Apparel retail is ceding its lead role at the mall

Joel Groover/Shopping Centers Today - Mall landlords are doubling down on a strategy that would once have been unthinkable: reappraising their apparel-based tenant lineups. Several have been outspoken of late about this pivot, a signal to Wall Street of their commitment to this new direction. “If there’s any criticism to be made on our industry, it’s that we’ve been way too apparel-focused,” Simon Chairman and CEO David Simon said during a conference with analysts this past September.

Both he and Sandeep L. Mathrani, chief executive of GGP, touted their portfolios’ lowered exposure to apparel chains during second-quarter earnings calls this summer. In Simon’s portfolio the percentage of apparel tenants is now down to the low 40s as an allocation of gross leasable area, according to a call transcript. The exposure to apparel for class-A assets at GGP is also in the low 40s, Mathrani told analysts. That number, which would have stood at about 70 percent at the typical mall as recently as eight years ago, is now down to about 50 percent sectorwide, according to a report by Boenning & Scattergood, a securities, asset management and investment banking firm. So far this year only 25 percent of GGP’s new leases have been with specialty apparel retailers, Mathrani said.

CBL Properties is similarly conveying a new approach to tenants. “Our properties are not just about retail or shopping — they serve as gathering places for their respective communities,” said Stephen D. Lebovitz, president and CEO of the Chattanooga, Tenn.–based mall REIT, in a press release last month. “They are evolving through the addition of more food, entertainment, service, fitness and other new uses, and we are actively exploring adding hotels, medical, office, residential and education components.”

These shifts are notable, given U.S. malls’ heavy focus on specialty apparel and accessories over the years, experts say. Back in 2010 the top tenants in the portfolios of Simon and GGP were the same: Abercrombie & Fitch, Foot Locker, Gap and Limited Brands, according to an analysis that year. By contrast, today only a few of GGP’s top 50 tenants fall into the specialty-apparel category, according to Mathrani.

The dip in enthusiasm for these stores has everything to do with trends in the category, says Jeff Green, a Phoenix-based retail consultant. “We have been seeing this since the beginning of the year because of the number of store closures in the specialty-apparel segment,” he said. “Everybody in the mall space is trying to diversify away from apparel by bringing in entertainment and restaurants, or [by] moving big-box chains into the mall so as to downsize small-shop space.”

These moves come just as retailing in general happens to be growing nicely: According to an IHL Group report titled Debunking the Retail Apocalypse, retailers and restaurants this year will have opened 4,080 more units than they have closed. The fastest-growing categories include mass merchandisers, convenience stores and grocery chains. Specialty apparel is another story: By IHL’s count, the sector is set to lose 3,137 stores. Among the apparel chains closing stores this year are Abercrombie & Fitch, American Apparel, Ascena Retail Group, BCBG, BeBe Stores, Gap, The Limited, Rue21 and Wet Seal. “Shoe stores are also having a tough go here, and part of that has to do with Payless [ShoeSource] — they’re closing 700 stores,” said Lee Holman, IHL’s vice president of research and product development, during a webinar about the report. Among department stores, JCPenney, Kmart, Macy’s and Sears are scaling back store count, with a loss of about 400 department stores in total.

The IHL report underscores the reality that store closings are normal even in times of economic growth. And any notion that all of specialty apparel is in a nosedive is a misconception as well, according to Kelly Sayre, an IHL retail analyst. “The data in our study shows that 2,783 store closings in specialty soft goods are attributable to just nine retailers,” Sayre said. “Further, there are no less than 16 specialty soft-goods retailers that are showing a net increase of 20 or more stores for 2017. Five of those are opening more than 50 stores each.”

When it comes to apparel retailers and department stores, the real issue is sluggish growth and productivity relative to other tenant types, explains Melina Cordero, head of retail research in the Americas for CBRE. “The traditional mall model that was developed nearly 70 years ago is heavily dependent on categories that are no longer fast-growing or meeting today’s consumer demands,” she wrote in a September report.

To understand why some of these tenants fall short, start with the cash-strapped consumer, says Paco Underhill, founder and president of New York City–based Envirosell, a behavioral research and consultant firm. According to the Census Bureau, it was only last year that U.S. median household income hit $59,039, surpassing what it had been in 1999. As Underhill sees it, this stagnant income growth goes a long way toward explaining why fewer shoppers are loading up on full-priced fashions at the mall: Once Americans pay for cable TV, mobile phones, Internet access, health and child care, insurance, taxes, tuition and more, he says, they have little money left over for discretionary spending. “There are only two places where you have flexibility in your wallet: one is apparel, and the other is food,” Underhill said.

The need for consumers to stretch their dollars to the max is reshaping tenant mixes across much of the retail real estate landscape, says Mark Hunter, managing director of retail asset services for CBRE. “Overall, value and off-price apparel is a growing category,” he said. “You’re seeing this not only in outlet centers but also in traditional malls and typical power-center-format locations.”

In this bifurcated U.S. economy, Cordero says, luxury and discount retailers alike are well positioned, but stores selling branded, midprice apparel and accessories often struggle. “It’s the midrange pricing that has been hit the most, and that tends to correspond with the tenants you see in the malls,” she said.

In this environment, off-price retailers such as Burlington, Ross and T.J.Maxx are among the winners. According to a September report by JPMorgan, the off-price retail sector will grow by up to $19 billion over the next five years. If current trends hold, department stores will lose about $22 billion in sales during that period. Off-price chains deserve credit for smartly capitalizing on the rise of the value imperative, Cordero says. “Off-price retailers like T.J.Maxx have really invested in their store formats and in their branding and marketing,” she said. “Going into a lot of these stores, you do not feel like you’re in a bargain basement. There has been a change in the image or the stigma around buying off-price.”

Fast-fashion chains Forever 21, H&M, Uniqlo, Zara and others, known for their discount pricing, also continue to perform well in ways that are reshaping mall tenant mixes, Green says. “They’ve taken a big chunk out of the sales of traditional U.S. apparel chains,” he said. As Holman noted during the IHL webinar, so far this year clothing and shoe sales are off by 1.1 and 0.9 percent, respectively, but fast-fashion sales are up by 6 to 7 percent. On the department-store side, IHL cites the deleterious effects of cosmetics and beauty concepts striking out on their own. “Companies like Sephora, Ulta Beauty, Lush and Body Shop are opening individual stores instead of being sections of department stores,” said Greg Buzek, IHL’s president, during the webinar. “Those are big, big changes that have affected the margins and the traffic within department stores.”

Slashing prices is one way for mall-based apparel chains to try to compete, Cordero says, but this is hardly optimal for businesses that had mostly been charging full price before the recession. “Consumers may actually be purchasing the same number of apparel items they were buying 10 years ago,” she said. “It is just that the pricing on those items has changed significantly, so the volume, in terms of sales, is actually lower than it once was.” Competing in the e-commerce realm, too, tends to become a drag on these chains, Cordero says. “The pressure apparel retailers are facing is much more on the profit-margin end of things as opposed to losing a ton of share to online players,” she said. “The problem is that the cost of operating e-commerce is much more expensive than the cost of operating a store. So even as sales may be flat or growing, [retailers’] costs are going up.”

But just because specialty apparel is down does not mean it is out, some say. One intriguing possibility is that a breakaway fashion trend could reinvigorate sales, Cordero says. It has been about 12 years since so-called skinny jeans became enormously popular, she notes. “When a fashion trend like that comes out, it then spurs all of these other purchases around that item: certain kinds of tops that go with skinny jeans, or shoes,” Cordero said. “There are some in the apparel industry who believe we are overdue for the next new thing.” Individual chains can also shine by scoring a hit with shoppers. American Eagle Outfitters, for one, surprised Wall Street by posting same-store sales growth for the second quarter ended July 29. The retailer credited the popularity of its Aerie lingerie, sales of which had jumped by 26 percent.

or well over a decade, Underhill, author of the books Why We Buy (1999) and The Call of the Mall (2004), has urged U.S. mall owners to make their malls more like those in Europe or Asia, where tenants typically include grocers and other nonapparel uses. Now Underhill lauds the accelerating efforts of U.S. landlords to take their properties in this direction. “They are recognizing that if a mall is going to succeed, it has to be more of a destination,” he said. “That means bringing in other things that drive traffic. It could be food, electronics — everything from a locksmith to an art gallery.”

GGP’s portfolio now includes 58 movie theaters, 36 entertainment concepts, 14 fitness centers and 12 grocery stores, as Mathrani noted in his earnings call. The firm has also added mixed-use elements to roughly 75 percent of its properties, he said. The latter tally includes 15 hotels, 6 million square feet of offices and 2,000 residential units. “It’s all about location, location, location,” Mathrani said. “Our centers are within an hour’s drive of 56 percent of the U.S. population.”

Already, U.S. malls have doubled the amount of space they lease to entertainment and food-and-beverage tenants, according to the Boenning & Scattergood report. The report writers caution, however, that so far the prime beneficiaries of these moves have been the owners of higher-end malls; those with lots of class-B and ‘C’ properties will have a harder time replacing department stores or wooing the best nonapparel chains.

“U.S. malls have seen declines in traditional retail categories, particularly among apparel tenants,” the analysts wrote. “However, nontraditional retail categories, including food-and-beverage, have seen a consistent increase in sales during the past five years. For the first time ever, the value of restaurant sales surpassed those of grocery stores last year. The operators within our coverage universe have continuously repositioned their store base and tenant mix to maximize tenant sales and rental income.”

Apparel trimming seems to be a good fit for many malls.