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Will Amazon Replace Closed Department Stores?

Aug 11, 2020 by Maurie Backman
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Malls were in trouble prior to the COVID-19 pandemic, but in its wake, they're in even more desperate shape. That's because numerous shopping mall mainstays have declared bankruptcy in the course of 2020 -- notably, J.C. Penney (OTC: JCPNQ), a department store known for taking up large amounts of retail space, which filed back in May.

J.C. Penney had around 850 stores at the time of its bankruptcy filing and has plans to close hundreds of them. But there may be a way to put those and similarly large yet vacant retail spaces to good use: Convert them to Amazon (NASDAQ: AMZN) fulfillment centers.

A mutually beneficial arrangement

Vacancies could be the death knell of shopping malls, and a surge of retailers filing for bankruptcy in 2020 could end up driving them toward extinction. But now, Amazon is in talks with Simon Property Group (NYSE: SPG), the largest mall property owner in the U.S. with over 200 properties in its portfolio, to convert empty retail spaces into Amazon fulfillment centers -- warehouses that would process and ship out online orders.

As part of the deal, Amazon could take over larger spaces that department stores like J.C. Penney once occupied. Simon Property Group is, in fact, pursuing an acquisition of J.C. Penney that would give it more control over store operations. (Right now, Simon Property Group is merely a landlord in that relationship. If this deal goes through, Simon Property Group would actually own the J.C. Penney chain.)

Converting unused department store space to fulfillment centers would serve both malls and Amazon. For mall property owners, the optics of occupied retail space are more favorable than vacancies, and the revenue is key as well. For Amazon, taking over department stores puts its product closer to customers. With more strategically located fulfillment centers (malls tend to be physically closer to customers than warehouses), the online giant will be in an even better position to ship out orders quickly and cost effectively.

Of course, this arrangement would be an offbeat move for Simon Property Group. Typically, malls like to fill their spaces with stores that have the potential to draw in foot traffic. Amazon fulfillment centers don't achieve that goal -- they're warehouses that don't allow customers in the door. But given the way retailers are struggling, it's a strategic move.

Sears (OTC: SHLDQ) is another retail location that's prime for Amazon. Its mammoth stores could easily be convertible to warehouse space, and since Amazon isn't exactly strapped for cash for right now, mall owners stand to gain a lot by teaming up with it and bucking tradition.

Meanwhile, this move isn't such a reach for Amazon. Some of its existing fulfillment centers can already be found in old strip malls where retailers have gone out of business. Taking over department stores aligns with the online giant's quest to turn shipping into an art form of sorts, and the ability to expedite delivery times will only help improve its bottom line.

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