The wedding took place in 1956 in Edina, Minnesota with the opening of Southdale Center, the first enclosed mall in the U.S. Its beloved anchor spouse was Dayton\’s department store. At the time, if an astute marriage counselor had defined the term \”anchor\” as a grip on the bottom of a vessel to restrict its movement, the world might have foreseen the eventual collapse of what was once a beautiful marriage. Here\’s how it worked in 1956 and up to 2000: the department stores attracted traffic (paying little to no rent) and the malls brought in a myriad of other shops, particularly apparel retail chains which paid higher leasing costs because they were blessed with the huge traffic the anchors attracted. The concept was a one-stop shopping experience, which would compel the shoppers to hang around and browse and shop through the mall for hours.

Manifest Destiny

As described in a report by BCA Research, \”Southdale positioned 72 stores across two levels joined by escalators and bookended by two department store anchors.\” The open floor plan connected the anchors and allowed for unimpeded views of nearly every storefront. The report continues, \”A garden court under a skylight set in the center of the mall with a fishpond, enormous sculpted trees, a 21-foot cage filled with brightly-colored birds, balconies with hanging plants and a café meant to evoke the feeling of a town square, inviting visitors to linger. Vast parking lots stood ready to accommodate thousands of their cars.\”

[callout]The mall/department store marriage was beginning to collapse in the 90s as neither partner was resilient enough to prop up the other and attract the customers it needed to thrive.[/callout]

The mid-50s was also the era of massive construction of the incredible interstate highway system, connecting the entire U.S. from coast to coast, south to north, and everything in between. This enabled the suburbanization of the country. And this, in turn, fueled the explosive growth of the regional malls (counting in at about 1200 in 2019),

Even before Southdale, there were thousands of department stores across the country, many of them experiential emporiums, some called \”castles of consumption\” selling anything and everything a family needed or wanted.

So, the marriage of Dayton\’s and Southdale established the model that would rapidly be replicated across the U.S., to the delight of mall owners and their anchors, the department stores. It also welcomed the hundreds of emerging apparel retail chains and other shops, restaurants, movie theatres, etc. It also delighted consumers. Until it didn\’t.

Broken Vows

The wedding looked to be made in heaven and delighted mall shoppers rounded out the family. One big happy community. However, circa the 1960s, the specialty retail sector exploded, primarily the apparel retail chains, expanding in both mall and off-mall locations. Walmart, Target and Kmart also launched in the 60s, adding clout to the entire discount channel. And of course, both of these models began to chip away at the foundations of the mall/department store marriage, eroding their share of market as their shoppers abandoned them.

Rolling into the decade of the 90s, department stores and malls would begin to see their loyal families stray to the big-box category killers like Home Depot, the late Circuit City, Best Buy, Barnes & Noble, Sports Authority, the late Toys \’R\’ Us, and others. This model, depending on the overlapping product categories within the malls and department stores, also added to, and accelerated their declining share of market.

An anomaly among traditional department stores during the 90s was Kohl\’s, who transformed its business model to appeal to their 35-year-old working mom who had no time for traveling to, and shopping through the malls. Accordingly, they located their stores in those moms\’ neighborhoods, with one floor, big parking lots, and central check-out, all for quick in and out. One estimate was that Kohl\’s stole $5 billion directly from JC Penney, primarily a mall anchor, during the 90s.

The mall/department store marriage was beginning to collapse as neither partner was resilient enough to prop up the other and attract the customers it needed to thrive.

The Apparel Apocalypse

Another significant factor in the marital break-up accelerated in the 90s with the over-storing and excessive production of stuff, particularly in apparel. This economic dynamic resulted in ferocious price promoting, which in turn, also accelerated the growth of the off-price and outlet sectors, further chipping away at the department stores and mall\’s share of market.

Apparel prices peaked in 1998, according to BCA Research, rebounded a bit in 2011 and 2012, drifted lower and then plunged to 1998 levels in May of this year. Women\’s apparel fared even worse, falling 27 percent from their 1993 peak to plunge back to 1981 levels.

And since apparel retailers account for 60 percent of malls\’ leased space (and more when department stores\’ apparel offerings are added in), the SOM erosion starts to hurt.
And then came fast fashion, that wondrous category, including the likes of Zara, H&M, Forever 21, among others. In short, they provide more new fashion, more often, more quickly and cheaply-a young woman\’s dream, but a department store\’s nightmare.

The Triple Whammy and Ultimate Collapse of the Marriage

While the mall and department store model struggled to keep their marriage alive in the 90s amidst declining share of market, then along came Amazon, ushering in the ecommerce revolution. Amazon changed everything as it took off in the mid 2000s, nimbly responding to the changing values and shopping behavior of the emerging young consumer culture. The next-gen had a collective desire for experiences over stuff and convenience and speed, all of which work against malls and department stores.
Then whammo! The Great Recession! To make a long story very short, both the malls and department stores (both in malls and free-standing) were limping alongside online commerce, while the competition continued to beat up on them. So, limping into the recession, they are almost crawling out of it. Many of the department stores had to take on heavy debt loads, much of it having to do with the necessity to make billions of dollars of capital investments in transforming their business models in order to compete in the new digital and technology era. One might say, the department store partner in the marriage transformed from an anchor to an albatross around the neck of the mall.

So, the drum beat downward intensifies for both malls and department stores. According to Euromonitor International, department store sales fell 23.5 percent between 2013 and 2018, from $99.6 billion to $76.2 billion. Coresight Research projected a decline to $56.6 billion in 2023. In 2017, Credit Suisse estimated that 20-25 percent of malls would shutter between 2017 and 2022.

Whoa!! These projections were made in October of 2019, before a sick bat ended up in a live animal market in Hubei province.

Divorce

We all know what has transpired in the last six months, the biggest nightmare for retailers combined with a totally unknown future. The accompanying charts in a report from BCA Research provide a horrific snapshot of store closings since the inception of Covid-19. The report adds that \”Green Street Advisors, the leading commercial real estate research and advisory firm, estimates that half of all mall-based department stores will close by the end of 2021.\” And, halfway through their fiscal year, mall-based retailers have seen their earnings plunge 256 percent, according to data from Retail Metrics.

And malls? \”Estimates of the share of malls that will close in the aftermath range from a quarter to a third. If the U.S. has around 1,200 malls, 300 or 400 may soon disappear. Their owners and the entities that have lent to them will recoup only a fraction of their initial investments. If their losses lead to a reduction in the availability of credit or trigger a self-reinforcing wave of defaults and bankruptcies, they could have a broader macro impact.\”

These retail brands and malls were in a downward trajectory for decades before the pandemic hit us. The virus has simply accelerated a collapse of a 64-year old marriage.
While neither the malls nor department stores will be seeking alimony, the leasing agreements they have will provide a field day for the lawyers.

Whatever sadness this collapse will bring to many, so many retailers and brands were blind to the changing consumer and expanding competitive world for decades. They continued to do \”what they had always done, just better.\” The final blow of Covid-19 will usher in a \”new normal\” and they won\’t be part of it.

For those who survive the divorce, but find themselves on life support, I say, hope for a bold transformative miracle.