Retail Apocalypse

In the 1980’s Buggles release, ‘Video Killed the Radio Star’, they pushed the point as to how technological disruption killed the prominence of the Radio DJ. And while no one in the team is grabbing a microphone or strumming on a guitar, we do draw some parallels with how e-commerce is ‘killing’ the mall, which has become a common narrative in ‘REIT land’. Although facts do get in the way of a good story, it would be remiss to ignore them. After growing at 23% to $2.3 trillion in 2017 (10% of sales), global e-commerce sales are expected to grow further at an annualised rate of 21% per annum through to 2020. The US and China account for around 70% of global e-commerce sales with China, the most exposed, at 23% of total sales, UK at 17% and the US lagging at 10% (although 10% of a significantly bigger pie). While this super growth in online has been achieved, brick and mortar stores in the US have grown by a paltry 2-3% per annum with no acceleration in sight.

And as the story goes, this strong growth in global e-commerce is being singled out for blame for the sharp increase in retailer bankruptcies and store closures around the world, particularly in the apparel space. According to Fung Global Retail & Technology (FGRT) brick and mortar store closures in the US reached a record 6,985 in 2017 with six chains - RadioShack, Payless, rue21, Ascena, Sears and Kmart - accounting for 48% of all closures. What’s not always discussed are the 3 433 store openings, with the bulk being large format grocery stores. Our analysis shows that closures are concentrated in B or Low Productivity malls where anecdotally, only eight of the 81 Macy’s store closures were in A-malls (held by the likes of Simon Macerich, General Growth and Taubman). Truth is that physical stores have evolved from being ‘the space where people pay for stuff’ to being part of a larger communication and marketing strategy. Malls with strong footfall provide an opportunity for the retailer to increase market share, market new concepts and improve brand awareness; these properties will continue to outperform; which strengthens the argument for online and physical presence…enter Omnichannel. As retailers refine their online capability, the physical store remains an important component of the retailing journey, with a focus on the customer experience; consider the irony of the Apple Store being a primary protagonist to online trading while still drawing significant feet to ‘touch and feel’ product.

Interestingly, outfits that were once considered ‘e-commerce only’ retailers, notably Amazon, have embraced this Omnichannel concept and started opening stores, even in these so-called relics we call the malls.

What’s the next phase? Well Amazon shook the grocery retail sector in June 2017 when it announced the acquisition of Wholefoods Market for $13.7 billion in cash. The market expected an immediate disruption in the sector with huge price cuts and e-grocery retailing starting to take market share from its peers. However, more than seven months after the deal closed, the market is realising that it will take some time for Amazon to figure out the best e-grocery strategy and how to make the most of the physical stores. These stores could be used as distribution hubs for the last mile delivery process, which is the final step of the delivery where the product reaches the consumer. This is important with respect to perishable groceries as well as delivery times (Amazon Prime is next-day delivery and Amazon Prime Now is two-hour delivery). Apart from using the stores to sell Amazon products it also could be used as a pick-up and return location for purchases made online. Therefore, as important as the potential impact is for e-grocery, is the fact that the 466 Wholefoods Market stores allow Amazon to become an Omnichannel retailer.

Green Street Advisors points out that e-commerce conducted on mobile phones is expected to account for 50% of total e-commerce in coming years. Mobile phone voice control systems such as Siri and Google Assistant, coupled with voice activated hardware such as Amazons Echo and Google Home, are paving the way for voice to be the next big disrupter and provide a boost to e-commerce market share due to their convenience and ease of use.

So…is the mall dead, no. But the mall must evolve to survive.

As REIT managers our default position is to defend the mall for fear of becoming jobless! At 10% of global sales, e-commerce can grow at 10 times the rate of physical sales but will not completely destroy the mall in the foreseeable future. However, in an effort to be objective the US market in particular, with an 8% vacancy rate, is over-shopped and mall operators are behind the curve.

The US with its 1600 malls, 760 million square meters and 1.6 square meters per person has been slow to adapt with even the A class operators lagging the trend. US regional malls on average have 46% department store exposure and around 14% in ‘entertainment and food’ versus European malls that have 8% department store exposure with 34% exposure to ‘entertainment and food’. European (and South African) malls also have higher grocery store anchor exposure, which is likely to be more defensive although not invincible to e-commerce disruption. Through countless treks through malls across the globe we believe mall REITs have a steep slope to climb to avoid becoming irrelevant. Malls must progress from ‘places to buy stuff’ to where you want to be seen, entertained and fed while you experience the power of new brands and possibly end up with some ‘stuff’ once you’ve sent all the tweets and selfies to your friends who will be impressed by where you are.

May 22 2018 By Anil Ramjee, Global REIT Analyst at Sesfikile Capital Retail