It's been a really bad year for retail investors. The coronavirus pandemic has wreaked havoc on retailers, forcing many into bankruptcy, and that extends to major department stores like J.C. Penney (OTC: JCPN.Q), Neiman Marcus, and Lord & Taylor.
Some bankrupt retailers, like Lord & Taylor, are shutting stores permanently. Others, like J.C. Penney, are attempting to keep their doors open. But one thing's for sure: The more retailers that struggle, the more likely it is that malls will lose their anchor tenants.
What are anchor stores anyway?
Anchor stores are large retail locations, typically department stores, that are used to drive customers to malls. Also known as anchor tenants, these stores tend to be well-known names and are larger in size, like the ones referenced above.
Anchor stores get their names because many malls are actually designed around them. Walk through your local mall, and you'll probably notice that it has at least two department stores, typically on opposite ends of the property. And as you drive up to the mall, you can probably see those stores from the street.
Shopping malls rely on anchor stores to not just bring in customers but also to take up space -- and pay for it. Now anchor tenants aren't necessarily malls' most lucrative. Often, anchor stores are given incentives -- namely, heavily discounted rent -- in exchange for commiting to multi-year leases. But anchor stores also serve the purpose of attracting new tenants -- ones that may pay more of a premium for mall space. And it's for all of these reasons that shopping malls can't afford to lose them.
Unfortunately, though, they may not get a choice. Retailers have been struggling well before the coronavirus pandemic took hold, and many were making plans to close down less profitable locations before the term "COVID-19" became a cornerstone of everyday conversation. In February, for example, before the coronavirus outbreak took hold, Macys (NYSE: M) announced plans to close 125 stores over the course of the following three years. That news alone was devastating for mall operators. Throw in a slew of retail bankruptcies, and it's clear malls are in serious danger of losing more and more anchor stores in the wake of the pandemic.
What happens then? In a best-case scenario, mall operators pivot, reconfigure that space, source new tenants, and find ways to attract customers outside of popular department store names. In a worst-case scenario, malls risk closures themselves. It's the latter that has retail investors terrified at present, and understandably so. And sadly, there may be little that malls can do to retain anchor tenants intent on closing. As mentioned earlier, anchor stores often get a steep discount on rent. While malls could consider letting anchor tenants take up residence for free, the financial blow may not be worth it.
We don't know what the future holds for malls and the anchor stores they so heavily rely on. But the longer the coronavirus pandemic drags on, the more anchor stores are likely to drop like flies. And even if the crisis ends sooner than expected, the reality is that large stores just aren't as cost-effective to run as they used to be -- not when there's the option to let customers shop online and ship out orders instead. As such, in the coming years, shopping malls may start to look very different -- that is, if they're able to survive at all.