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As Macy's and Sephora Flee the Mall, Will Other Retailers Follow?

By Adria Cimino - Feb 13, 2020 at 5:22AM

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Macy’s and Sephora are opening stores in neighborhoods -- right where the customer shops the most.

Department store Macy's (M 1.35%) is struggling, while business is booming at LVMH's (LVMHF 1.01%) Sephora makeup chain. And yet, the two retailers are making a similar move. In a recent announcement about store closures and job cuts, Macy's said it will open smaller stores outside of malls. Sephora, in a statement on the very same day, spoke of its biggest single-year North American expansion ever -- happening outside of malls.

An outdoor shopping area is pictured on a sunny day.

Image source: Getty Images.

"Off mall" locations

Macy's has faced declining sales as shoppers spend less time at the malls and more time online. As a result, Macy's shares have suffered, falling 43% last year. Competition also comes in the form of off-price retailers as well as new ways to shop, such as at online resale shops like The RealReal or online services that tailor clothing purchases to the shopper, such as Stitch Fix. Along with other measures to combat lagging sales and bring shoppers back, Macy's is testing a new store format. And this is where the "outside the mall" part comes in. Market by Macy's is a smaller-than-usual Macy's store, located in "off mall" locations. In addition to apparel and other items, the stores will include local food and beverages. The first such store opened last week in Dallas.

As for Sephora, the plan is to open 100 new stores across the country this year, more than doubling its store openings from last year. Sephora said the shops, many smaller than traditional Sephora stores, will open in shopping centers, closer to where people live and work, with the goals being "ease" and "convenience." While parent LVMH didn't break out exact figures for Sephora sales, LVMH said the makeup chain saw growth in every region and drove gains in the selective retailing business group, which posted an 8% increase in revenue in 2019. For Sephora, unlike Macy's, the idea of moving into city centers isn't about recovery, but instead about keeping the momentum going.

Customers' daily routines

We have an example of a struggling retailer and a strong retailer favoring spots closer to customers' daily routines rather than expanding in the mall. A wise move in both cases, as the mall situation is far from bright. Credit Suisse analysts in a 2017 report wrote that they expect 20% to 25% of malls to close by 2022. The vacancy rate for regional malls rose to 9.7% in the fourth quarter of 2019, the highest since at least 2014, according to research firm Reis.

Now the question is: What do these new locations -- strip malls, open-air shopping centers, or spots offering room for a free-standing store -- have to offer, and could these points boost retailers' sales? Local shopping centers are often anchored by a grocery-type store and include shops that are part of a weekly shopping routine. They also are located in the heart of neighborhoods or on commuter routes. The key point here is people need to go to these shopping centers. So, by opening a shop there, the retailer is coming to the shopper rather than waiting for the shopper to come to it. It's the opportunity to reach the customer on an everyday basis instead of only when he or she decides to take a trip to the mall to buy new clothing or other nonessential items.

A smaller shop is another plus. They offer a more personal feel and a quicker shopping experience -- two more features people look for when they are shopping close to home on a weekend or on their way home from work. And finally, retailers might save on rent when choosing smaller spaces, depending on the location, as well as costs related to inventory and storage. All of these points support the idea of higher sales and more visibility as the stores become just as much a part of the shopper's daily life as his or her favorite grocery store.

Will other retailers follow?

Brick-and-mortar retailers still face the massive challenge of online rivals, and building relationships with customers and bringing them back to physical stores won't happen overnight. But being proactive regarding their physical locations is essential and may make the difference between the winners and losers in the coming years. Will other retailers follow Macy's and Sephora? They, and investors, certainly should keep an eye on how the new stores fare, because this is a crucial test for the evolution of retail beyond the mall.

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Stocks Mentioned

Macy's, Inc. Stock Quote
Macy's, Inc.
$18.41 (1.35%) $0.24
LVMH Moët Hennessy - Louis Vuitton, Société Européenne Stock Quote
LVMH Moët Hennessy - Louis Vuitton, Société Européenne
$593.08 (1.01%) $5.93
StitchFix Stock Quote
$8.27 (-0.36%) $0.03
The RealReal, Inc. Stock Quote
The RealReal, Inc.
$3.18 (-2.45%) $0.08

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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