Are Regional Malls Becoming Obsolete?
By: Frances T. Odenthal and Robert J. Strachota
The retail industry, as we know it today, has a relatively short history. In 1956, when the Southdale Mall in Edina, Minnesota was constructed, it became the first enclosed regional mall anywhere in the world and pioneered a revolutionary concept in consumer purchasing. Prior to that time, all retail transactions were handled in "mom and pop" freestanding stores, or via catalog/mail order systems. At that time, almost no one envisioned that retail malls might one day replace the Sears Roebuck catalog.
In 1996, just 40 years after this dramatic renovation of the retail environment, regional malls are located in every major metropolitan area in the U.S., as well as in many outstate areas. And once again, the retail industry faces revolutionary change. Shifts in consumer lifestyles, demographics and buying patterns, combined with the emergence of shopping by computer, pose imminent challenges to regional malls.
These industry changes beg several questions, "What is the future trend for regional mall shopping in the U.S.?" "What does the future hold for retailers?" "How will these changes affect their businesses?" And perhaps most importantly, "Are regional malls becoming obsolete?"
The retail industry is faced with dynamic markets, divergent consumer demands, and substantial competition. In our role as retail appraisal experts, we are constantly observing and analyzing the trends in consumer attitudes and spending patterns. A summary of our key findings follows.
Changes in Consumer Attitudes and Spending Patterns
A. Consumers are motivated less by fashion and more by value, while still demanding service and attention to detail. We believe that this trend is due to the aging of the population.
B. Today's average consumer is too busy to spend large blocks of time shopping. A growing number of women are working (either part or full-time) and do not spend the same amount of time shopping as they have historically. We now live in a fast-paced society ruled by fax machines, powerful computers, voice-mail and E-mail. Thus, consumers are demanding goods and services instantly and are not willing to spend time shopping for many consumer products.
C. With the increasing pace of life, wardrobes are shifting from formal to informal. Many major corporations have dropped formal dress codes and adopted a more casual style, which easily accommodates working more comfortably at a faster pace. Additionally, some corporations have implemented work-at-home employment arrangements for selected careers, which allow employees control over their own dress code and work schedule.
D. As America has evolved from a primarily Caucasian population to one of significant ethnic diversity, there have been shifts in the types of goods and services demanded by consumers. Only recently have retailers become responsive to growing ethnic populations and begun to sell products reflecting ethnic demand. With a shift in ethnic populations, this diverse group appears to be "under-retailed" in many traditional shopping malls.
E. Demographic changes are re-defining household income. This is primarily due to the growing number of households which may be classified as "non-traditional" (i.e., single parent) as well as to the reduction in the number of persons per household. The spending patterns of these smaller households will be different from the traditional household. What's more, in recent years, the average household income of many mall customers has grown at a much slower pace and has, in many cases, plateaued.
Considering the changes in the consumer population and buying patterns, there must likewise be a change in the retailers' selling format. In order to satisfy consumer needs and remain successful, retailers will need to pro-actively adapt to the changing market. Consider the following trends:
Changes in Retail Selling Formats and Merchandising Methods
The successful malls will continue to expand internally and, if necessary, add free multi-level parking. In order to attract and keep existing customers loyal to the regional shopping center, mall ownership interests must be willing to change and update the look of the mall. The need for capital improvement reserves is crucial to fund periodic face lifts and guarantee long-term economic viability.
Aided by technology, retailers are changing the manner in which they order, stock and sell their inventory. Theft is easier to detect, and low levels of stock are easily determined (thus indicating the proper reorder schedule), and items which are not selling are easily identified and phased out of the mix. Demand for storage areas backing up shelf space is declining due to improved inventory monitoring and control.
The more open type of floorplate, providing more products under one roof and "one-stop-shopping," better suits fast paced lifestyles. Often, the cost of tenant improvements for retailers is less expensive, as the amount of finishing of the selling space is less than the historical experience. The majority of these types of retailers are the "power center" or "category killer" type of developments. These large volume discounters will be integrated into the most successful malls.
As consumers continue to demand the "one-stop" type of retailing, the demand for land is reduced. Typically, these types of developments require a significantly smaller site, and with a smaller building footprint, there is generally little need for side-shop space.
Retailers are finding that they are able to reduce the number of sales clerks. This is due to the increased automation of inventory and to the fact that consumers are becoming more "value oriented." This change is currently being reflected throughout many stores in the upper Midwest.
As the competition for the consumer's disposable income increases, retailers are experiencing tighter profit margins, necessitating an increase in sales volume to cover operating costs and remain profitable.
As the information highway continues to accelerate in speed and efficiency, we foresee the increase of electronic buying over the computer or TV, which will replace some portion of the traditional shopping experience. However, we believe this type of shopping will be successful only for "commodity" type items, such as hard goods. When shopping for soft goods, such as clothing, shoes, etc., the majority of consumers still prefer the personal experience of inspecting a product or trying on an article of clothing to ascertain a proper fit.
The trend of mixing shopping/dining and entertainment is clearly on the rise. Implementing a significant entertainment and dining component within a mall will attract more consumers. This traffic will likely benefit nearby retailers as well. There will be less reliance on women's apparel fashions, which has been the mainstay for many retailers.
How have these market changes impacted regional malls? To aid us in analyzing these trends, we consulted Dollars and Cents of Shopping Centers. This publication tracks the actual sales along with other pertinent data for super regional shopping centers. Using historical data, we analyzed sales figures for super regional shopping centers from 1981 through 1995. The findings? Median sales per square foot for a super regional mall increased 58% from 1981 to 1995. At the low end of the spectrum, the lower decile sales increased only 40% from 1981 to 1995. On the other hand, the upper 10% of super regional malls increased 88% from 1981 to 1995. (A chart detailing the sales performance for the lower, median and upper groups of super regional shopping centers is provided below.)
| Year | Lower Decile | Median | Upper Decile |
| 1981 | $100.08 | $125.92 | $162.50 |
| 1984 | $104.34 | $139.97 | $194.82 |
| 1987 | $122.46 | $179.02 | $272.48 |
| 1990 | $135.65 | $210.67 | $303.47 |
| 1993 | $132.49 | $195.19 | $303.16 |
| 1995 | $140.46 | $198.93 | $305.23 |
As we studied these sales further and graphed the results, it became apparent that the successful malls continued to become more successful and that, while the lower decile of shopping malls improved in performance, they were clearly not keeping pace with the most successful shopping centers ù a growing disparity between successful and unsuccessful shopping malls is clearly evident. The results of this analysis are shown in the graph on the following page.
Shenehon Company has had many years of experience in the appraisal of shopping malls throughout the Midwest. Based upon this experience, we have been able to identify changing attitudes, demographics and buying patterns of the consumer population which affect the market. When this is coupled with the changing retail selling formats, we make the following observations for today's regional malls:
- The best regional malls will remain prosperous because they possess monopolistic locations whereby competing developers do not have site development alternatives.
- Currently successful malls will continue to improve, and they will be the survivors. These malls will offer the best location, with superior visibility and easy access; they will provide a synergistic mix of retail tenants and entertainment, and they will possess a location with strong demographic profiles in the surrounding community.
- One significant characteristic of a successful regional mall will be access to free and convenient parking to ensure that consumers can spend their dollars on goods and services in the mall and not on parking.
- Regional malls which do not possess these superior characteristics, will fall behind and will experience increasing difficulty in remaining competitive.
- Successful malls will need to respond to the demand for a festive and entertaining environment.
- Competition will become more acute as consumer life-styles change and the majority of the population ages. In the years to come, it will be a challenge for the retailer to sustain sales growth and keep the aging consumer population coming back to the mall.
- Large retailers, who are well capitalized and have financial staying power, will be able to respond to the changing retail spending patterns and will survive the dynamic changes occurring in the retail environment.
- Many of the marginally successful malls will turn to some type of reuse to change the course of their declining prosperity. We expect that the bottom 20% of retail malls operating today will experience a change in use within the next ten years.
- As the retail environment continues to evolve, there will be an increasing differentiation between the truly successful malls and those on the "edge."
The question of regional mall obsolescence will ultimately be answered by the 21st century consumer. To a large degree, success will lie in the ability of the mall ownership to correctly interpret the dynamic market changes as they occur, respond aggressively to divergent consumer demands and perhaps, most importantly, to stay one step ahead of the competition.
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