TRANSCRIPT
Peter:
Hey everyone, Peter Crosby coming to you from the Digital Shelf Institute’s Cape Cod office. Rob is in the Berkshires. Hey, Rob.
Rob:
Hello there.
Peter:
So, listeners, we are taking a new approach to the, to the weekly episode, instead of going through a few different topics. We decided we're gonna pick a trending topic and really dive into detail, citing a number of stories and, and sort of doing the deep dive. And so we'd love your feedback and we'll certainly be watching the ratings to see how things go and try and just be a little bit more thoughtful and deep diving with these things. And so today we're going to talk malls, I mean, malls, of course, have long been an engine of retail and teenage meetings in the country. First of all, we'd love to make a public call if there's anyone out there or anyone who knows anyone out there who wants to make the bull case for malls, like don't worry, these things are coming back. Cause I mean, honestly we have a lot of doom and gloom coming up. So what are we missing? If you're a mall expert or know one, please let us know. You can reach me peter@digitalshelfinstitute.org or of course, you can tweet or the LinkedIn page, please let us know. So, the inspiration for talking about this today, the inspiration for this piece came from an article in the New York times by Sapna Maheshwari, a great article and worth a read. We'll put it in the show notes in your podcast app, but Rob, the first thing that jumped out at me was the roll call of announced closing from the anchor tenants, department stores account for about 30% of the mall square footage in the US with 10% of that coming from Sears and JCPenney. Do you want to take us through the honor roll of some of the things that the Times article pointed out?
Rob:
Honor roll indeed. Yeah. So JC penny has said store closings will start this summer and it could eventually be as many as 250 Macy's, which Bloomingdale's said in February will close 125 stores in quote "lower-tier malls" during the next three years. And has since said that that time frame could be accelerated, Nordstrom would close 16 of its 116 full-line department stores, you know, Neiman Marcus, you know, another bankruptcy, said it plans to reopen all stores, but landlords don't really expect them to be able to maintain all of them. Barneys is shuttered. Victoria's secret will close 250 stores in North America Gap is closing 170 stores globally, senior retail, Ann Taylor loft just filed bankruptcy. You've got Forever 21 things remembered Payless, lucky brands, GNC. it's a bloodbath.
Peter:
Yeah, it really is. Um, the chief investment officer had an article, they said that real estate trusts for malls or the second-worst performing real estate trust this year down 39.4%. Second only to lodging.
Rob:
Yeah. Oh, I mean, this is basically for those who don't know what an REIA is. It's a way of effectively investing in a basket of real estate by theme. So in this case, if you buy a read, it's like buying, you know, a bond where the bond fund is diversified by investing in a whole bunch of malls. And so the REIA's that are mall investors have just gotten absolutely crushed. That's an indication that investors broadly don't see a path here for these malls.
Peter:
They're going to get hurt in the near term. And one of the things, you know, you listed off a lot of those anchor stores, a bunch of small retailers apparently have clauses in the leases that allowed them to pay, reduce rent, or even break the lease. If two or more anchor stores leave a location. So you can see kind of the thing is just falling in on itself.
Rob:
Yeah, that was, that was eye-opening for me. I didn't know those clauses existed until a few weeks ago, when you and I had talked about JC Penney's bankruptcy and how I believe it was Simon property group, one of the couple largest mall owners in North America or globally, really. And the rumor was that they were going to bid on JC penny. And I thought, why, why would the mall owner bid on JC penny? This doesn't make any, you got a bad tenant owning the bad tenant doesn't make them a better tenant. You know, there's, there are big issues at hand here. And so we were speculating, well maybe Simon property group can focus a little bit less on the per square footage, profitability from a retail perspective and turn some of the space into more experiential or blah, blah, blah. You know, we were just totally making stuff up. But in this case, there's a plausible economic reason, which is that if they only keep the JCPenney's open, even if they're losing money, then it allows them to keep their leases on a lot of these other smaller retailers. But as soon as they lose JCPenney, as soon as a JCPenney and plus one of the other anchor tenants, all of a sudden all the rest of the retail can just shut down in that mall. Risk-free, cost-free just liquidate what's there and go, right. You don't have to pay to get out of the lease. So that's, I just, I wonder how much of a motivation that is for Simon and others to just want to effectively put these department stores, these anchor tenants on life support just to keep them all. Yeah.
Peter:
Yeah. I think it certainly is a better explanation probably than any of that speculation we did a few weeks ago. So it was really, yeah, I agree, finding that fact out, just realizing how interconnected all of it is. Just kind of darkens the picture a little bit more. So I don't know. What is the future, Rob? What do you, what's going to happen today? I mean, when you think of you know, for me, I was never a big shopper. It was the movie theaters that would draw me into the mall. And then before you waited to go to your theater, whatever we'd wander around and usually some sort of purchase would happen. But now obviously movie theaters as an anchor tenant are not particularly great right now, either in this space.
Rob:
Matthew Ball, the venture capitalist, whom I think is the best writer about media made a point this last year, that if you look at, if you look at movie theaters in 2020, I mean, assuming that they were open, which most of them are not right now, but if they were open they're awesome! Movie theaters have these big seats, they're super comfortable. The sound systems are incredible.
Peter:
Order food and drink
Rob:
But if you, if you look at the ticket price adjusted for inflation, the ticket price is less than it was 20 years ago. So, these movie theaters have been investing capital in improving year over year. The experience of being in the theater and it's, and they've been making less money every single year despite the improvements of experience.
Peter:
and the price of popcorn.
Rob:
and the price of popcorn. Yeah. But they're not, they're not even making it back on popcorn. These guys are not, not really cashing huge checks here, operating movie theaters. Um, I don't know, it feels grim to me when I, on my 11th birthday, was living in the UK. This is around 1990. And we did a, we went to paintball and the paintball location we went to was a hospital that had been shuttered 40 or 50 years earlier. That sounds so dystopic. Totally all overrun with vines and growth. And there were holes in the floor, so he could shoot people between the floors. That sounds amazing. It was like the greatest day of my whole life, imagine me like an 11-year-old playing in an abandoned hospital. And so I'm thinking of these malls is what's going to happen. Like, I don't know, maybe, maybe you just need to turn them into paintball centers.
Peter:
I have to tell you when I was an actor in New York, I did a guest spot on Delocated, which was a series about, it was a comedy thing I've forgotten, I think on adult swim network or something, the guy, his way of being, you know, an FBI relocation, you know, he was hiding the way he was relocated was that he just wore a ski mask. Like that was his, that was his changing of identity. But anyway, actually a funny show, but I played a doctor and they did it at this abandoned hospital and it was so creepy to go there and they, you know, they had set up the scene, but the dead hospital was one of the weirdest places I'd ever been. And it was so creepy. I can imagine as a paintball site, it would be amazing.
Rob:
Yeah. I mean like, so what's the dead mall going to look like? I mean, there's so, so what do you repurpose? There was a quote from Prashant Tewari, partner at the Townsend group, which is a global real estate investment managing firm. He says it's very difficult to take an expensive space on a dollar per square foot basis, put more capital into it and end up with a space that is a lower dollar per square foot. So the economic case just hasn't worked out so far and that's in response to what malls have been trying for the last 10 plus years, which is to move away from just retail. Just a place you go shopping with a food court, to be more experiential where you've got like legit restaurants, you know, not just the McDonald's, but like real sit down restaurants and climbing gyms and LA Fitnesses and those types of stuff. And he's saying that economically, that switch is not a net positive for the whole thing. So even what they've been trying in terms of repurposing, hasn't worked. I mean, it's just,
Peter:
But he was, yeah. I mean, he went on to say though that if the mall goes completely dark and remains dark for two or three years with very little hope of revival, then I think those cases become very powerful because now you can get the same mall as a fraction or low cost.
Rob:
Yeah. This is the, you know, this is the creative destruction. Every force needs a forest fire argument of capitalism. There's, you know, the short, there's the short, sharp shock of a major change. And then you can have rebirth. The co-founder of the Alinea group up in Chicago made the statement about restaurants more generally. He said a lot of restaurants in the last 20 years have taken on a lot of debt to expand. And so you got a lot of restaurants with 10 locations, 15, 20 locations that are just on the edge, the nice edge of financial viability all the time. And because so many restaurants have taken on so much debt and suddenly we're starting groups that have taken on so much debt to expand so quickly, it's driven up lease prices on restaurant locations. And so if you're like a 30-year-old chef, that's trained in Michelin star restaurants and you really want to open up your own place, it's hard to do that. It's just too expensive. And his point is COVID a good thing for that person COVID is going to cause a lot of these, frankly, not well run businesses to go bankrupt and landlords are going to have no choice, but to reduce the least price of the spaces and that's going to make it possible for these next-generation superstar chefs to have a window to open up their place. Right. And so you can look at that in almost anything. So if malls really just start shuttering left and right, it's not like the concrete and the superstructure of the bar and the parking lots and all that disappear overnight and turn into the post-apocalyptic pink ball center that I was talking about. So you know, his, his point is, it's just, who knows what's going to happen if it gets cheap enough, maybe all kinds of things.
Peter:
I know, you just know that the communities that are going to be the most affected cause, the article, was also talking about how some of the turnovers of models in the more luxury areas have been, you know, in the big cities they've been turned into office space for Google and things like that, like where, you know, you can turn it over to something that, that could get a similar kind of square footage. But again, the hard-hit places are going to be the communities where the mall is kind of the only place it's where you go, it's where you go to the shop. It's where you go for the community. And when those shutter, I mean, in some ways it will be a boon to online shopping. Cause that will be, you know, without having to travel 30 miles away or whatever, that will be their outlet for getting their stuff.
Peter:
Even if it's not a community for them.
Rob:
Yeah. I mean like you couldn't make the movie with Mallrats today, right?
Peter:
Well, except with real rats. Yeah. I, you know, the funny thing is here with the community aspect of this man. I do think you're right. There's, there's going to be a gap in a lot of places where it's still a gathering place. And I don't, I don't know that that's going to be tough. You know, there, there might be second-order impacts. So the first-order impact of a mall shattering is people can't go to the mall and maybe they go online. A second-order impact might be that in specific communities, malls were trendsetting even, even today. Right. So I remember in Connecticut, in the mid-nineties, if I went to the mall, you'd have, you know, if you were made a lot of money, you could buy clothes at an app or your parents made a lot of money by closing Abercrombie and Fitch.
Rob:
But if you, if you made less money, you could go to Old Navy, you'd go to the gap, right? And, and then a hot topic opened up and all of a sudden, all kids started, you know, had a place where they could go buy clothes. And so what was available in the mall very much determined the fashions and at the high school, my high school had almost 2000 kids in it. At the high school, it's there, it wasn't like a huge variety of styles. It was what was available in the Trumble mall. And I wonder if you'd take away that trendsetting capacity of a mall and simply, you know, there the stores that are available in the mall to set fashion, what happens next is social media, right? It's Instagram, it's influencers.
Peter:
And so in some ways, then that broadens as that broadens actually potentially your exposure to trends where now kids may have more access to stuff that they never would have, because then they can just they're online, you know,
Rob:
Or terrifyingly, they just spend less. Right. So if you're, if your idea of how to keep your 14-year-old occupied for an afternoon as you go to the mall, let them walk around and you give them a little spending money, and that's no longer available. Maybe, maybe like, they're just not going to buy it, buy something.
Peter:
Yeah. I mean, let's take through some of the repurposings that we've been seeing. I mean, you know, some of the things you talk about, which last-mile distribution says, so let me go. Actually, 16% of repurposing malls are mixed-use. So that's a 2020 study from the national association of realtors. So most common use is to maintain the speeds to some sort of retail store we're attracting popups or new anchor tenants, the warehouses where the third, most common for repurposing malls, although the dollar per square foot there is very low. That's about 9% used for industrial warehouses. And I thought this was really cool. I found a reference in Euclid, Ohio, the city and County governments provided one point $3 million for a road project to give an incentive for Amazon to use their vacant mall as a fulfillment center.
Rob:
Wow. That's it. I hadn't seen that one. That's interesting. So what percentage of them were multibillionaires just building new castles?
Peter:
I wish I knew that percentage.
Rob:
Just think about all those little nooks and cranny, small stores that were within a mall. Imagine how many secret layers you could have if you were turning it into your castle. Most makeup.
Peter:
The castles though, I don't know. At least the malls in my community were,
Rob:
They do make ugly castles. I mean, you certainly have a lot of parking space for all of your amazingly expensive cars. Right.
Peter:
That is true. That is true. Again, back to the community impact, these places are just going to be, if they're closed and go dark, they're just going to be surrounded by chain link, fence, barbed wire, you know, it's just, Oh man, it's, it's so sad.
Rob:
Yeah. It's hard. It's hard to see the fulfillment center, you know, dark store, dark restaurant, et cetera, having enough dollars per square foot to really make that much difference. I mean, fundamentally what it comes down to is malls had this sort of sweet thing going on where they were, they were, were, Americans bought a lot of stuff and that was a good profitability per square foot. And it's just all of these options that you're talking about. As you said, it's fewer dollars per square foot. Yeah.
Peter:
Yeah.
Rob:
That's why the rates are down 40%.
Peter:
Yeah. And, and, you know, I think you, you found this stat that America has 10 times the retail square foot per capita of Germany.
Rob:
Yeah. That was from Benedict Evans, the analyst, I mean, that's, I think it was 25. I might be off a square foot or two but 25 square feet per capita of retail space in America compared to 2.5 square feet of retail space per capita in Germany. People have been talking about that as being unsustainable for a long time. And in the, in the nineties, in particular, and the early two thousand the big box stores were stamping out thousands of new locations at just a stupid clip, an absolutely insane clip. And so we just, we added a lot of Realty real estate space, ironically, just before e-commerce was about to explode. Right. So part of this is simply the reckoning, right? So the malls are one example, but they're not the only example of retail locations closing and not reopening. I mean, I'm in the Berkshire's right now, and the big industrial town out here, which is, you know, going through some hard times is Pittsfield. Pittsfield has opened an old GE industrial center and you go to downtown Pittsfield, the buildings are beautiful. The side, you know, they've got nice broad sidewalks, but you know, what's in those, what's in where the real estate location or the retail locations used to be. It's like the guy who fixes your computers for 10 bucks and stuff like that, it's like cheap blow and service centers, which is not a lot of dollars per square foot for the landlord that owns them.
Peter:
Yeah. And, and even beyond malls and retail morning consult had a survey about consumers' comfort level for most leisure activities like across categories. And that it's, it's just, there were the big dips when in some of them, when, you know, COVID came along and now they've just plateaued. Like I'm looking at the chart now and going out to eat is sort of at 36% feel comfortable doing that 30% going on vacation 25% going to a museum, 21% to a movie, 20% to gyms, 17% to an amusement park, 15% comfortable going to a concert, 14% traveling abroad, although really we're not welcome anywhere. So I guess it doesn't matter whether you're comfortable doing that. But it's just across the board, sorry, folks doom.
Rob:
And a lot of that maybe, I mean, this multibillion-dollar question is how much of that fear is sticky. For example, I was paying 175 bucks a month for a fancy gym membership. It was a really great gym Equinox, a big fan. Now I'm paying that. And I've been investing money in-home gym equipment at this, you know, the home gym equipment category. That's been killing it. And at the end of this thing, depending on how long this goes, if this goes for another year where a lot of people are uncomfortable going to the gym and are instead of putting that, putting those dollars to Peloton and, you know, the whole slew of home gym equipment, that's, that's come up in the wake of Peloton. You know, there are a couple of smart rowing companies that have raised money recently. There's smart treadmills and so on and so forth. Maybe you don't ever go back to the gym. You know, maybe all these people that are staying at home baking, you know, I think after the first month, it's exciting, I'm baking. I don't get to cook that often, but after a year, maybe it's a real habit where you think, why would I go back to the restaurant or you go to the restaurant and you think, you know, it's not as good as the one that I make at home because you've got enough experience or whatever it is. And so there's there, there isn't, there is a question about that trend of people being uncomfortable the longer this goes on the stickier, some of that
Peter:
Yeah. Habits. Yeah. I agree with you. Okay.
Rob:
And then you've got a lot of downstream impacts. So if not, if not only you're talking about retail stores and closing down, but then you started talking about gyms, may be closing down and you start talking about restaurants, closing down. He starts off it's like, I mean, it's a lot of commercial real estate.
Peter:
Yeah. And I think, you know when we sort of transition this to all right, how do brand manufacturers operate in the midst of this gloom? What, you know, what's within their power and McKinsey put out recently a great report called the great acceleration. And they talked about the Quintiles of where companies are, where brands are in terms of, of their ability to, in a way take advantage of the crisis, take advantage of the moment of opportunity to really make dramatic shifts in the business. And the sort of the takeaway is that you know, as, as often as the case, the leaders are leading and getting stronger and stronger, the bottom quintile is, you know, selling things off. And so what's the middle quintile to do, to get, and as always, it's about innovation becoming agile, breaking down silos, you know, all the things that we talked about and that stood out to me, you know, easier said than done Rob, we were on a call with the executive forum yesterday of the digital shelf Institute and the complexity of the CMO and digital marketing person's job, you know, just wrung out to me of all the different things that they're trying to manage right now.
Rob:
Yeah. There's no, there's no easy path right now. There's just a lot of hard paths. That's a good way to end. We Should just end that, good luck world. Yeah.
Peter:
I kind of think it is the way to end, you know, if you're interested in that McKinsey report, not to self promote, but I guess I'll self promote So, we're starting up a blog on DSI dot or coming up on August 3rd. And one of the first articles we'll publish will actually be one by me covering sort of the outtakes of this McKinsey report. So, August 3rd visit digitalshelfinstitute.org and check that out. I think that would be cool if you would come and visit our knowledge. Rob, will have one up on niche markets and we'll be throwing some knowledge down every week there. So Rob, thanks for spreading the manure of malls with me today. We do want to, in a hopeful side, we want to give you a heads up on an upcoming session. As you know, we're having a D2C strategy playbook series which is a whole series from now through September to help brand leaders think about how they should do a D2C initiative. And then what are the core components and executive executives who have been there and done that? So the upcoming week is Jordan Jewell from IDC. He's doing a live webinar on the tech stack for D2C. So if you look in your podcast app in the show notes, we'll put the link for registering for that webinar in the notes. And thanks Rob and everyone as always, if you enjoy the show, please leave a review wherever you get your podcast. And seriously, thanks as always for being part of our community.
Links we mentioned:
Register for our upcoming webinar with Jordan Jewell from IDC talking about the tech stack for D2C. https://www.salsify.com/content/webinar-d2c-playbook
Other sources:
