What will retail look like if half of department stores close?

Photo: Getty Images/sanfel
Apr 30, 2020

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.

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?

Please practice The RetailWire Golden Rule when submitting your comments.
"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."
"This is not the first time department stores have been projected to disappear, yet they are still here."
"Balance people. Balance. Real challenges yes but it’s bordering on Y2K hysteria."

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36 Comments on "What will retail look like if half of department stores close?"

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Mark Ryski

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.

Neil Saunders

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.

Craig Sundstrom

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.

Art Suriano

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.

Bob Phibbs

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.

Georganne Bender

Well said, Bob. Well said.

Bob Amster

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.

Cathy Hotka

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.

Peter Charness

I’d go for 2022, to discuss how life will look after things settle out.

Dick Seesel

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.

William Passodelis
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… Read more »
Ben Ball

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.

Lee Peterson

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!

Dave Wendland

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.)

Ken Morris

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.

Jeff Sward

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.

Shelley E. Kohan

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.

Stephen Rector

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.

Liz Crawford

One word: online.

Rich Kizer

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.

Ananda Chakravarty

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.)

Brandon Rael

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.