In the wake of the pandemic, a number of stores like Macy's (NYSE: M), Whole Foods (owned by Amazon (NASDAQ: AMZN)), and Kroger (NYSE: KR) are trying a new tactic to stay afloat: They're going dark. That doesn't mean they're shutting off the lights and calling it a day. Instead, these so-called "dark stores" are attempting to stay open by closing their doors to shoppers and transforming their spaces to order fulfillment centers.
Case in point: Macy's recently turned stores in Littleton, Colorado, and Dover, Delaware, into Omni Service Centers. Now closed to on-site shopping, these locations will be staffed to ship orders, fulfill pickup orders, accept credit card payments, and a few other services. For example, Macy's will offer a virtual shopping experience, where customers can communicate with sales associates on social media. Staff at these stores can be considered for new roles at Omni Service Centers, or they may have the opportunity to be hired by another location. Those who don't remain with the company may be eligible for severance compensation.
Let's take a closer look at what the dark store model means for Macy's.
The good news
First, it's great Macy's is working hard to figure out other ways to stay afloat. While the dark store model ceases in-store shopping for Macy's customers in Dover and Littleton, it also means these two stores haven't gone out of business completely.
Of course, for investors in mall real estate investment trusts (REITs), it's always good when retailers can pay the rent. By shifting gears, Macy's is able to still occupy the space and cater to both local and distant customers.
And therein lies the problem.
The bad news
That these two Macy's can still pay the rent will make REIT investors happy. Mall REITs have undoubtedly taken a beating during the pandemic. Macy's is Simon Property Group's (NYSE: SPG) biggest tenant. The REIT has seen its stock plummet over the past year, with numerous store closings even before the pandemic.
But keeping these locations open as dark stores means the real estate is being used, but shoppers won't be coming around. To be fair, on-site shopping is hit-or-miss these days because of social distancing and pending lockdowns as the second wave of COVID-19 arrives.
Still, REIT investors would likely prefer the option of using the commercial space for something else other than a fulfillment center. If the dark store model proves successful, this could mean more locations shutter to the public in the future -- meaning more shopping malls will be transformed into veritable warehouses.
Is there light at the end of the tunnel?
The glorious image of the department store giant writ large in Miracle on 34th Street has certainly faded. But Macy's is still hanging on. By 2020 standards, it's a success that the department store has been able to save two of its stores from closing.
As we head into the holiday season, these dark stores will hopefully be buzzing with order fulfillments. Will they be here to stay for the long run, or will they eventually close like so many others? Only time will tell. But for now, we'll be optimistic that stores are embracing other business models to keep the lights on.