The Mall Is Dead.."Long Live the New King"

Implications: The mall is dead, at least ins so far as ownership of the consumer is concerned.  However, retailers have been slow to react.  J. C. Penney is one company that sees the strength of a diversified real estate portfolio.  Here's why retail companies that move off mall will be the winners in the next decade.

Analysis:  J.C. Penney is wise to further develop its off mall presence for several reasons.  First, it’s where the customers are, second, it’s where the customers are.  The old adage that retailing is about location remains true, even in the 21st century.  

While this isn’t a new shopping trend, it is one that is gaining momentum as gasoline prices escalate.  Most research, formal and otherwise, indicate consumers are making fewer shopping trips per week and prefer to shop closer to their homes.  

Unlike many mall department stores, J.C. Penney is one of the few that can successfully compete in an off mall environment, both in terms of value and quite often in price too.  Probably the biggest thing Penney’s has going for them is its assortments of private label apparel for men and women alike.  Unlike Sears Roebuck which has to have the worst apparel offer of any retailer in America, J.C. Penny’s cloths seem perfectly positioned for their target customer.  Add to that, complete assortments in color, size, and few stock out, time pressed, value conscious customers have a lot reasons to shop Penney stores.  

Unlike Kohl’s that has established a reputation for cheap chic, it’s really neither cheap nor chic for long if longevity is considered part of the value equation.  J. C. Penny has struck a good balance between fashion rightness and practical value which many of today’s consumers will appreciate.  

Some may consider off mall development risky, but the fact is Middle America’s shopping malls are a dying breed.  While Main Street retailers flocked to malls because of suburban development and cheap transportation in the 1960’s and 1970’s, the same events are making malls less attractive to consumers for the opposite reasons.   

Transportation is no longer cheap, mass transit never developed, and the mall generation has aged.  Suburban growth has evolved into small communities themselves with smaller, local retailers providing added value such as convenience and service.  Meanwhile, many small malls have been retired and redeveloped as non-shopping commercial real estate.  

Regrettably, many specialty retail chains will lose market share as this trend evolves.  Originally attracted to malls by the promise of traffic, downtown retailers like shoe stores, sporting goods stores, and jewelry stores relocated to malls trading higher occupancy costs for reduced advertising costs. 

Today, most mall based specialty retailers have the worst of both situations; high rent and higher advertising costs too.  For instance, typical advertising costs for mall jewelers in the 1980’s were about 3.0% of sales.  Today, occupancy costs have nearly doubled and large chains are spending about 7.0% of sales on advertising.  All the while, traffic has continued to decline in many malls.  Add those four percentage points back to margin and the jewelry industry would be one of the most profitable in any retailing sector. 

The benefits of a diverse distribution strategy are becoming more obvious as new shopping patterns have emerged.  One example is the Payless ShoeSource stores which beats Wal-Mart at its’ owe game. Payless offers a wide variety of shoes to consumers through nearly 6,600 outlets which include malls, shopping centers, business districts, free standing buildings, strip centers, leased departments, as well as on-line shopping too.  The company’s success can be attributed to many factors, but the power of its real estate strategy can’t be underestimated  

Sadly, most retailers have ignored multiple format/location strategies as a driver of competitive advantage.  But that may change too as more ‘big box’ retailers move off mall.  Retailers may hate to admit it, but the mall is dead; at least in so far as customer ownership is concerned.  The question for investors is: Which retailers will recognize that the king is dead…”Long live the new King”