For years, retail locations have been shifting to an e-commerce model as the cost of maintaining physical stores has grown increasingly burdensome, and the ease of online transactions has made it less and less appealing to welcome customers to an actual location. But the COVID-19 crisis could be making the so-called retail apocalypse an even more imminent reality.
Even before COVID-19, a number of big retailers were making the decision to close stores. Macys (NYSE:M), for example, announced earlier this year that it plans to shut down 125 stores, or one-fifth of its locations, over the course of the next three years. Meanwhile, bankrupt retailer J.C. Penney (OTC:JCPN.Q) says it will close 154 stores in the wake of the pandemic, while high-end retailer Neiman Marcus will be shutting down 22 locations, including those in prime markets like New York City.
And now, another well-known department store is jumping on the closure bandwagon. Lord & Taylor recently announced that it plans to shutter 24 locations, seven of which will be in New York and six of which will be in nearby New Jersey and Connecticut. And that's bad news for real estate investors -- especially those with money tied up in shopping malls.
Why malls can't (easily) survive department store closures
Department stores serve as anchors for malls, and they're a draw for customers. When they start to disappear, consumer interest can begin to wane.
Also, department stores take up a lot more space than the typical retail establishment. Many, in fact, span multiple floors, which means they're hard to replace. When a typical retail store closes, that vacancy can be filled with yet another typical retailer. But it could take upward of a dozen retailers, not to mention some major reconfiguration and construction, to fill vacant department store space in malls.
As such, mall investors have a lot to be worried about as the COVID-19 pandemic drives more and more physical department stores into extinction. From a consumer standpoint, many of these stores will simply shift their inventory to warehouses so that customers can do their shopping online, and generous shipping and return policies can take the place of fitting rooms and in-person associates to fetch replacement sizes. But online shopping doesn't help mall owners -- quite the contrary. And so now, mall operators may really need to get creative if they're faced with extensive department store closures in the not-so-distant future.
That said, some malls are already making the shift from shopping hubs to entertainment centers. In these cases, vacant department stores could be converted to indoor amusement parks, bowling alleys, arcades, and movie theaters. Some might go a different route, converting that space to offices or medical facilities instead. Still, malls will be challenged in the coming years as the impact of COVID-19 continues to play out in the retail world, and the news of Lord & Taylor closing stores should serve as yet another wakeup call in an age where the retail apocalypse is becoming more and more real.