By Emily Hamann
The Bellingham Business Journal
If you walk into a mall today, you’ll likely see lots of change. That’s true at Bellis Fair Mall — depending on the day, you might see a large sign proudly proclaim that Dick’s Sporting Goods is now open, going-out-of business signs filling the windows at Rue 21, and empty storefronts throughout dotted with “coming soon” signs.
It’s an indicator that retail is going through a transformation. The companies that have recently filed for bankruptcy include Radioshack, Wet Seal, Payless Shoesource and Rue 21. Sears and Kmart, JC Penney and Macy’s are scaling back, shutting down hundreds of stores.
Bellis Fair is weathering the storm. Its Wet Seal shut down, and its Rue21 is in the process of closing, but anchors JCPenney and Macy’s have not been affected so far.
Last month the Dick’s Sporting Goods opened, replacing the anchor tenant Sports Authority, which went bankrupt and closed all its stores last year.
A Verizon store relocated to a much larger space, and a T-Mobile store is opening soon. A Mac cosmetics store is also opening soon, and will be the third cosmetics store, in addition to the Ulta and the Sephora, to open at the mall since 2016.
“In the shopping center industry, there’s only one real constant — that is change,” Bellis Fair general manager René Morris said, in an email. “Unfortunately some retailers have fallen on some hard times. Losing Wet Seal and Rue21 does make an impact, but we need to look at this as an opportunity to bring in fresh and new concepts to Bellis Fair.”
While this is a turbulent period for retail stores, it’s not all doom and gloom. The stores that are innovating with the changing times are thriving. That’s also true for malls — those that are able to stay flexible and get creative when stores shut down might even emerge stronger than before.
Adapt or die
There are many reasons that so many retail stores have run into trouble recently.
“There are a couple of trends going on simultaneously,” James Cook, director of retail research for the Americas for JLL, an international financial services firm, said.
For one thing, consumer tastes are changing.
More people are shopping online, but that’s just one factor.
Department stores aren’t as popular as they used to be.
Traditionally, malls been anchored by department stores and have relied on them to get people in the door. After decades, that strategy isn’t working so well anymore.
“Malls are the retail property category that hold the type of retailers that are not showing growth right now,” Cook said.
Instead, customers are flocking to luxury stores and discount retail.
“Most shopping malls are targeted at the average consumer,” with average prices, Cook said. “That’s not what’s growing right now. What’s growing is discount retail and fast fashion.”
Stores like H&M and Forever 21 are growing, as well as discount retailers like Ross, TJ Maxx and Marshalls.
While department stores are scaling, back, Cook said, it’s not the end for them.
“I don’t think this is the end of the department stores, by the way, we just don’t need as many department stores as we’ve had,” he said.
“The importance of department stores is not going away,” he said. “But it is getting less important. It is shrinking.”
Changing consumer shopping habits is one factor in the closing retail stores.
Another is that there are just too many stores to begin with.
“What we are finding is that there are too many retailers and too many malls,” Steve Jellinek, a vice president at Morningstar Credit Ratings, said.
After the recession, stores were eager to prove to shareholders that they were bouncing back, Cook said, so they opened a bunch of new stores. Maybe too many new stores.
“They probably opened up more stores than demand warranted,” Cook said.
Those problems compounded when stores took on debt to build the new stores, while at the same time, consumers are shopping more online. What stores need to be doing, Cook said, is developing a robust online presence.
However, some companies can’t make those kinds of investments, because they already have too much debt from that overly ambitious brick-and-mortar growth.
The internet has helped spark a massive disruption in retail which is just now hitting clothing stores, Jellinek said.
“What we began to see a few years ago is a sector-by-sector whittling of retail,” he said.
It began with books, and chains like Borders shut down. Then it moved to electronics, and Circuit City went out of business. Radioshack has now filed for bankruptcy twice. Now it’s hitting sporting goods — and clothing and department stores.
In each of those disruptions, while many stores shut down, others thrived.
Take sporting goods — while Sports Authority went out of business, Dick’s Sporting Goods is expanding.
“It’s night and day between the two,” Jellinek said.
Dick’s builds more attractive stores, that feel more like an experience. And importantly, Dick’s has an active online presence, and has figured out a way to integrate the experience in the brick-and-mortar store with the experience online. Jellinek said that if stores have the right online approach, not only do they sell more online, but they can actually lure more customers into the store.
Cook also said that a store’s web presence is the key to its success or failure.
“Retailers are going to start selling more of their goods online, and the ones that don’t are probably going to go away,” He said.
Effect on malls
Most malls are pretty used filling in a non-anchor tenant space when a store goes out of business.
“If it’s one inline space, then it’s not the end of the world for a mall,” Cook said. “That happens all the time, malls are fairly adept at handling that.” Some malls might have a list ready to go for new tenants that are interested in the space.
They may not even notice a major loss in rent revenue.
If it’s an anchor store, that’s a bigger deal. When an anchor store closes, that can be a bad omen for that entire section of the mall.
“Even if it was an anchor that wasn’t driving that much traffic, the perception is that that end of the mall feels dead,” Cook said. If the hole is not filled right away, the inline tenants in that section of the mall can start to leave.
There’s sometimes a line in their lease contract that allows tenants to break the lease if the mall isn’t replacing a missing anchor fast enough.
That can cause what Jellinek calls a “death spiral” for the mall.
“The property not being able to fill the anchor space is a sign of longer term trouble,” Jellinek said.
Some malls managers are getting creative about filling empty anchor spaces. Jellinek said one strategy is to split the space into multiple smaller tenant spaces. That can actually bring in more revenue for the mall, since they get more rent per square foot than they would if one big retailer was occupying the space.
Other malls are taking the opportunity to bring in tenants that offer experiences or services rather than retail. That could include movie theaters, kids play areas or restaurants.
However, filling an anchor space is probably not something Bellis Fair will have to deal with again any time soon. Jellinek tracks data for properties with commercial mortgage-backed securities — which includes Bellis Fair. He said the mall is performing very well. It debt service coverage ratio is 2.25, meaning the mall is making more than twice the amount needed to service its debts.
And while Macy’s stores around the country are closing, the one at Bellis Fair likely won’t be one of them, Jellinek said. In terms of sales per square foot, the Bellingham Macy’s is doing well above average.
“Based on that data it doesn’t look like it would be on Macys’ radar any time soon,” Jellinek said.
The future of malls
While not all malls are going to make it, the ones that can adapt will come out on top. Bellis Fair is working to adapt.
“I feel very lucky that my parent company, GGP, invested millions of dollars in Bellis Fair for our large renovation and update,” Morris said in an email. “They know that in order to be competitive and to offer a great experience to our shoppers, we need to change and re-invent ourselves along with our retailers.”
That’s a trend going on around the country, Cook said.
“All mall owners right now are thinking very strategically,” he said. They’re also getting creative.
Without department stores as anchors and the main drivers of traffic, malls of the near future might look a little different than they have in the past.
“Our prediction is that malls are going to have more experiential offerings, things that don’t easily translate online,” Cook said. “The importance of food and beverage in a shopping center will grow.
That also could mean more entertainment — and not just movie theaters. There’s also potential for arcade/restaurant concepts like Dave and Busters.
Escape rooms and puzzle rooms are also springing up more often.
As the technology improves, there’s potential for virtual reality experiences to fill spaces at malls.
But that doesn’t mean it’s the end of department stores, or traditional malls.
“There are plenty of malls that are anchored by department stores that are going to keep on chugging along, and be just fine,” Cook said.