This is the second report in our three-part The Mall Is Not Dead series that looks at the US mall landscape with a focus on the challenges malls face and their need for transformation. In this report, we examine the department stores and specialty stores that constitute the bulk of mall tenants to determine what is working for them and what is not.
The mall is undergoing a metamorphosis, changing from its traditional form into “the mall of the future.” The mall format is still relevant, but what made it successful in the past is not working well today. In the first report in our Mall Is Not Dead series, published in November 2016, we asserted that the US is overmalled and that one-third of the 1,221 malls in the country should be closed.
In this second report in our series, we look at the composition of malls—specifically at the department stores and specialty stores that constitute the bulk of mall tenants. We examine which retailers and formats are staying and which are leaving, and analyze what is working and what needs to change.
Consumer behavior has already changed significantly, and retailers and mall owners need to catch up. Consumers today shop via multiple channels, and they look to social media influencers, mobile devices and computers to help inform their decisions and purchases. The conventional mall does not reflect the way consumers now live and shop.
Department stores, which traditionally anchored and welcomed consumers to malls, are declining in prominence, and department store sales have fallen by 40% since 2000. Consumers used to shop for the entire family at department stores, but their one-stop-shop appeal has lessened as retail has gone omnichannel. Also, in the 1990s and early 2000s, consumer preferences began shifting toward specialty retailers. Now that lower-priced merchandise can be found at off-price and fast-fashion retailers, the specialty segment is thriving.
In part due to the challenges and underperformance of the malls, store closures and retail bankruptcies have accelerated in 2017. Major department store retailers have already announced that they will close a total of 251 stores this year—and industry watchers expect that there will be more to come. At the time of writing, retail store closure announcements this year already totaled 3,296, which is nearly double the number of closures announced in the entirety of 2016. And as of mid-May, 10 major retailers had already filed for bankruptcy this year, affecting 1,585 stores. Retailers in the teen apparel segment have accounted for 36% of these bankruptcies, while consumer electronics retailers have accounted for 26% and women’s apparel retailers for 23%.
The good news for mall owners and retailers is that although consumers are shopping differently, they are still shopping. US retail sales were up 4.5% year over year in April. In addition, just over 90% of purchases are still made in stores, according to the US Census Bureau, and we think that the majority of retail sales will continue to be made in physical stores.
Forces Affecting the Mall Landscape
It seems that we see a new report every week saying that the mall is dead and that traditional retail is dying. Despite the doomsayers, we believe that the mall format is still relevant and that it can continue to thrive. What has worked in the past, though, will not work in the future. The mall is in a transition period due to a number of forces that are impacting the retail sector, including:
The bottom line is that consumers are shopping less frequently at full-price retailers and have fundamentally shifted the way they shop. Therefore, the mall as we know it is in a state of transition. In this report, we take a deep dive into the composition of malls to see what retailers and formats are succeeding. We look closely at the department stores and specialty stores that constitute the bulk of mall tenants to gain clarity on the future of the mall. This report highlights what is working and what needs to change in order for malls to regain their prominence and popularity among American shoppers.
Traditional enclosed malls are focused on apparel, with 80%–90% of square footage devoted to department stores and specialty stores. According to the International Council of Shopping Centers (ICSC), nonretail/nonrestaurant tenants occupy 13.3% of space in regional malls as of early 2017, up from 10.5% in 2012. In super regional malls (those of 800,000 square feet or more), that figure rose from 10.5% to 10.8% over the same period. The diagram below depicts a traditional mall, with department stores as the mall anchors.
The department store is an icon of American shopping and American malls. Many of America’s department stores were launched before the turn of the 19th century, and Canada’s Hudson’s Bay Company, which now owns Saks Fifth Avenue and Lord & Taylor, among other chains, was founded as a fur trading business more than 300 years ago.
The department store was traditionally the one-stop shop where consumers could buy everything they needed for their entire family. At one time, there were more than a dozen major department store retailers in the US, each with its own specialty or geographic coverage. As the retail landscape evolved, the department store sector consolidated and now there are just a handful of key players. The most recent acquisition in the sector was Hudson’s Bay Company’s purchase of Saks Fifth Avenue in 2013. By our calculations, there were approximately 4,439 department stores in operation in the US in 2016.
As the sector has consolidated, department stores have become less specialized, offering mainstream products with the goal of appealing to a broader audience. Meanwhile, consumers have shown an increasing preference for shopping at specialty stores that offer particular brands and targeted concepts.
The timeline below shows that a significant amount of merger and acquisition activity occurred in the department store sector after the 1980s, creating companies with larger portfolios of department store banners.
Department Store Sales Have Declined by 40% Since 2000
Following decades of success, department stores have been in transition in recent years. Many have carried too many products that seem to be offered everywhere, often at uncompetitive prices. Additionally, many department stores began to look the same over time.
The sector has been struggling to stay relevant in a changing world. In the last 10 years, department store sales have declined by 30%, and since 2000, they have declined by 40%. Although these stores still constitute a multibillion-dollar industry, industry insiders are questioning whether the department store format is still viable. The products featured in these stores are considered neither inexpensive nor luxury by consumers and, without a point of view, the department stores are getting lost in today’s world of specialization, customization, personalization, fast fashion and off-price.
Sales per Square Foot at Department Stores Have Declined
Sales per square foot is one industry metric that is used to quantify how stores are performing. The table below compares sales per square foot in 2006 versus 2016 at selected department stores, and shows that such sales were lower in 2016 at five out of the six major department store chains listed.
Of the department store retailers shown in the table above, Neiman Marcus had the highest sales per square foot in 2016, at $548. The company also had the fewest US stores among the group, with 44 total. Sears had the lowest sales per square foot of the group in 2016, at $97, and the company saw the metric drop by 56% over the 10-year period.
A Group of Just Seven Department Store Retailers Saw a Combined Revenue Decline of $5.8 Billion from 2015 to 2016
Combined revenues for the seven companies shown in the graph below fell by more than $5.8 billion from 2015 to 2016. Sears saw the biggest decline, of $3 billion, over the period, while Macy’s saw revenues decline by $1.3 billion year over year.
Number of US Department Store Closures Is Up
For this report, we looked at nine major US department store retailers that range from value-conscious to luxury in terms of positioning. In 2005, these nine companies operated a total of 4,098 stores, we calculate, based on company reports. That number had decreased by 3%, to 3,967 stores, as of May 16, 2017, we calculate.
The graph below compares the total number of stores operated by each of the nine retailers in 2005 with their number of stores in 2017, including announced closures. Sears had the largest decrease in number of stores over the period, dropping from 924 in 2005 to 628 in 2017 (as of May 16), while Kohl’s had the largest increase, growing its fleet from 732 stores in 2005 to 1,154 in 2017.
The table below compares store counts at the end of 2016 and as of mid-May 2017 for the selected group of nine department store retailers we examined. As of May 16, announced store closures by this group of companies would result in 6% fewer stores in operation than at the end of 2016.
Consumers Are Shopping More at Specialty Stores and Less at Department Stores
Beginning in the 1990s, consumers started to become very interested in brands with specific identities and niches. Retail stores built up around these specialized brand concepts. In women’s apparel, The Limited, Caché and Express appeared in the 1990s. In teen apparel, Express, Scoop and Abercrombie & Fitch gained popularity, while The Gap maintained its status as the original denim shop for the whole family. Other names, including Nike, Ralph Lauren, Izod Lacoste and Coach, also offered customers more reasons to shop at specialty stores instead of at department stores.
The graph below illustrates consumers’ gradual move away from “everything under one roof” concepts toward specialized, differentiated selections. Specialty retailers saw positive year-over-year sales growth every year from 1993 through 2015 except during the 2008–2009 recession, according to data from the US Commerce Department. During the same period, department store sales saw positive year-over-year growth in the late 1990s, but then again only in 2010 and 2011.
The table below lists the selected major US specialty retailers we analyzed for the purposes of this report, sorted by segment. In the discussion and graphs that follow, we refer repeatedly to these segments’ performance over a 10-year period.
Specialty Fashion Stores: Which Categories Are Growing?
The number of fast-fashion stores grew from 1,762 in 2000 to 12,270 in 2017 (based on our calculations, which include announced store openings for this year), an increase of 596%. Why is fast fashion so popular? Because it is affordable and on trend and because the product is replenished quickly, so every week, there are new styles available. This promotes a “must buy it now or it will be gone” shopping mentality.
The number of off-price stores grew from 1,902 in 2000 to 6,308 in 2017 (again, based on our calculations, which include announced store openings for this year), an increase of 232%. Off-price retail has become increasingly popular by offering customers an assortment of name brands at low prices and giving shoppers the fun of a treasure hunt shopping experience. According to Euromonitor International, TJX Companies was the top apparel and footwear retailer, by revenue, in the US in 2016: T.J. Maxx accounted for 6% of sales and Marshalls for 5%.
The success of the discount and off-price segment has encouraged department stores to get into the game, as have Kohl’s (with its Off/Aisle banner), Lord & Taylor (with its Find @ Lord & Taylor banner), Macy’s (with Macy’s Backstage), Saks Fifth Avenue (with Saks OFF 5TH), Nordstrom (with Nordstrom Rack) and Neiman Marcus (with Neiman Marcus Last Call).
The number of luxury/accessible luxury brand stores grew from 649 in 2000 to 3,507 in 2017, according to our calculations, which include announced store openings for 2017. Growth in this category, too, is consistent with the trend of consumers seeking more specialized products.
Specialty Fashion Stores: Which Categories Are Slowing?
In terms of number of stores, women’s apparel is the largest of all the specialty store categories we analyzed: we estimate that there are 17,135 women’s apparel stores in the US. From 2000 through May 16, 2017, the number of women’s apparel stores grew by 55%, but sales of women’s apparel plateaued during the period and are now on the decline. The category is oversaturated, and companies are beginning to announce store closures. For example, between 2016 and May 16, 2017, the women’s apparel brands we looked at announced 106 store closures. Bebe, Chico’s, Guess, J.Crew and New York & Company are among the women’s apparel retailers that have announced store closures in recent months.
The number of teen-focused fashion stores grew consistently from 2000 through 2010, and then plateaued before starting to decline. The teen apparel category has experienced six bankruptcies since 2014. Teen specialty stores, once a mall staple, have been increasingly replaced by fast-fashion stores and athletic footwear stores. Teens have also shown a growing preference for purchasing electronic devices over apparel. According to Euromonitor International, tablets, smartphones and wearable electronics grew by volume CAGRs of 64%, 38% and 337%, respectively, from 2010 through 2015, and teens increasingly consider these items aspirational purchases.
Store growth in the athletic category has fluctuated. Finish Line closed 62 stores in 2016, whereas Lululemon Athletica opened 43 stores last year. Collectively, retailers in this category are likely to open 50 new stores in 2017, based on our estimates, but we believe this category will begin to experience a slowdown. As we have seen with many other previously popular categories, the athletic space is becoming oversaturated with undifferentiated product offerings. Therefore, we predict that consumers will continue to seek niche brands that offer specialized products.
The table below shows a breakdown of sales per square foot in 2006 versus 2016 for a number of specialty retailers.
Of the retailers listed above, two of those with the highest increase in sales per square foot over the 10-year period are off-price retailers: TJX Companies (which saw a 27% increase) and Ross Stores (which saw a 23% increase). The retailers that saw the largest decrease in sales per square foot over the period include Coach, teen apparel retailers Abercrombie & Fitch and American Eagle Outfitters, and women’s apparel retailer Bebe.
The table below shows how many stores are expected to open or close in each specialty category in 2017. Despite already having the second-largest number of stores of all groups in the specialty category, fast-fashion retailers are still growing their store fleets and are planning to open 627 new stores, collectively, in 2017. Off-price retailers are planning to open 371 stores, collectively, in 2017.
The women’s apparel subgroup accounts for the largest number of stores within the specialty retail category, but these retailers, particularly those with a midrange positioning, are beginning to close stores due to oversaturation.
Announced Store Closures in 2017 Already Twice as High as in All of 2016
Nearly every day, there are reports of store closures in the news. Additionally, as the department stores that anchor malls close, the malls are seeing a ripple effect on their specialty store tenants and other tenants.
As of May 16, major announced US store closures already totaled 3,296, nearly double the 1,674 store closures announced over the entire year in 2016. The graph below shows the store closures announced this year as of the time of writing.
Bankruptcies: A Detailed Look
According to consulting firm AlixPartners, roughly 55% of the US retailers that filed for bankruptcy between January 1, 2006, and June 30, 2015, ended up going out of business, versus just 5% of companies in other industries.
Over the past five years, a number of mall-based retailers have filed for bankruptcy. Economic factors such as capital constraints, competition from online and discount retailers, and weak consumer demand have contributed to the liquidation of many retailers, but changes made to the US Bankruptcy Code in 2005 have played a significant and often overlooked role. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 condensed the timeline for companies to get a sale or reorganization plan approved before they are forced into liquidation. The law, pushed for by landlords tired of having tenants in protracted Chapter 11 cases, shortened the time a retailer can spend in bankruptcy. The law now gives bankrupt retailers just 210 days to decide what to do with their store leases.
Given this short time frame, lenders that finance retailers through bankruptcy often provide only short-term loans, as they are concerned with protecting their own collateral. This makes the 210-day timeline even tighter for retailers, since it can take up to 90 days to hold a going-out-of-business sale. Therefore, lenders often try to decide whether to liquidate or reorganize a debtor in just 120 days.
Electronics and Teen Apparel Retailers Hit Hardest by Bankruptcies
The two retail categories that have been hit the hardest by bankruptcies are electronics and teen apparel. In 2008, Circuit City went bankrupt, and the event is considered one of the largest retail bankruptcies in history. Then, in September 2015, RadioShack, which had been in operation for more than 94 years, filed for bankruptcy. Since 2014, seven retailers in the teen category have also filed for bankruptcy.
As of May 16, 10 major US retailers had already filed for bankruptcy this year, affecting a total of 1,585 stores. Teen apparel retailers accounted for 36% of these bankruptcies, while consumer electronics retailers accounted for 26% and women’s apparel retailers for 23%.
The timeline below shows major retail bankruptcies since 2008.
The graph below shows the number of stores affected by bankruptcies by major retailers, by category. From 2008 through 2016, more than 11,470 stores were affected by bankruptcy proceedings: approximately 4,000 of those stores closed, a reduction of 35%. The figure below shows that the consumer electronics and teen apparel categories have been most affected by retail bankruptcies.
The graph below provides a more detailed look at the teen specialty retailer space and shows that 2,028 teen specialty stores were affected by bankruptcies between 2014 and mid-May of this year.
Oversaturated Women’s Apparel and Athletic Categories Are at Risk
The women’s apparel category is starting to show the effects of oversaturation. BCBG and The Limited filed for bankruptcy earlier this year, which will affect a total of 370 stores, and Bebe, Guess, Banana Republic and Ralph Lauren have all announced store closures.
In athletic retail, Sports Authority filed for bankruptcy in March 2016. The company planned to reorganize by closing 140 of its 463 stores, but wound up liquidating its assets. The company was unable to keep pace with its higher-end rival, Dick’s Sporting Goods. In 2017, Michigan Sporting Goods Distributors, which operates the MC Sports chain, filed for bankruptcy, affecting a total of 68 stores.
The mall—and retail—are still alive, despite a wave of recent store closing announcements and retail bankruptcies. Retail sales in the US grew by 4.5% year over year in April 2017, and retail sales excluding autos increased by 4.5%. So, the retail story is not all doom and gloom. Consumers are spending, but the retail landscape is changing.
The mall is undergoing a metamorphosis in the US. Malls are still relevant, but they are subject to a retail landscape that is transforming due to e-commerce, a lack of differentiated product offerings, the off-price sector boom and consumer demand for experiences as part of the retail journey. The US is currently overmalled and overstored, and we think that at least 30% of the malls in the country should be closed.
Today, we go to the mall for more than just shopping; we go for dining, entertainment, fitness, health, information, classes, services and more. As consumer habits shift, our expectations about the mall’s purpose are changing. We expect retail to continue to be a big part of the shopping mall, but experiences and technology will grow to play a more prominent, if not leading, role at some mall properties.
Stay tuned for the third report in our Mall Is Not Dead series, where we envision how malls will look in the future. In that report, we will detail how anchor stores are repositioning themselves and how the mall of the future will be a space where the lines between the physical world, the virtual world and e-commerce merge.