Where Did My Shopping Mall Go?

The growing popularity of online shopping is remaking the world of offline shopping—stores are getting smaller, malls are getting scarcer. Rajiv Lal and José Alvarez look ahead five years at our radically transforming shopping experience. Plus: Book excerpt.
by Sean Silverthorne

The new book Retail Revolution: Will Your Brick-and-Mortar Store Survive? argues that traditional store-front retailing is at an inflection point, under tremendous pressure from ecommerce and the changing wants and needs of a new generation of shoppers—the millennials.

In the third and final part of our interview with authors Rajiv Lal and José B. Alvarez, they discuss what the future of storefront retailing looks like and how its transformation will also change the economy and society.

Sean Silverthorne: What is happening to the shopping mall? According to mall researcher Green Street Advisors, more than 20 enclosed malls have been shuttered over the last few years with another 60 on the endangered list.

José Alvarez: Ecommerce has significant implications for the current conception of the mall. We are seeing that traffic is down, so cross selling and upselling are down, impulse buying is down, therefore basket size is down—so everybody in the mall is affected by traffic being down. If you have two or three major traffic-driving tenants in trouble, this affects the entire mall. This then creates a domino effect in the entire community in terms of tax base, employment, and blight. For the longest time nobody thought malls would be seriously hurt by ecommerce but now we have enough evidence to believe that the tsunami is actually coming. If you are not careful about thinking through the implications, you will be caught by surprise in many ways.

“What's the impact of all these changes on jobs, tax base, and blight as you lose thousands and thousands of stores around the country?”

Q: Are some malls still working well?

Alvarez: Some you see succeeding are experience-based malls, ones that have restaurants, movie theaters, and other sources of entertainment or services. The other place where you are seeing malls thrive is at the high end. The luxury malls, what the industry calls A-class malls, are doing very, very well. It's the B- and C-class malls that are in trouble. These malls are targeting the income-constrained middle- to lower-middle class consumers, and that's really where the problem lies.

Q: We've seen this phenomenon recently where wages are stagnating or declining What are the retail implications of a shrinking or bifurcating middle class?

Alvarez: Traditionally the US economy has prospered on the economic well-being of the middle class. Many of the mass merchants have gone after the middle class, but as income bifurcation happens and the middle class tends to disappear, you don't have the disposable income to take advantage of. In just about any category it is really difficult to go after the middle, so you wind up with this split between the dollar stores and others who provide the low end, and those targeting the high end. Both of those are doing fairly well from a traffic and margin perspective. Ecommerce is making life most difficult for players targeting the middle class.

Q: What are the public policy impacts when such a great driver of the economy as a robust middle class starts to disappear?

Alvarez: Right. What's the impact of all these changes on jobs, tax base, and blight as you lose thousands and thousands of stores around the country? I don't think policymakers fully understand yet what's going to happen, but people are starting to get an inkling. Politicians are visiting malls in their districts and thinking, "What the hell happened here?" There is more and more of that awareness occurring. So policymakers are near an inflection point, too—they are going to have to start thinking about solutions to this problem. Some have suggested taxing ecommerce to blunt its growth, but it is likely too late to change behaviors that have been engrained over the last decade.

An abandoned escalator in an abandoned shopping mall. ©iStock.com/Versionphotography

Q: One major retailing trend that Retail Revolution points to are that retailers will reduce store count and also reduce the size of those locations as online commerce begins to satisfy more and more demand. What is to become of all this retail space? How do consumers go and "kick the tires" of items they might want to buy?

Alvarez: Over time you might get some very interesting things happening. For example, in electronics, manufacturers need to have Best Buy as a partner. If you are investing a billion dollars on the next Galaxy launch at Samsung, you don't want your R&D to just become a line description on Amazon, maybe fifth or sixth on the list. You want people to touch your product and actually get the brand experience. You could get to a point where stores like Best Buy become just showrooms and fulfillment is done by Amazon because they are much more efficient at it. I could envision a time when some of these retailers become sales arms and showrooms for the brands that really need them to sell their goods.

Rajiv Lal: You could really reimagine a story where there would be manufacturers, showrooms, and fulfillment—Amazon. There would be no transactions in the store and the showrooms would get paid by the manufacturers, by the brands. However, retail then becomes a real estate play, as is true in Japanese department stores.

Alvarez: This isn't something that would happen overnight but you could imagine it as people get more and more comfortable in the online space. I'll go to the store to figure out what I need and it will get delivered to my house tonight, where it will be set up and ready to go.

Lal: Furniture is often sold that way today. It's a showroom where your order is customized and delivered in six weeks.

Q: What retail segments are most vulnerable to ecommerce?

Alvarez: I think changes in consumer behavior are going to make the food space more vulnerable in the next five years. There is going to be enormous change, both because of the way people eat and because new models are starting to come into the equation that will erode the brick-and-mortar business. You see it already. There are a lot of grocery store closures around the country. Supermarkets are moving to much smaller formats, much more prepared foods, and healthy foods, because they are getting hit by many competitive threats that make large stores unprofitable.

And now this thing called ecommerce is going to get much bigger than the current half-percent of the retail grocery market. You see the shakeout happening in London already, where more than 10 percent of sales are online. Five years ago people would have said Tesco was impervious. But now they are in trouble and part of the problem is that ecommerce has become more significant.

Lal: Another thing that has happened in the economy is that the need for convenience has gone up dramatically. Most category-killers were destination stores, but over time people didn't want to spend that much time traveling, so smaller formats closer to your home are becoming the rage for almost every retail sector. Part of that is being driven by Amazon, because they can quickly deliver to your home. It's all relative. When Amazon or Google Express was not there, driving 20 minutes was not that big a deal. Now 20 minutes seems like an unnecessary exercise.

Other Stories In This Series

The Surprising Winners and Losers in the Retail Revolution
Retail Reaches a Tipping Point—Which Stores Will Survive?

Retail Revolution: Will Your Brick-and-Mortar Store Survive?book excerpt

The Trends Shaping Retail's Future

From Retail Revolution: Will Your Brick-and-Mortar Store Survive?

By Rajiv Lal, Jose Alvarez and Dan Greenberg

Brick-and-mortar retailers face a host of challenges in the years ahead. For some retailers, ecommerce threatens to digitize the products they sell and leave them without anything meaningful to stock in their stores. For others, hyper-competitive online retailers with operating, price, selection, and convenience advantages render their brick-and-mortar formats unable to earn their cost of capital. A few retailers face the challenge of successfully capturing the opportunities ecommerce presents to increase the productivity of their existing brick-and-mortar stores.

The vast majority of shoppers, aided by the transparency of technology and conditioned by the Great Recession, are becoming more price-driven causing many brick-and-mortar retailers to become unable to compete. Furthermore, some hyper-informed customers now connect directly with manufacturers, cutting retailers out of the transaction entirely. As shopping trips, both online and in-store, become more targeted and baskets shrink, retail continues to fragment between brick-and-mortar stores and ecommerce. As consumers, too, fragment along income lines, retailers that have depended on a broad middle class are finding that their one-size-fits-all formats now fit only a narrow segment of the population. Finally, much of retail growth over the last three decades has relied on aggregating volume to support a large store infrastructure. However, this volume may not materialize in any channel in the coming years. Millennials, who are soon to become the main consumer segment in the economy, are expressing decreased consumption due to better utilization of existing goods, lower spending capacity, lower desire to consume, and delays in key life events that drive consumption (e.g. marriage, children).

A key tenet of this book is that retailers are not all equal in facing these threats. While some retailers will manage through this revolution, many will perish. The old strategy of containing shrink and growing incremental store traffic two percent per year will not save stores. Rather, we are at an inflection point for brick-and-mortar retail, and survival requires comprehensive strategies that in many cases will transform and revolutionize brick-and-mortar retail as we know it. The strategies outlined in this book are a good starting point for retailers to rethink their businesses.

This retail revolution will not occur in a vacuum. Brick-and-mortar retail is at the center of many parts of our society—it bridges the gap between consumers and brands, brings Americans into the workforce and helps them advance their careers, attracts traffic and a sense of community to our towns and cities, and plays a very important role in America's local and national economies. The shifts in retail that we have described will likely shrink store counts, square footage, and retail employment. Municipal, state, and federal governments will need to pay close attention and find solutions to the increased blight and decreased tax base and employment that are unavoidable consequences of survival strategies on the part of retailers. The new retail landscape requires strategic thinking not just from retailers and landlords but from policy makers as well.

Post A Comment

    • Lucy Bitts
    • Marketing Director
    I loved the furniture store example from Prof. Lal, and the six-week wait time. Why do I think three-day custom furniture delivered is a great business opportunity? Who happily waits six weeks for anything anymore?
    • Ananth V
    • Founder & CEO, Techdivine Creative Services
    Powerful and extremely insightful post.We are able to see and feel all every aspect discussed in this post all around us these days. Increase in ecommerce needs from brands and sadly but vividly an equal and direct increase in the number of malls getting shut down.

    Thanks for sharing.

    Ananth V
    • Richard Gardiner
    • Urban Planner, Self Employed
    I am not so convinced that ecommerce will rule the world. Compared to driving to a store, even a shopping center, where there is no extra cost (and hidden profit) for going home with your purchase, ecommerce charges an extra cost for "handling and shipping", sometimes priced almost as high as your purchase. Clearly the ecommerce store is making a substantial hidden profit as the actual cost of shipping by US Postal is no where as high.

    What we may be looking at is the maturation of shopping centers into more specialized participatory experiences, i.e. entertainment, and product offerings that shoppers prefer to see and feel. Creative shopping center owners and developers will survive, and thrive, if they start thinking horizontally.
    • Mario Valori
    • Business Consultan, Own
    Congratulations for such an excelent to-the-point and inshightful article. Nothing to add, except for that fact that this probably explains somehow the unprecedent flow of investments in malls and large commercial centers in developing countries, where ecommerce has not reached (yet?)an important share in retailing business. Indeed, malls and commercial centers have actually become a hot investment in Sount America, the region I am more familiar with. Besides, it meets a compelling customer behavior to having human interaction when buying. Maybe another corner of the same issue for further discussion...
    • Anonymous
    From my very personal perspective, I find interesting -- in almost all commentary on retail -- that two things are consistently overlooked. First, I don't go to malls because I can never find anything right for me. (For example, I'm a petite. Few clothing stores have a good selection of petite products). Second, going to a mall is a huge time waster. I have to drive there, hike into the mall from a large parking, keep walking to the store I want -- which usually doesn't have what I want. The constrained finances of the middle class may be part of the issue -- but it isn't the whole of it.
    • Sophie Willson
    • Trainee, Swift computers Pty Ltd
    Good Post! Actually this is true, as few years down the line more number of masses will prefer 'ONLINE SHOPPING' over shopping mall. The views on this are properly laid.
    Thank you for the information...
    • Mikkel Bager
    • CMO, MM Sport
    I do not see brick and mortar stores die. I see them getting transformed. Every time a store selling physical stuff is closing a new cafe, restaurant or specialty food store is opening. Human beings are social animals and commerce is social. And because of that there is no way that 50% of commerce will ever become e-commerce. What is happening now is that a re-configuration of retail is taking place. Certain products which are either better suited for buying online than in stores think travels. Or for very boring items which are not interesting to shop for online think office supplies e-commerce is/will become pre-dominant. Food , clothing , DIY and many other categories will always have a large component of physical stores.
    People move to the cities. Meaning more expensive store meters, smaller homes, smaller fridges which taken together induce a different format than the superstore. Which in certain categories is and will remaing being very successful with the large format. IKEA, Home Depot and more.
    I do not see problems for taxes, employment etc. since the guy who sold shoes yesterday will serve espressos tomorrow. I do see a transformation though. And one for the better. Less stuff. More experiences. Less ressource consumption more focus on people and shared experiences.
    • Joerg Zobel
    • CEO, Z Dragon Ltd
    Interestingly here in Asia the trend is different: people in cities like Hong Kong are happy to leave their small apartments for a while to go to shops. E-commerce is not big at all In China E-commerce is huge for low price items but consumers go to malls as a weekend entertainment activity. Plus they can put their kids in an indoor mall playground that has clean air.
    • Gary Ambrosino
    • CEO, TimeTrade
    I think the authors have hit the nail on the head when it comes to some of the transformational shifts in shopping behavior. But they miss on a critical point.

    We know in our company which services 40,000 retail locations, many in malls, that consumers are NOT as interested in touching the product. Last year we scheduled 85,000,000 appointments at the largest retailers and have learned an important lesson about what drives them.

    They ARE interested in getting knowledgeable help in finalizing the decision to buy something, much more than holding something in their hand. We found 88% of shoppers leave if they can't get knowledgeable help. They mention seeing and touching the product a lot less --only about 30% of them worry about that.

    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited
    E-commerce is becoming popular but I do not imagine that it will ever fully replace brick-and-mortar retail stores. There are plusses and minuses of both. While on-line marketing saves energy and time, it doesn't provide real feel of a host of items which one would like to actually see, touch and feel before choosing.
    The popularity of e-commerce in India whatsoever is amongst the tech-savvy upper class but a majority does not prefer this mode. It would be likewise for most developing and less developed countries.
    • John Tan
    • Home
    Good insights on the impact of brick and mortar shops due to the boom of e-commerce online shopping. However, I would think the current surge on online shopping is due to the early stage of a relatively new industry (10-15 yrs) as compare to the mature brick & mortar retail industry which is more than a few hundreds yrs everywhere around the globe. It is also true that due to property price appreciation, so much hot money coming in and so many shopping malls were built in the past, this has resulted over-capacity. E-commerce will bring the shopping mall industry back to the equilibrium state with many malls go out of business, and certain % of shopping will be done online, but that's it. E-commerce will not kill the entire shopping mall industry when many products and services are still best served by real shops and real sales persons.

    Wondering why the mail order business that was very hot in 70s and 80s didn't replace the brick and mortar shops? Same thing will happen to e-commerce when the % of online sales reach around 15-25% of the overall retail revenue in most countries.

    Cross-border e-commerce will even be more challenging when there are so many regulatory hurdles need to be overcome. At best this will take away 3-5% of the domestic retail business in most countries, unless there is a major change in customs and other regulations.
    • Suraj G. Jadhav
    Great statement to align thinking on this topic -- "Your strategy depends on what type of items you sell, who your competition is, and whether Amazon can effectively sell the items in your category ..."

    Looking at off-price retailers Ross, T.J. Maxx -- comps trend over past few quarters has seen basket size up but number of visits are down -- not a good sign for their type of business.

    The same consumer set that shops there are also engaged in digital and social world and while the value driver for such off-price retailers is still branded merchandise at throwaway prices -- they checkin using Foursquare, Yelp - they tweet or post about sweet deals at these stores or what they bought.

    These could be avenues to forge connections in a retail format that thrives on word-of-mouth and today digital and social can amplify that word-of-mouth for them, often times for free.

    Given that they are rapidly expanding store numbers and Street seems to be rewarding them -- combination of Enhancing the Value of the Box and 'Expand' and Transform could be interesting.
    • Cheryl
    I'm not so sure about the prediction that people want to buy their food online and already prepared. Some of that depends on dietary trends. For example, for 20 years I ate low-fat. Now I eat low-carb. That means salads every day, and I make them fresh. Chopping lettuce is really no problem. I want to pick my own heads of lettuce to make sure I get the best ones, and I do that in person, at the store. If low-carb continues as a dietary trend, and if raw food diets expand in popularity, it could interfere with the predictions above.