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CHAPTER 3

Apocalypse? No.

“Reports of my death have been greatly exaggerated.”

—MARK TWAIN

From recent headlines you might assume that sales in brick-and-mortar stores must be falling off a cliff. You’d be wrong. Yes, e-commerce is growing at a much faster rate, but revenues in physical stores in most major markets remain positive. Another mistaken belief is that online shopping is becoming the dominant way people buy. In fact, even with the dramatic shift of the past few years, e-commerce still represents only about 11 percent of total retail sales in the United States. The portion is expected to remain below 25 percent even ten years from now.

So the constant media references to a “retail apocalypse” lack both accuracy and nuance. We’re all better served by avoiding painting the industry with too broad a brush or spinning false narratives.

Yet it is true that far more stores closed in the US during 2019 than during the financial crisis. Moreover, dozens of once-prominent retail brands, such as Payless ShoeSource and Barneys, have filed for bankruptcy in the last few years, with quite a few deciding to dissolve, closing their doors forever. Others that have re-emerged are most likely only postponing the inevitable, which is one of the reasons I have been referring to Sears’s prolonged descent as “the world’s slowest liquidation sale” for quite some time.

Years of over-building, the failure of most traditional retailers to innovate, shifting customer preferences, and market-share grabs from transformative new models that aren’t held to a traditional profit standard are creating fundamentally new dynamics. Physical retail is not going away, but digital disruption is transforming most sectors of retail profoundly.

Physical Retail Is Still Growing

In opposition to the retail apocalypse narrative are some important facts. During 2019, major retailers in the US opened a lot of stores—by one estimate, well over 3,500. Sales growth through physical stores was positive for the tenth straight year. Moreover, the market research company eMarketer estimates that brick-and-mortar store sales’ total incremental growth exceeded that of online shopping.⁴ While brick-and-mortar sales are growing at a far slower pace than digital shopping, the reality that they are still growing does not mesh well with the idea that physical retail is dying—or will die any time soon.

In fact, apparently quite a few well-known retailers failed to get the retail apocalypse memo. Brands like TJX, Five Below, and Dollar General are all profitable and opening many brick-and-mortar locations. Collectively, they’ve announced plans to open many hundreds of stores per year. A little outfit from Seattle is also making a multi-billion-dollar bet that brick-and-mortar is here to stay with their acquisition of Whole Foods and expansion of their cashier-less Amazon Go format, along with Amazon Books and Amazon 4-star stores and an apparent big play in traditional grocery. Amazon sales through physical stores are already in excess of $16 billion, which is greater than those of Nordstrom, Bed Bath & Beyond, and many other household names.

Isn’t It Ironic?

Not only isn’t physical retail dead, dozens of DNVBs—think Bonobos, Glossier, or UNTUCKit—that once believed they could become large, profitable brands as “pure-play” (online-only) e-commerce companies are now opening stores by the score. Many are also forging partnerships with legacy retailers for physical store distribution (such as Quip at Target and Allbirds at Nordstrom). In fact, some of these brands are now reportedly generating more incremental profits from their physical stores than through their e-commerce operations, most of which remain unprofitable. As these companies have thus far cherry-picked their initial locations, often launching with high-profile (i.e., expensive) locations in the ground zero of cool retail brands such as Soho or the Meatpacking District in New York City—or equivalent hipper-than-thou neighborhoods in other top-tier cities—their ability to scale profitably remains to be seen. But what has become clear is that the future success (or failure) of many of the bigger DNVBs will be determined by their physical store expansion strategies.

As it turns out, many customers like to touch, try on, and inspect products before handing over their cash. They like a knowledgeable salesperson to help them, or they enjoy shopping as a social event. From an economic perspective, these brands that want to expand and actively cultivate new clients are finding that customer acquisition costs are often far lower in a store than having to pay the digital tollbooth operators (Google, Facebook, Instagram). Moreover, e-commerce product return rates, which are often as high as 40 percent in apparel, usually run well under 10 percent for in-store purchases. The bottom line is that, for most retailers, legacy or disruptive, a physical store strategy is, and will remain, an essential part of creating a remarkable, sustainable business.

It’s the End of the Mall as We Know It . . . And I Feel Fine

For those promulgating the “retail apocalypse” narrative, another key component of their Chicken Little logic is that malls are dying. Moreover, much of the blame is cast on the growth of e-commerce.

When the longer view is taken, a different story emerges. Regional malls—and their department store anchors—have been on the decline for more than two decades, well before e-commerce was a gleam in Jeff Bezos’s eye. The first wave of disruption arrived with the national expansion of big-box category killers and discount mass merchandisers. The most recent wave of disruption has come mostly from the rise of off-price and dollar stores. So while it’s convenient to blame Amazon and its brethren, the ascent of online shopping is only one piece of the puzzle. And due to rampant over-building, a real estate correction was sure to come at some point.

Second, many dying or struggling malls are being killed by other malls. As growing retailers situate new stores in newer suburban areas with favorable demographics, an area’s “retail center of gravity” often shifts. A mall that was built in the ’60s or ’70s may lose relevance as more and more retailers locate closer to an area where a greater density of high-spending shoppers now reside or work. In many instances, a new mall with more desirable tenants has been built during the past decade or so to capture those sales.

An example that illustrates what we have seen play out in most major metropolitan areas is Prestonwood Town Center. Prestonwood was an enclosed two-level mall built in 1979 on the affluent north side of Dallas. It featured five anchor tenants, including Neiman Marcus. As Dallas grew, new pockets of affluent shoppers emerged in nearby or adjacent areas. To address these developing trade areas, a few years later another upscale mall opened a couple of miles away. Then a huge regional center anchored by Nordstrom was built several miles north. Then plans were drawn up for a luxury- and fashion-oriented center a mere ten-minute drive from Prestonwood, enticing Neiman Marcus and Saks Fifth Avenue to relocate. Prestonwood closed in 2000 and was eventually demolished.

Third, many malls are actually doing quite well. The nation’s so-called A malls represent about 20 percent of locations but generate about 75 percent of total mall volume. With few exceptions, these 270 or so malls have stellar (and growing) productivity and low vacancy rates. To use another Dallas example, NorthPark Mall has among the highest sale productivity of any shopping center in North America and is anchored by what are reported to be among Neiman Marcus’s and Nordstrom’s top-performing stores. Hot brands like Peloton, Eataly, Tesla, and Outdoor Voices all have locations. Relatively few of these top-tier malls are being affected by the closing of anchor tenants. And specialty store vacancies are typically snapped up quickly, often by the DNVBs.

Fourth, while the closing of department stores is hitting “B” and “C” malls disproportionately hard, it’s not all bad news for mall owners. Many department-store anchors have been chronic underperformers for years. As long as these albatross tenants continue operating, the mall operator receives paltry rents from big chunks of their leasable space while generating little incremental traffic. In reality, the loss of some poorly performing retailers is often creating new, more profitable opportunities. One scenario is a transformation of tenant mix, characterized by a shift to more entertainment options, restaurants, and/or professional offices. Sometimes, nontraditional retail tenants (think Dick’s Sporting Goods or Target) become anchors.

This is not to say that some malls won’t die a painful death, never to return from the ashes. But the apocalyptic vision some forecasters paint is far from accurate. Most high-end malls will continue to thrive with an approach that looks rather familiar. Many others will evolve to be quite different, but will remain far from hurting, much less dead. Others will be radically repurposed—often through either a partial or complete demolition of the center—to a more lucrative multi-use development, which will likely contain some retail, but will be principally anchored by office, apartment, and restaurant tenants.

Under Demolished

In the US (and a few other markets), cheap debt and false optimism led to decades of over-building of retail space. Since 1975, retail square footage in the US has expanded at four times the rate of population growth.⁵ America now has over 23 square feet of shopping space per capita. Canada has about 16.4, while the UK, France, and Spain each have less than five. The number of malls in the US grew from 306 in 1970 to 1,220 in 2016, a fourfold increase during a time when the population grew only 1.6 times. Even if e-commerce didn’t exist, commercial real estate has long been overdue for a major correction. The seismic shifts of the last several years are merely accelerating it.

Such an abundance of retail space has exacerbated the troubles of those brands that are poorly differentiated—what I often refer to as the boring middle. Moreover, so much of retail has been highly promotional and discount oriented for many years. But with more competition fighting for limited business, price competition is exacerbated, in turn pushing margins down. Retailers that failed to navigate these changes, particularly those stuck in the middle, have been forced to close stores in droves.

The Stores Strike Back

A couple of years ago legacy retailers like Walmart and Best Buy were often seen as laggards, soon to be made progressively more irrelevant by Amazon and others. In fact, some analysts and “futurists” saw e-commerce reaching a 30 percent share of total retail by 2025⁶—a prediction that now doesn’t look terribly prophetic—and many questioned why anyone would invest in physical stores. Yet a funny thing started to happen. Not only were many sizable retailers—including brands as diverse as Sephora and Tractor Supply Company—continuing to open many new stores, but a handful of savvy legacy retailers started using two really important strategies. These pivots have allowed a number of major players to not only mitigate the impact of, but actively participate in, the growth of digital commerce.

The first was correcting mistakes made, in some cases, more than a decade earlier. One of the most important facts lost in everyone’s hyper-focus on the growth of online shopping is that, according to Forrester,⁷ digital channels influence nearly three times as many physical store sales as e-commerce transactions. Unfortunately, many traditional retailers invested in e-commerce as a completely distinct sales channel and managed it (as some still do) as a separate strategic business unit. Not only did this wildly miss the reality of customer behavior, it caused brands to systemically make the wrong decisions about where and how to allocate their investment dollars.

Once these brands started to realize that digital was not only an online transaction channel but also a way to guide customers into their physical stores, they started to rethink what digital commerce really meant. Rather than fear digital, they started to harness its power. In practice this required greatly increasing their e-commerce capabilities to neutralize some of Amazon’s advantages. But it also meant understanding the critical role of digital in driving customers to physical stores and helping convert them once they got there. The more recent resurgence of Target is but one prime example of retailers that embraced this path.

The second shift allowing brands to regain their footing is how they view their brick-and-mortar operations. A brand that fundamentally regards its stores as liabilities seeks to optimize them for efficiency. That often begins a cycle of cost cutting and store closings. Conversely, if a brand sees its stores as assets, it must still work on improving its e-commerce and digital enablement capabilities. More importantly, it leans into making its stores more relevant by leveraging the many benefits of stores that online-only retailers can’t match: providing immediate gratification; being able to touch, feel, and try on products; allowing for free and safe product pick-up; obtaining sales help from a real live person; and so on.

Physical store spaces absolutely must transform for a digital age—in many cases quite radically. But the idea that all—or even most—of physical retail is doomed is clearly wrong.