It's no secret malls have been sluggish in recent years, and the coronavirus pandemic has only made the situation exponentially worse. With retailers filing for bankruptcy and major department stores like Macy's (NYSE: M) announcing store closures, malls are growing increasingly desperate for tenants to avert a major vacancy crisis. So Simon Property Group (NYSE: SPG), the largest U.S. mall operator, is negotiating with Amazon (NASDAQ: AMZN) to convert vacant department stores into fulfillment centers.
The move is strategic for both parties. Amazon has roughly 100 U.S. fulfillment centers but wants to improve its delivery speed and order fulfillment even more to edge out other retailers with physical storefronts. Because malls tend to be conveniently located near highways and main roads, opening fulfillment centers in shopping centers makes sense for Amazon -- especially if the price is right.
Meanwhile, Simon Property Group needs tenants to occupy the large spaces dying department stores are leaving behind. Though it's currently trying to save bankrupt retailer J.C. Penney (OTC: JCPN.Q), the reality is that Simon can't revive every anchor store it stands to lose in the near term. So switching gears and opening its doors to Amazon could serve the very important purpose of pumping revenue into Simon as many stores are closing and tenants aren't able to pay rent or are in the process of negotiating their lease terms in an effort to lower their rent.
Will an Amazon partnership backfire for Simon?
Clearly, there's lots to be gained for Simon if it continues to pursue a partnership with Amazon. But that relationship could backfire too. For one thing, it could anger Simon's existing tenants, many of which undoubtedly blame (or partially blame) Amazon for their own revenue struggles. And that could lead some retailers to not renew their mall leases when they come due.
Furthermore, Amazon fulfillment centers won't draw customers into malls; quite the opposite -- they might turn shoppers away, especially if they wind up replacing beloved department stores.
As such, Simon does need to proceed with caution when opening its doors to Amazon. Though the added revenue is an obvious draw, Simon shouldn't forget it's a mall owner, not a warehouse operator. If it alienates its core tenant base, as well as consumers who frequent its shopping centers, it could end up shooting itself in the foot.
Still, when so many retailers are permanently closing their doors, you can't blame Simon for finding a more creative way to generate revenue. It's a model mall operators will universally have to adapt to, especially if the coronavirus pandemic continues to batter retailers. Simon may therefore not be in over its head so much as ahead of the game, and teaming up with Amazon right now could help it thrive at a time when malls seriously risk dying out.