E-Commerce. Bricks and Mortar Commerce (the term first used by Charles Dickens in “Little Dorrit” per Wikipedia) Shopping Malls, the media is ripe with a comment. I will summarize what’s being proclaimed on all sides in two blogs.  This first one will summarize what the data is saying and the second one will discuss how real estate is managing the problem.

Let’s get one thing straight.  Despite all the media hype (maybe fake news?)?  Statista a well-known source of economic statistics says that E-commerce was 9% of total retail sales in 2017.  Several other sources repeated this number but I don’t if they got the number from Statista.  The share is predicted to be 10% this year and13.7% by 2021,  Just let that sink in, 13%.  And Amazon? It’s four percent of total retail according to a NASDAQ analysis. (Definitely not Godzilla except in E-commerce itself.) The “Seeking Alphaville” website claims “Amazon isn’t displacing retail. Rather, it is merely killing off the weaker businesses. Moreover, retail centers and businesses are adapting and evolving”.

So why are malls closing? The concept of shopping mall from their appearance in the early 1950’s  (My family went to Shoppers’ World in Natick MA in 1952 less than a year after its openings one of the first in the country) was to have an anchor department store which would draw traffic and smaller “line” stores which would keep people shopping and lots of parking.  The land was cheaper and there’s weren’t any “Blue Laws” which required commercial ventures to be closed on Sundays.

Mall space per person

Forbes Magazine

From 1970 to 2015, the number of US malls grew twice as quickly as the American population, the Atlantic reported last year, citing research from Cowen and Company. “The US has 40 percent more shopping space per capita than Canada, five times more than the UK, and 10 times more than Germany,” it found. The Atlantic also reported that ComScore, a company that tracks online trends, found that in 2015 for the first time apparel and accessories overtook computers and electronics as the largest sales sectors.

In an article in Forbes dated June 12, 2018 “Retail Apocalypse? Put the blame where it belongs not on the Internet” Joe Gose mentions comments by CoStar Group’s (a national commercial real estate analysis firm) Director of Research Suzanne Mulvee that years of unbridled expansion, demographic changes, and stagnant wage growth were the primary culprits for the retail industry’s woes.

Nick Egelanian, president of SiteWorks Retail Real Estate Services, has been quoted as saying that “electronic shopping & mail-order” channels accounted for 9% of retail sales in 2017. But a breakdown of that figure revealed “pure play” e-commerce retailers contributed only 3.7% of those sales. And Amazon.com? It made up only 1% of these E-commerce sales.

Malls are retail bundles, and when bundles unravel, the collateral damage can be massive. When anchor tenants like Macy and Lord and Taylor’s fail, that means there are fewer Macy’s stragglers to amble over to American Eagle. Some line stores used to have “co-tenancy” clauses in malls that give them the right to change from a per square foot to a percentage lease (fixed price vs based on sales)  or break the lease and leave if an anchor tenant closes its doors. Landlords have stopped giving these terms in leases.

The US is not entirely alone in overbuilding. The British Financial Times quoted  Bloomberg that Chinese retail real-estate construction — for years the world’s largest — has peaked and is expected to decline over the next few years as developers struggle with overcapacity and the rise of e-commerce. Retail space finished last year in China’17 largest cities as tracked by CBRE was 10 million sq m (107 million sq ft!)  and will sink to 7.9  million sq m (85 million sq ft) this year.  Vacancies in some malls are at 20%. Online shopping in China at 20% of total retail is double that in the US. Weirdly malls at 10,000 sq m (108,000 sq ft) are expected to grow from 1,000 to 1,400 by 2019 as reported by JLL.

There is a dark side to online shopping.  Because of impulse shopping people spend more money there than they would at bricks and mortar. In June 2018 the Harvard Business Review recently published a study done by management consulting firm Oliver and Wyman. In their of 1,500 shoppers they determent among other things.

  • Most shoppers are not omnichannel, meaning shopping on-line and in stores.  83% of shopping journeys still happen within a single channel — overwhelmingly in traditional stores, which account for almost 80% of apparel shopping which is the largest segment of retail today.
  • Shopping journeys concluding in online purchases have baskets that are, on average, 25% larger. One reason is that many online services require a minimum purchase to get free shipping.  Also just the physical fact of handling purchases in a store can keep the amount down. For physical stores to share in the benefit they should drive their in-store customers to their websites.
  • On-line shopping is not necessarily impulse shopping, The survey said that 27% of online shopper do comparison shopping.

Amazon has not quite disrupted or displaced all companies and industries as some have suggested. Rather, it may have accelerated the natural Darwinism and survival of the fittest throughout the modern economy. It has secondarily affected industries by stimulating them to adapt in a new age of communication and technology. What the Retail industry and mall owners are doing in response is the subject of my next blog.