Tuesday, January 21, 2014

On Retail

Saw this at Zero Hedge.

Keep in mind the deep structural fragilities of the average four-anchor regional mall. There's the fragility resulting from the slow decline of the middle class, and this is what blogs like Zero Hedge focus on.

Then there's also a management fragility, a fragility that stems from the very design of the mall: To be healthy, it is dependent on the health of all four anchors. Mall dead zones are intensely correlated with closed (or "dead") anchors. Since the beginning of the '90s, there were basically five different entities that would anchor a mall:
  • Sears
  • J.C. Penney
  • Federated (Macy's)
  • May (Strawbridge's, Hecht's, Filene's, Kaufmann's, Marshall Field, etc.)
  • Regional chains (Boscov's, Dillard's, Belk, Northern {Bon-Ton, Carson Pirie Scott, etc.})
Sector consolidation has been in full force since the '70s, when Macy's was semi-national and most regional malls had two regional chain options, with the loss of chains as large as Wanamaker's, Gimbels, Stern's, Hudson's, the Emporium, and Woodward & Lothrop, and as small as Hess Brothers, Lit Brothers, Bamberger's, Abraham & Straus, and countless other minor metro and secondary major metro chains.

The problem is that the four-anchor model matured just before this contraction: When malls such as Montgomery Mall, Neshaminy Mall, Oxford Valley Mall, Christiana Mall etc. were designed, REITs (mall developers) usually had a buffet of six or more potential anchors to court. A four-anchor mall was a nice tradeoff between mall developers and the anchors themselves, none of which would need to be in every mall to achieve market saturation. Failures such as Dixie Square in this environment were rare and more linked to demographic misprediction.

But the so-far culmination of the contraction in the 2005-6 Federated-May merger resulted in further anchor erosion, such that four-anchor malls could court only four anchors:
  • Sears
  • J.C. Penney
  • Macy's
  • Regionals
And since Federated (Macy's) and May duplicated each other in many, many malls, these malls were left with just three anchors. The growth of Target as a mall anchor has helped somewhat, but Target is independent in a sense that the older anchors just aren't. It isn't a coincidence that the inventory of dead malls began growing more quickly after 2006, as many malls with a merger-lost anchor saw themselves go obsolete, and lose more and more stores.

Either the collapse of Sears or J.C. Penney would catalyze the exponential growth of dead malls, a point Zero Hedge makes, largely because it would collapse the available anchor list for most malls from four to three (and keep in mind that hypermarkets e.g. Target generally make poor anchor candidates, as they're usually co-located in the same strip, just down the road), thereby creating large dead sections in most malls--and exacerbating dead sections of malls that still have dead sections left over from 2006. In fact, for the latter case, such a collapse spells a death knell, as, once a mall drops below a certain occupancy threshold, it generates inadequate rents to be self-sustaining.

A further issue is that more profitable malls currently cross-subsidize less profitable ones. This is why malls that obviously take massive hits on facilities maintenance, such as many of those featured on Dead Malls, can afford to stay open until Claire's, Gamestop, and Radio Shack are the only tenants left. Just the collapse of Sears or J.C. Penney harms the mall model overall, because the cross-subsidizer loses one of its major income centers (the wing it anchored), in turn reducing the internal cash flow to the subsidized dying/dead mall, forcing more dead malls to close etc.

Just the collapse of Sears or J.C. Penney makes the mall financially fragile.

The collapse of both wipes out whole wings, or halves, or--for malls still dealing with a 2006 anchor loss--more, of leased leasable space in 99% of all malls. Even the most financially robust malls see their balance sheets shrink to breakeven. Already dying malls are discharged. And for the typical challenged, already breakeven anchor mall, there is no white knight, no cross-subsidizer left. Only a truly slim subclass of malls--those with carriage trade anchors*--could possibly emerge from this for the better.

The net result would be a ripple contraction throughout the retail sector, as REITs merge to survive; inline stores contract locations and staff as they clear out of dying malls; and who-knows-what other consequences fall out of the vicious cycle.

Why does this matter? Aren't malls obsolete anyway?

To answer the second question first: Yes and no. Yes, the regional mall is an obsolete business model, but no, it's not online retail or lifestyle centers driving them out of business. For the former, I like to say that  Amazon is to us what the Sears catalog was to people living in the 1900s: that is, remarkably convenient, but not convenient enough to trump the bricks-and-mortar shopping experience. The numbers bear this out (Zero Hedge ibid.). And for the latter, lifestyle centers are just newer shinier malls, very occasionally with a prototype infrastructure of resiliency in them.

The thing that is really killing the mall is the return to relevancy of the very thing it displaced.

For the former question, this matters because--nearly all job growth in the last decade (or more) in any sector that doesn't require mastery of calculus has been in retail sales. And in most suburban markets, the highest job densities in this sector, after revitalizing Main Streets, are--in regional shopping malls. Just as the traditional setup cross-fertilized sales, so too did it jobs. Lifestyle centers replicate this to some extent, and hypermarket-driven power centers don't hold a candle. Of course, nearly all non-Main Street retail offers little more than servitor jobs, but even so...

The implication is clear. Concomitant collapse of Sears and J.C. Penney brings the mall to its knees. In doing so, it catalyzes the downsizing of almost every inline chain, as they scramble to locate or relocate to the remaining profitable malls. And in doing so, it catalyzes a major percentage cut in the retail jobs numbers. This, in turn, negatively affects mall patronization**, further weakening the remaining malls, further catalyzing consolidation, causing yet more cuts etc. in a vicious cycle. And of course, since retail jobs have been the only positive fudge for economists, a sector collapse would lead to significant wider economic implications.

The large-scale arc appears to be: The return of the (antifragile) entrepreneur, the Main Street retailer, and the failure of the (fragile) nationalized franchised chains. Bricks-and-mortar is resetting. But the path there will be ugly.
* I.e. Barney's, Bloomingdales, Lord & Taylor, Neiman Marcus, Nordstrom, Saks Fifth Avenue, and a handful of regionals or one-offs such as Von Maur.
** Among other things, such as further stressing a stressed welfare state.

1 comment:

  1. We must be ahead of the curve here in Connecticut, as JC Penney deserted the Stamford Town Center over 15 years ago, and the entire wing of the building that once hosted them (it became a Filene's in the interval) was ultimately demolished and turned into an outdoor restaurant area. Now even the luxury stores are leaving, with Saks scheduled to shut down during the first few months of this year. I've heard no word about a replacement (but it won't be Target, which has its own downtown quarters nearby). They'll be down to one anchor (Macy's) after having three as recently as 2005, and I doubt whether another "carriage trade" store will volunteer to take Saks' place after such a conspicuous failure.

    As for Sears, I've been in it only once in the past ten years, at one of their Nashville branches. I recall it having the feel of a poorly curated museum of American homewares.