The next 15 years of the shopping malls market
The US shopping malls industry has only five years to escape from a death foretold. According to the forecasts of bank Credit Suisse published by Business Insider, one quarter of these establishments is likely to go out of business by 2022. This means that between 20% and 25% of these establishments will lag behind competition due to the new trends and consumer behavior. Today, Brazil has 1,100 shopping malls, which means that within three years some 220 to 275 establishments will close down.
In 2017 alone, 3,600 stores where shut down. According to the survey, 8,640 stores will close by December. One of the main reasons for this massive movement of change or closing down of stores and shopping malls is electronic commerce – e-commerce stores and marketplaces – and the growth of store chains with lower prices, such as the outlets.
Even in less developed and mature markets like Brazil, the shopping mall market is losing ground even in the case of the launch of new developments. Those starting to operate now are a risky bet, especially considering that renting store spaces is becoming increasingly more difficult. A study conducted locally showed that 20 shopping malls inaugurated in 2016 are operating with vacancy rates of 55%, which means that over half of the stores are empty.
In Brazil, this market is in constant decline. From 2013 to 2015, new establishments operated with a 45% vacancy rate, against the current rate of 55%. Beginning 2013, vacancy and idleness in new establishments are equivalent to 900 thousand square meters, corresponding to 7,600 stores. Vacancy rates in consolidated malls with strong brands fluctuated between 9.1% and 8.5% from 2015 to 2016. Regarding the area, the variation in the same period dropped from 7.6% to 5%.
Additionally, the sector’s growth was below the inflation rate, with only 5.58% in more mature regions, while visitation rates decreased by almost 1%. Due to these pessimistic data, 90% of shopping malls do not plan to expand their operations.
Shopping mall market: are the doors closed?
Worldwide famous department stores headquartered in the United States announced that they may shut their doors. The announcements made by Macy’s and Sears at the beginning of 2017, for example, point to gloomy days for the shopping mall market. The business model that was consolidated in previous decades has no effect anymore.
According to Green Street Advisors, a real estate research company, “same-lessee” sales will grow only 1.2% between 2016 and 2019. For 2015, forecasts were at 2.6%. Another aspect is rent prices on the market. According to estimates, by 2019, rent prices should increase by 1.5%, or a significant decline compared to previous estimates of 2.5%. At this point, we must consider two factors: the dependence on large stores and on the real estate market share that is guaranteed with a lease agreement.
Big brands, large losses
There is no denying that a negative domino effect is taking place in large stores. Announcements of closures are frequent:
- Sears, as mentioned above, announced two rounds of store closures, in June and March;
- Macy’s will close another 68 stores in 2017, despite the huge cuts made in the previous year;
- JC Penney will close 138 stores in July;
- Retailer Bebe will close 170 stores and will start selling only on-line;
- The Ascena Retail Group, which owns brands such as Ann Taylor and Dress Barn, announced that it will close some 250 to 650 stores within two years;
- Gymboree, with 1,300 stores, filed for bankruptcy in order to commence restructuring.
The situation is even more worrying, since the data only represent the intentions for 2017. Are shopping malls closing down due to the negative trend affecting major brands?
The article “A giant wave of store closures is about to hit the US”, published by Business Insider, says that anchor stores are mainly responsible for the downward spiral of performance, as defined by Morningstar’s analysts in 2016.
Besides losing income and traffic, shopping malls are also including new clauses in lease agreements. In the United States, remaining lessees can terminate or renegotiate the conditions of their agreements, particularly in periods of lower revenues, until a new store takes the vacant area.
An important barrier to replacing large stores – or “anchor” stores – is the space they occupy. In general, these business occupy wider spaces or even more than one floor. Until a new store is set up, traffic usually diminishes in other sectors of the shopping mall.
Looking beyond the real estate horizon
Practical E-commerce’s article “Will Shopping Malls Survive?” presents a different point of view: too much retail capacity. In other words, the famous balance between demand and supply is being affected on physical sites. The United States has 23.5 square feet of retail space per capita, far more than any other country. Canada with 16.4 square feet and Australia with 11.1 square feet are the runners up.
Many shopping malls seek to offset their revenues from a real estate point of view. They do not consider their catalog, sales or traffic. On the contrary: their practices are based on space occupation processes.
This move is similar to that made by e-commerce business, which ended up paying too much for advertising and CPC. Now, there is a migration to CPA (Cost Per Acquisition), where only the sales effectively closed are paid, rather than paying for traffic generation, regardless if the visit is converted into sales – which is not a practice used in the shopping mall market. In addition to earning a percentage of sales, the practice is still to ensure minimum revenues with rent payments.
The generation that preceded the millennials certainly recalls shopping malls as a meeting point for friends, courting couples, families etc.
However, the current generation has revolutionized behavior in many ways, from the manner in which they relate to each other, to the way they consume products and services. The market must keep up with this trend, or even to be a step ahead. This is not about paying a rent or having an area. So, what is this all about?
Possibilities of the shopping mall market
Imagine a woman who wants to buy black sneakers, size 36, intended for running. She goes to a shopping mall and finds several shoe stores. In some stores, she finds the size, but not the color she wants. Other stores have the color she wants, but they have only men’s shoes. Other stores may also have the product, but only for casual use, not for sports.
Some years ago, this woman would have to make do with a product that was different to what she was looking for, since the catalog was limited and the demand generated by consumers was sufficient, despite including just a few options. Now, due to the evolution of consumers and their search for more customized products, companies must significantly improve their mix. With e-commerce stores and marketplaces, the possibilities are endless.
How does the evolution in sales profile impact on purchase processes, retailers and, as a result, on the shopping mall market? The purchase process starts much before going to a shopping mall and visiting a physical store.Sales may also take place in the e-commerce environment:
- 96% of consumers do an on-line search before deciding to go to the store;
- 95% research the product before buying it at the physical store;
- 92% spend more time doing an on-line search than inside the store;
- 93% check whether they can purchase on-line;
- 87% check online whether the store they intend to go has the product they want;
- 72% purchased from on-line stores which they had never known personally;
- 66% purchased on-line and picked up the product at the store.
With the new generation, the barrier between the on-line and off-line environment has disappeared. So, the shopping mall market must learn how to merge with technology and adopt new practices:
- Customized services: “know your customer”;
- Have a fast—loading website;
- Use your website and the social networks to clarify doubts with a real-time response;
- Make a physical spot available for pick-up of online purchases;
- Surprise your customer: __63% of people expect to be surprised with a good brand experience whenever there is an interaction.
An example of that is Walgreens’s strategy. According to Think With Google, the marketing team uses the drugstore’s mobile application to connect consumers with doctors and pharmacists in physical stores. Beauty consultants also use tablets all the time to check customers’ purchase data online and make off-line suggestions.
The success of Hong Kong’s shopping mall market
According to Citylab, “The Mall Isn’t Dead, It’s Just Changing”. Would this really be a question of change? To prove their point, they mention the example of Hong Kong, which has more than 300 shopping malls. The malls, however, don’t sit on asphalt parking lots; rather, they’re above subway stations or underneath skyscrapers. The latter could be considered the world’s tallest vertical malls with over 26 floors.
The change in Hong Kong’s malls and in the way of doing business started in 1975, during the construction of subway lines, when there was a perfect integration between the stations, office buildings and stores. This is why they are the most visited worldwide. They are surrounded by thousands of people, apartments and pedestrians.
One single megastructure includes homes, companies and hotels that are built in combination with malls, without streets, blocks or individual buildings. A gigantic area the size of the Pentagon. It is strategically developed for the inflow of pedestrians at all entry points to the structure.
A vision about the possible future of shopping malls
Based on our analysis, it is clear that shopping malls flows and sales are decreasing due to the following reasons, among others:
- change in consumer behavior, in the search for convenience;
- reduced family structure; which changed and expanded the search for entertainment to other centers;
- demand for more products; physical store windows cannot support the mix required.
With the migration of this flow of visitors and orders to the digital environment, the main differential of shopping malls will not be valid within 10 or 15 years. Traffic and sales will see large-scale migration to the environments that best fulfill the new demands: the digital world, which offers lower prices and an (almost) unlimited assortment originates from marketplaces.
We must also take into account that the increase in sales that would combine the physical world and the online environment, and boost profitability, has not been evidenced yet, in accordance with the forecasts made 5 years ago. So, the possibility that digital sales will effectively boost physical sales is a moot point.
Meanwhile, the strategies to attract visitors to shopping malls are showing results. Frávega, a large Argentine retailer with more than 120 physical stores and revenues of some USD1 billion, has dates in which the ‘pick-up’ option exceeds 40% of total orders. In France, over 60% of orders are also included in this modality.
Accordingly, we can conclude that shopping malls must:
Be converted into providers of centralized dispatch services for digital orders
If the flow of orders follows the trend to migrate to the digital world, and if the sense of urgency in receiving the goods continues to be a crucial factor in purchase decisions, physical shopping mall stores should be turned into dispatch centers, with reduced deadlines and increased sales.
However, if a physical store creates the initial structure required, in addition to making personnel available, this can be an impediment. On the other hand, by offering these services, shopping malls may be able to increase their revenues.
This strategy is even more profitable for large shopping malls, where, if a large number of stores adheres to the model, this would generate a competitive advantage for the shopping mall which, based on economies of scale, would be able to offer services that one store alone would not be able to provide with the same efficiency.
Making the pick-up store available
If the pick-up store volume is a reality, while the increase in cross- and up-selling sales has not yet occurred, directing the customer to a physical store may increase the cost of the store, since the traffic is not qualified.
The centralization of order pick-up areas in shopping malls makes this process easier for consumers, who are able to return to the store later on to purchase new products. Making it even easier, in the next on-line checkout, consumers may decide whether they want to pick-up their purchases at the store or in the closest shopping mall.
Development of a digital marketplace
One of the only players with sufficient assets to lead the race against digital marketplaces are precisely the shopping malls, since they already have a large quantity of sellers on their bases.
As a last option, increasing entertainment options in shopping malls may increase the inflow of potential consumers. Even if the flow is not ideal, since the primary objective is not to purchase, the positioning of actions in strategic areas will force the consumer to walk in all areas of the mall and see the stores.
So, retailers are able to display their brands to a large number of visitors, expanding the brand’s positioning to potential buyer audiences.