In the Know

A Perspective on the Storyline that E-Commerce Will Devour the Retail Shopping Malls
August 08, 2017
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Arnall Golden Gregory LLP
In the recent proliferation of pessimistic articles about the demise of brick-and-mortar shopping and the looming retail “meltdown” or “apocalypse,” many writers have emphasized those economic forces that support their predictions that as many as 25-30% of retail malls will close over the next 5 years and retail tenants at malls will struggle to remain in business. Amazon and other online retail providers are cited as the principal driving force behind the high profile bankruptcies and store closings being reported over the past several years involving retail anchors among other mall tenants. Besides e-commerce, the shift in consumer buying habits, especially among younger people, toward dining, travel and entertainment is another contributing factor. Also, the development of many new shopping malls with superior attributes puts lower end malls at a competitive disadvantage giving rise to a greater risk of failure.

Admittedly, these developments will have a very significant and broad impact on existing retail malls and mall tenants. However, whatever changes are occurring in the retail business environment that create obstacles to the continuation of past business practices will necessarily motivate businesses in the retail sector to imagine and implement creative solutions. For those malls that will fail, owners should focus on the value of their real estate if put to other uses. The mall owners who adjust to change and survive the “meltdown” will benefit from the positive economic development that overall retail spending by consumers has continued to grow steadily during this decade. Many mall owners are already beginning to adjust to the market changes in positive ways.

The emergence of “lifestyle malls” on the village concept is one reaction to the changes in consumer habits and desires affecting the retail sector. Young consumers especially want to go to a shopping destination that provides dining, entertainment and activities in close proximity to where they live. This development in the consumer market has particularly been a major boon to the restaurant industry. Malls are being updated or built to serve these changing consumer wishes and needs with greater emphasis on mixed use development and service providers, in addition to restaurants and destinations for activities and entertainment. While traditional tenant mixes may fail to maintain adequate levels of foot traffic due to the competition generated by e-commerce, redesigning the mall concept in response to changes in consumer desires could certainly drive foot traffic to levels that exceed those experienced in the past.

To compete more evenly with e-commerce challengers, retail tenants at malls must provide conveniences similar to those made available to online shoppers while retaining the extra benefits of mall shopping. For example, mall tenants’ return policies need to match the convenience of online policies. Necessarily, tenants will need to utilize more sophisticated technology to simplify transactions and make their customer interactions more convenient and enjoyable. As mall owners adjust to change, mall tenants can emphasize the wide range of shopping, dining, activities and entertainment options available to families and friends that visit the mall that their e-commerce competitors cannot provide. While it is not a good development for mall landlords, retail tenants also can benefit from co-tenancy provisions in their leases to negotiate reduced rental rates and other concessions or to vacate their premises and relocate to malls with more favorable rental rates and lease terms, as well as better amenities and foot traffic.

These recent developments that impact the retail sector will encourage both mall owners and their tenants to reevaluate business plans applying fundamental marketing basics. Given the rise of e-commerce, competition from more malls being built, and changes in the lifestyle choices of young consumers, owners and tenants should reconsider the consumer market they want to target, the needs and wants of consumers in the targeted market and how to fulfill them better than their competitors, and how to make a profit while doing so. Those companies and individuals who recognize the ongoing changes in the retail industry - and make the appropriate business adjustments to address those changes - will have the opportunity to reap the benefits of growing retail sales and emerging business opportunities.