Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

Are Malls Really Doomed?

That cherished and reviled American institution known as the shopping mall is facing the greatest crisis in its history. Many of the retailers that sustained the malls for generations are disappearing.

Four of the nation’s most prominent department store brands, Sears Holdings (NASDAQ: SHLD), Macy’s (NYSE: M), Kohl’s (NYSE: KSS) and JC Penney (NYSE: JCP), are planning to close dozens of stores this year. Macy’s is planning to close 40 stores, Sears could shutter up to 100 stores in the next few months (with 50 confirmed closings), Kohl’s will pull the plug on 18 stores, and JC Penney has plans to put up the closing sign at seven stores.

And it’s not just department stores. Sporting goods retailer Finish Line (NYSE: FINL) will close 150 stores, and another sporting goods store, the privately held Sports Authority, plans to close 160. The clothing store Aeropostale (NYSE: ARO) is apparently planning to close around 84 stores. Areopostale is a retail basket case; its stock was trading at 20 cents a share on Feb. 26, 2016, even though it reported a revenue figure of $1.630 billion.

To make matters worse, some mall staples such as the GAP (NYSE: GPS), which also owns Banana Republic, and Old Navy, Best Buy (NYSE: BBY), and Restoration Hardware (RH) are reporting declining sales, CNN reported. Target (NYSE: TGT), which has some mall locations, reported increasing foot traffic, but declining revenues.


This means many malls are going to have a hard time attracting foot traffic and staying in business because they are losing their major attractions. This is both a problem and an opportunity for malls.

Why Store Closings are not Such a Bad Thing for Malls

The store closings are not necessarily such a bad thing for malls because they do force them to reinvent themselves. Getting rid of decrypt brands like Sears can actually help a mall; last year, mall operator Simon Property Group (NYSE: SPG) was actually paying Sears to leave the building.

Some investors, including Warren Buffett, even believe that Sears’ properties have value. Berkshire Hathaway (NYSE: BRK.B) actually bought a small stake in Seritage Growth Properties (NYSE: SRG), the real estate investment trust Eddie Lampert set up to unload Sears’ properties.

The space can be redeveloped into something that people actually want to shop at, for example, one of Amazon’s new stores. Other uses could be restaurants, arcades, supermarkets, and public space. Some large discount stores like TJ Maxx, Walmart, and Kroger might be interested in mall locations too.

If handled the right way, store closings can help a mall, particularly if it can attract high-end retailers such as Nordstrom (NYSE: JWN), which has been doing very well in recent years. The problem facing malls though could be that Americans simply do have the money to shop at them.


Is Income Inequality Killing the Mall?

Strangely enough, the real threat to the mall could be income inequality and not a lack of tenants. Malls might be dying because Americans simply do not have enough money to shop at them anymore.

Just 300 of the nation’s 1,100 malls account for 75% of the industry’s value, Green Street Advisors told CNN. At those high-end supermalls, such as Denver’s Cherry Creek Mall, retail space rents for $965 a foot. Meanwhile, at the low end of the spectrum, space rents at $130 a foot, which makes the stores unviable.

A more worrying sign is that TJX (NYSE: TSX), which operates the TJ Maxx and Marshalls discount stores, reported that its sales grew by six percent in the fourth quarter of 2015. During the same period, Gap’s sales fell by 5%, which does not seem like a coincidence.

The reason more Americans are shopping at TJ Maxx is obvious: the income for the average American actually fell between 2013 and 2014. The U.S. Census Bureau reported that the average family made $53,657 in 2014 and $54,462 in 2013. That means the average income dropped by $809 in 2014.

The average income in the United States has been falling for some time, according to our friends at Statista. It peaked at around $57,724 in 2000, dropped after the turn of the century, rose to $57,357 in 2007, and has been dropping since.

An even more worrying trend for mall operators is the increasingly uneven distribution of wealth in the United States. The U.S. currently has the fourth highest level of income inequality in the world, according to Fortune.

University of California Berkley Economist Emmanuel Saez found that 90% of Americans only received 49.6% of the nation’s income in 2012, Pew Research reported. He also found that 1% of the population received 23.9% of pretax income. Such figures explain why business is booming at Nordstrom, while Macy’s is closing stores.

Naturally, the situation is worse for some groups and regions of the country. Four U.S. states, Alaska, North Dakota, West Virginia, and Wyoming, were in recession in 2015, and three more, Louisiana, Oklahoma, and New Mexico, were on the verge, Bloomberg reported. Some sectors of the economy, including oil and agriculture, are also in terrible shape.


Could Amazon Save the Mall?

Strangely enough, malls could have an unlikely savior in the form of their greatest enemy, (NASDAQ: AMZN). The online giant could help malls in two ways, by renting space there and by giving people a reason to go.

The everything store has plans for 300 to 400 more brick and mortar bookstores, Sandeep Mathrani, the CEO of mall operator General Growth Properties (NYSE: GGP), told The Wall Street Journal on Feb. 2, 2016. These plans are not confirmed, but they could be good news for mall operators.

Amazon could help malls because people will go to them to see items they buy online, a process known as “Amazoning.” This means the future of the mall could be as a showroom/entertainment center. Models for this could be the Apple Store and Tesla’s showrooms.

Creative mall owners could pitch for a Ford store, a Chevy store, a Mercedes store, and a Samsung store at their centers. These could be augmented Starbucks or even a Kroger supermarket with a café in it.

Malls are far from dead, but the traditional mall, anchored by a department store, is definitely on the way out. Income inequality and Amazon are hastening its demise in the retail apocalypse.