Bon-Ton bites the dust

Bon-tonIn Voltaire’s 18th century satirical classic, Candide, the hero’s tutor, Dr Pangloss, stuck obstinately to his famous optimism, despite an unending series of catastrophes.

“All is for the best in this best of all possible worlds” was his mantra. Pangloss was misguided: there were rarely any silver linings in the disasters that litter the book’s narrative.

Now though, as the entire middle of the department store sector in developed countries wobbles slowly toward extinction, a little dose of Panglossian optimism might yet be warranted.

On the surface that might seem absurd, particularly as April brought yet another face plant for the global department store industry. This time it was the liquidation of the 120-year-old Bon-Ton chain in the US.

Bon-Ton isn’t one of the glamour names of department store retailing but it has an awful lot of real estate; specifically, it operates – or rather operated – more than 260 stores under seven different banners.

The stores are scattered around the north of the country, many of them anchoring enclosed regional shopping centres in secondary markets.

Average store productivity was abject, with sales per square metre a paltry (the word ‘appalling’ might be more appropriate) US$1,355. The surprising thing is not that the chain ultimately failed – it’s that someone saw fit to keep it going on for as long as it did.

In the short term, Bon-Ton’s liquidation is more of a blow to the shopping centre industry than the department store sector itself, as landlords scramble to try to fill the void.

The problem is not confined to industry bit players. Two large mall Real Estate Investment Trusts – Washington Prime and CBL Properties – each have a Bon-Ton store in 25 per cent of their enclosed malls.

Unfortunately for Washington Prime, nine of its malls with a Bon-Ton also have another moribund department store chain – Sears – anchoring the other end of the property. Misery loves company.

The problem for shopping centre operators in this kind of situation is not just figuring out what to do with empty boxes that average around 9,000 square metres. It’s trying to stop co-tenants from exercising their right under the terms of their leases to early termination.

In leasing jargon, this is referred to as a ‘kick-out’ or ‘co-tenancy’ clause. Such a clause in the lease can be activated in the event of an anchor store closure, or when occupancy falls below a certain threshold for some other reason.

It all sounds like hell, but there are huge upsides.

One’s loss is another’s gain

First, Bon-Ton’s failure will mean a donation of approximately US$2.5 billion annual sales donation [estimated annual revenue for Bon-Ton in 2017] to other retailers. Major beneficiaries will be value department store Kohl’s, discount department stores like Walmart and Target, and off-price retailers such as TJ Maxx and Ross.

Some spending will also shift to specialty shops in the apparel and beauty categories. Amazon will also benefit but offline value retailers are likely to be the big winners. One retailer’s loss mean gains for a number of others, and from the real estate perspective, the same applies to shopping centres.

Second, landlords haven’t been sitting around just hoping this day wouldn’t come. Slicing and dicing demised anchor boxes to introduce fresh tenants in more productive categories is something they plan for.

True, the global fashion brands that used to be top of mind to fill anchor space are not as ready an option anymore. These brands too are feeling the declining importance of apparel in consumers’ budgets. Lifestyle changes are dampening apparel demand and driving up the growth rates of other spending categories.

Instead of stuffing empty department store boxes with fast fashion, shopping centre operators are moving steadily toward a more diverse, mixed-use model. For example, large health and wellness precincts can include specialised fitness centres, medical facilities, large-format beauty retailers and gourmet food.

In the right circumstances an empty department store box can accommodate this kind of model.

The third positive of the demise of mid-market department stores like Bon-Ton is less tangible. It’s that as long as these stores continue to exist they will drag down the prestige and public image of the department store industry as a whole. It’s a little bit like an upscale residential street where 30 per cent of the houses are trashed.

Full-on Panglossian optimism may be out of place when it comes to department stores. But although there is no longer a place in consumer affections for retailers like Bon-Ton, there is still a place for the best of breed. And these will better be able to prosper as the Bon-Tons of this world fall.

Michael Baker is a Sydney-based retail consultant and former head of research at the International Council of Shopping Centers. [email protected]

 

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