan more than 18-months out. Stores that were hurting prior to the pandemic, of course, will struggle to survive going forward. Online will only continue to increase, and those physical stores, large and small that adapt to evolving consumer sentiments will thrive. Nothing has really changed if you think about it. This current crisis is just a bigger smack in the face for all of us who experienced the evolution of the most recent years.
Retail space per capita is the highest in the US at 23.5 square feet, with Canada at 16.8 and Australia at 11.2. Every other first world country is below 5 square feet per person. US real estate physical space is over saturated and will come down significantly. The concept of the anchor store is gone and will be a relic soon. But consumers are hardly noticing a difference.
Innovation needs to happen in formats, experiences and products that encourage people to come out.
After reading all of the comments and predictions:
With few customers and (even) fewer employees, haven’t department stores been practicing “social distancing” for years? It would be a double whammy for malls because in addition to the anchors, it’s reasonable to assume many of the in-line stores will close as well. Although not completely new — many chains have folded in recent years — the scale and timing of it would be unprecedented.
So what is a mall if it has few/no anchors AND few stores? It’s a dead mall. This isn’t a new phenom — that there’s already a term for it shows that — but the (d)evolutionary process may have been sped up by decades.
Traditional indoor malls have to be redesigned around food courts and restaurants and in person entertainment to drive traffic to the other tenants, rather than department store anchor stores.
Open air street malls (like Santana Row in San Jose) don’t have department stores as anchor stores to start with.
Centers will have a plethora of space to rent, and the center profitability will fall dramatically. Worse, as the centers shrink in numbers of stores in demand by shoppers, shoppers will be less inclined to go to those centers, accelerating the demand trend downward. Some shopping centers will close for good. The greater retailing industry will have a smaller number of centers, many less large stores and a trend to smaller stores and online shopping.
Just as the coronavirus has accelerated many trends, department stores that were already on the rocks before the crisis will see increased challenges to their traditional business model. The trick will be for them to find some way to adapt and add new value to the market. For retailers, now more than ever, investing in the omnichannel experience is critical. Their plan of action must grow to include e-commerce and direct-to-consumer platforms, if they didn’t already.
The collapse of the middle is widely documented, and accelerated in large part by debt financing that made the organizations much more fragile. It will be interesting to see the follow on effects of specific closings. For example, over half of Sephora stores are in JC Penney. What happens to them with such risk exposure? If many department stores close, will the remaining ones see boosts? Can they use that to help catalyze their transformation?