Who Loses When the American Mall Dies?

When I was a child, my town had two thriving malls. One was driven by its sheer size, while the other relied on strong anchors and a major movie theater. Today, the smaller mall has been reduced to small shoe stores and smoothie bars, while the larger mall has consolidated its power.  It's a story that has played out across America, as malls are fading from fashion.

Some analysts have estimated that half of the country's malls will eventually shutter their doors, leaving the businesses that rely on mall traffic searching for new answers. Already, the slowdown in traffic is forcing companies like J.C. Penney (NYSE: JCP  ) and L Brands (NYSE: LB  ) to rethink their strategies and approach to customers. 

Inside an abandoned mall in Florida. Source: user Brett Levin

Since 2010, mall traffic has fallen over 15%, according one estimate, and the stores with a strong mall presence are feeling the pinch. America is home to around 1,000 malls, and many companies have built their businesses on those malls, putting the vast majority of the pinch on their sales and earnings. 

In the new world, malls are seeing consolidation just like many other businesses. Larger models are taking a bigger share of the pie, while smaller, regional malls continue to underperform. Online sales are taking a fair share of business, but shoppers are also tighter with their cash, leading to fewer impulse purchases, which mall stores often rely on.

The result has been an increase in promotional activity in the malls, leading to a decline in margins, and a tenuous grip on foot traffic. If that trend continues, it won't just be malls that take a hit. Companies that rely heavily on foot traffic are going to take a dive, as well.

Anchor stores on the way out
The last things holding malls together are the same things that the malls were originally built around. Anchor stores are typically larger department stores or retailers that bring in a wide range of shoppers. J.C. Penney is a perfect example of an anchor store.

The company has amassed billions in real estate that it has used to secure lending facilities.  Those funds are pushing the company's turnaround, but in 10 years, they might not be so easy to come by. As malls fade, the value of those anchor locations will begin to slip, putting businesses in a bind if they're heavily reliant on the value of those assets. J.C. Penney knows that this is a growing problem, and in one of its most recent SEC filings, the company said, "A substantial majority of our stores are located in malls, which have been experiencing a decline in traffic."

Clearly, J.C. Penney has more pressing issues than the long-term health of the American mall, but it's a hurdle that company is going to have to clear at some point. Being an anchor may simply mean that the decision is deferred until it's made by a landlord, as malls begin to actually close.

Inside the mall
While anchors may be clinging on to the last vestiges of dying malls, businesses in the mall are taking their business elsewhere as quickly as they can. L Brands, owner of Victoria's Secret and Bath & Body Works, is a mall staple, but not an anchor.

The company is assuming that traffic over the next year will be flat in malls, but that's likely to be a temporary situation that's going to get worse. In the long run, traffic is going to pull back, leaving big mall brands suffering. Victoria's Secret is primarily mall-based, but the company has been pushing for online and catalog -- what it calls "direct" -- growth in the last few years. Unfortunately, comparable direct sales are slow to grow.

Victoria's Secret's direct channel actually had a drop in sales last year, due to weak holiday sales. It's a trend that is going to be much more worrisome as time rolls on and the company is forced to shift or close locations as malls drop to the wayside.

What it all means for the mall
The news that big-box stores are being overtaken by Internet retailers isn't news, but for some reason, we don't think of malls as boxes. In reality, they represent a bygone era of suburban life. America is shifting out of the burbs and into the city, leaving behind the cheap real estate that fueled a boom in mall construction.

Companies that want to stay ahead of the curve are going to have to trim their exposure to the typical mall. While the biggest shopping centers may continue to thrive, smaller locations are going to keep suffering.

Victoria's Secret can push its online presence, as it has been, in order to keep its brand strong. Companies that are more heavily invested, like J.C. Penney, should start to consider the value of the family silver. The billions in real estate that it holds now in stores and ground leases could easily shrink soon. If those companies sell their weaker assets before the mall collapses, they may make out like bandits -- it's all a matter of timing and finding a buyer. 

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3064336, ~/Articles/ArticleHandler.aspx, 9/1/2015 3:58:15 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Andrew Marder

Andrew Marder worked in retail for years, holding jobs ranging from bookseller to bank strategy analyst. He has worked for the Motley Fool since 2012, and loves coffee.

Today's Market

updated 6 hours ago Sponsored by:
DOW 16,528.03 -114.98 -0.69%
S&P 500 1,972.18 -16.69 -0.84%
NASD 4,776.51 -51.82 -1.07%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/31/2015 4:01 PM
JCP $9.11 Up +0.17 +1.90%
J.C. Penney Compan… CAPS Rating: *
LB $83.90 Up +0.26 +0.31%
L Brands CAPS Rating: ****