THE BLOG
07/11/2014 11:39 am ET Updated Sep 10, 2014

Along With the Internet, Here Are 3 Other Culprits for Dying Malls

A lot has been written and said recently about dying malls, and much of this has been attributed to the growth of online sales. But even though the Internet is taking a bigger bite out of retail sales every month, the fact is that it only accounts for about 6 percent of total U.S. retail sales. Something else is going on with these dying behemoth blights on our architectural landscape. At least 3 other factors, in fact. And now the term 'mall anchor' has now taken on an opposite and much darker meaning. Major retailers, defined by mall and shopping center owners as "anchors" for their ability to generate traffic, in other words, serve to anchor the mall, now feel as though they are literally anchored to the mall, not able to cut loose as their Titanic-like host goes under. The term 'mall anchor' -- as well as its burdensome reality -- has become the new cross for retailers to bear.

With the exception of a hundred or so A malls, the B, C and D malls are learning the hard way what they should have anticipated and acted upon a decade ago -- that instead of forming a heavy dependence on their anchors for generating traffic and profitable growth, mall developers should have realized that nothing stays the same forever. As the Internet loomed larger by the minute, it didn't require a rocket scientist to predict that technology would drive a fundamental transformation across the entire industry and threaten the very existence of mall-based retailing as we know it.
Had mall owners foreseen the devastating plunge in traffic and the waning power of their anchors to draw shoppers, they would have proactively collaborated with their tenants to come up with a strategic transformation to unshackle from the anchor model. However, they didn't. Therefore anchor positions have become an albatross around the necks of both successful retail anchors, who now want a more compelling location, and the failing anchor stores who just want to get the hell out.

The Internet is Not the Only Culprit

With every mall and store in the world resting comfortably in consumers' pockets or on their desktops, who needs to spend the time and effort actually going to the mall and shopping through it, when they can let their fingers do the walking and shop virtually, with an unlimited selection, in a matter of minutes? All while sipping coffee out of their own mug. Though it's a rhetorical question, and while the Internet, rocket-fueled by the smartphone, has been the big disrupter, many malls' irrelevancy has been aided and abetted by three other major drivers:

1. Millennials Are Replacing Boomers as the Largest Consumer Segment.
Millennials are projected to account for about 30 percent of all retail sales by 2020, and they're also shaping and defining a different lifestyle. Currently about 80 percent of the U.S. population lives in urban areas. That number is growing due to Millennials' preference for urban living, further influenced by the fact that many cannot afford to buy a home in the desirable locations they want to live in. Some are burdened with paying down school loans, and many of them are still struggling to find jobs commensurate with their college-grad degrees that pay anything decent. So renting an apartment is, more often than not, their only choice.

Other lifestyle characteristics of this generation do not bode well for the future of massive suburban malls and shopping centers, either. Less is more for Millennials, and quality of lifestyle is desirable over big quantities of anything. Smaller, more intimate and interesting environments trump giant stores and massive choice. High-tech and even higher-touch experiences are requisites. Ostentation is eschewed for the understated. Special-just-for-me, highly personalized brands beat out overexposed badges of luxury. And social gathering places don't always need physical spaces in which to meet -- but when they do, these places are not going to be impersonal, mega-scaled shopping centers.

Millennials are shopping differently, largely due to the fact that they were born into and are using the full empowerment of the Internet and technology. They continue to accelerate their use of the Internet, fueling its double-digit growth rates. Therefore the shopping mall, unless it can offer a compelling enough reason for these young people to hang out, is being replaced by local grassroots gathering places where the Next Gen can be with their friends to shop as well as work on their personal projects, assisted by their smartphones and MacBook Airs. Mall-based teen specialty brands are struggling because they haven't changed their models and store designs to reflect this new reality.

On the other hand, if Millennial shoppers do seek more of a mall-type experience, they prefer clusters of smaller, freestanding stores in local neighborhoods or in mixed-use "village lifestyle centers." These new public plazas offer a more compelling social and community experience, with streets of shops, outdoor cafes, restaurants, movie theatres, bakeries and the like. Developers are keyed into this seismic shift, as many of these "villages" are designed for mixed use, with offices or apartments located above the shops.

At the same time, aging Boomers, the largest consumer group ever, are retiring or starting to die off. And those among the living are downsizing, trading their McMansions for smaller homes or renting in urban areas where they find more freedom in less burdensome, maintenance-free apartment living. They just don't need or want more stuff. "Stuff" expenditures for this group are now being transferred to experiential travel, leisure and entertainment purchases, as well as health and wellness. The Great Recession has changed shopping behavior across the board, and whatever lesser amounts Boomers are still spending on stuff is being spent more online, dispensing with the fatiguing and annoying trip to the local mall.

2. Cash-Strained, Lower Income Consumers.
Imagine if you took JC Penney and Sears out of all malls across the country. There would be the wheezing, sucking sound of the giant vacuum left in their place. These two retailers are anchor tenants in roughly half of mainstream U.S. malls, and their story is not a happy one. JCP is struggling to right its ship after reporting a net operating loss of $1.42 billion in 2013, which will likely require them to close many of their mall locations. Sears's tale is one of a slow and painful death (in my opinion), which means they will ultimately close or sell the locations they own. Whatever small amount of traffic these former giants are still generating for the malls will continue to decline.

And why is this? On the face of it, econmics don't support it. The rich are getting richer, and the A malls that largely cater to them will likely survive -- although they too must elevate the shopping experience. However, many of the B, C and D malls catering to lower income consumers -- JCP's and Sears's target segment -- many of whom are getting poorer, will either close altogether or be repurposed as walk-in medical clinics, health and wellness centers, video game complexes, movie theatres, etc. These cash-strained consumers are reducing the number of visits to the mall to save on gas. At the same time, dollar stores have opened thousands of small, freestanding locations in lower income neighborhoods, more accessible and convenient for these paycheck-to-paycheck shoppers. Furthermore, Amazon, offering rock bottom prices on just about everything, has stolen huge market share from all the brick-and-mortar discounters serving this segment.

To throw more fuel on the fire that's burning up mall traffic, both Walmart and Target are fighting to regain some of their market share by moving away from the mall and accelerating their small-store neighborhood strategies -- competing with dollar and convenience stores. The big-box guys are also aggressively increasing their omnichannel capabilities to better compete with Amazon.

3. Outlet Malls On Fire
As retailers from luxury to mainstream continue in the value race to the bottom, in which price has become the weapon of choice, outlet stores are actually just another ruse to discount. Since the overhead for running these operations is much lower than full-line stores, the opportunity for faster and more profitable growth is intoxicating for all retailers who have had to drastically slash prices in their full-line stores, thus decimating their margins.

Saks Off Fifth, Nordstrom Rack, Bloomingdale's The Outlet Store and Neiman Marcus Last Call are all aggressively opening new outlet stores while they have few, if any, new full-line openings planned. Even mainstream Macy's is opening an outlet, and will probably find that it's a highly effective distribution channel for new growth. Just as an example, upscale Coach generates 70 percent of total revenues from its outlet stores. Chico's, Gap, even J.Crew are all opening more outlet stores, along with many others.

Of course, the elephant in the room is the question, How is this type of discounting going to affect the credibility of these brands over the long term?

What's an Anchor to Do?

If you happen to be a retailer "anchoring" dying malls, you need to determine how you can get out of Dodge without paying huge penalties. Then you need to craft a new, smaller neighborhood store strategy that can be freestanding, or become a part of one of those new "lifestyle villages" mentioned earlier.

It's amazing how much of this story is about the power of architecture -- its ability to elevate and empower or disgust and disempower. Mall architecture has never been distinguished, to put it mildly. Simply put, these uninspiring, unaesthetic monstrosities weren't built to last. If you own a dying mall, you have to figure out how to repurpose your space, or simply close it down entirely. If you do, please take it down with a wrecking ball. These abandoned malls, with their ugly, windowless forms, their piles of cracking cement and huge empty parking lots, are horrible blights that devalue a whole metropolitan region.

For those malls that can -- or should -- be repurposed, examples abound. A laundry list of ideas: walk-in medical clinics, health and wellness centers, video game complexes, bigger Cineplex theaters with more Imax screens, university extension schools, 3D printing centers, gun ranges, aquariums, gyms, go-cart tracks, Maker Faires, community theatres, bowling alleys, daycare facilities for pets or humans, indoor parks, community centers and churches. And a huge opportunity: conversions to ethnic, culturally themed malls such as the Fiesta Mall in Atlanta, which focuses totally on Latino customers and all the things they enjoy as they spend the day shopping with their families -- their food, their music, their gathering aesthetic.

So the message to anchor-store mall owners or anchor-retailers: Un-anchor yourselves and embrace the revolution. Disrupt yourselves and bite the bullet on whatever financial hit you must take to change your business model. Quickly. As the saying goes, sink or swim.

About Robin Lewis
Robin Lewis has over forty years of strategic operating and consulting experience in the retail and related consumer products industries. He has held executive positions at DuPont, VF Corporation, Women's Wear Daily (WWD) and Goldman Sachs, among others, and has consulted for dozens of retail, consumer products and other companies. He is co-author of The New Rules of Retail (Palgrave Macmillan, 2010). In addition to his role as CEO and Editorial Director of The Robin Report, he is a professor at the Graduate School of Professional Studies at The Fashion Institute of Technology.