The writing’s on the mall
Are you a retailer looking to go big in the USA? Think again.
Australian retailers who are possibly eyeing the huge US consumer market for growth are now faced with some very mixed signals. On the one hand, economic growth in the birthplace of the mall is currently robust, and the sheer weight of population – now exceeding 320 million and only likely to shrink if Donald Trump gets his wall built – is still imposing, despite the bigger numbers in China and India.
But with shoppers now often preferring to go online or to off-price formats that occupy lower-rent real estate, the venerable regional shopping centre is at bigger risk than ever before. And space at the centres that still work well is so tight that prospective tenants either have to wait interminably and then face steepling rents, or they get turned down flat. Most retailers who think they can just waltz into ‘trophy’ centres like South Coast Plaza in Orange County, California, are in for a rude awakening.
The trouble is that South Coast Plaza is in an elite group that vastly outperforms the average US mall.
So retailers from outside the US who might think that this is a great time to be in US shopping centres should choose with great care. In the first half of this year, the largest department store company, Macy’s, will close about 15 per cent of its stores. Or at least that is the number that has been announced so far. Major store closing announcements by other retail chains are being mooted and most industry observers believe that a massive repurposing of retail real estate will occur over the next few years.
For perspective, the scale of this rationalisation will probably result in the closure of an amount of retail space equivalent to more than twice the total amount of all retail space in Australia.
According to the shopping centre industry’s peak body, the International Council of Shopping Centers non-anchor tenant sales productivity at regional shopping centres declined by 2.4 per cent in the year through October 2016, to approximately $5,014 per sqm. By excluding common mall anchors like department stores, this metric actually understates the problems being faced by US malls.
Both traffic and sales have been declining at physical stores for some time, and by a non-trivial amount. According to a report issued by Fung Global Retail and Technology last November, the fall-off in traffic was more than nine per cent since January 2015. Only increases in conversion and sales per customer had prevented sales from going into a tailspin.
The same report estimated that the top 20 per cent of US regional shopping centres (those that generate sales of just over $5,900 per sqm and referred to as ‘A’ malls) produce an astonishing 72 per cent of sector sales. You don’t need to be a mathematician to understand how long a shadow this casts over the remaining 800 or so malls.
One of the underlying problems is that categories that were stars when the regional shopping centre was in the ascendant during the golden decades from 1970-2000 are now performing pretty horribly, particularly ready-to-wear clothing that is migrating online. Amazon is set to surpass Macy’s imminently as the America’s biggest apparel retailer by sales volume, if it hasn’t already.
Not surprising then, that many believe the writing is on the mall’s wall.
Is there a good counter-argument? Yes. The ‘A’ malls, many of which are positioned to capture the tourist market as well as affluent local demographics, continue to steam ahead. The wedge in performance between these centres and the rest of the pack continues to widen. Examples of such outperformers are the top performing centres in the US, Bal Harbour Shops in Bal Harbour, Florida, with sales per sqm in excess of US$30,000, The Grove in Los Angeles (which generates sales of approximately US$23,000 per sqm), Woodbury Common Premium Outlets outside of New York City (US$17,000 per sqm) and Ala Moana in Hawaii (US$15,000 per sq.m).
The news isn’t all bad at many of the lesser centres either, with some categories still doing ok despite the general deterioration in the apparel category. Athletic footwear and athleisure are trendy and functional, and personal care is thriving among members of the selfie generation whose appearance on social media platforms has become just as important – if not more so – than their appearance in the street.
And then, of course, regional shopping centres are being helped by the introduction of more and better food concepts.
Cyclical factors are also in their favour. US consumer confidence at its highest level in 15 years, stock prices are near record highs and interest rates are still well below historical ‘normal’ levels.
Republican control of both houses and the executive branch could presage an end to legislative gridlock and improve confidence among the business community.
Recent sales trends overall have been good: retail sales during the holiday period will probably be up somewhere in the area of 4 per cent, extrapolating from early measures.
Overall, the situation isn’t quite as dire as the impending retail space rationalisation suggests. Still, for retailers seriously looking at breaking into the US market, be careful. There are still some great centres to be in, but the price you pay will be high.
Michael Baker is a Sydney-based retail consultant and former head of research at the International Council of Shopping Centers. [email protected]