The Business of Fashion
Agenda-setting intelligence, analysis and advice for the global fashion community.
Agenda-setting intelligence, analysis and advice for the global fashion community.
EAST RUTHERFORD, United States — American Dream, the 3-million-square foot retail and entertainment complex just outside Manhattan, had planned to welcome its first shoppers in March. Instead, developer Triple Five is hosting what might be the world's most expensive Covid-19 testing centre out of the mall's parking lot.
As far as symbols for retail’s troubles during the pandemic go, American Dream is not a subtle one. Nationwide, at least 15,000 stores are expected to shutter this year, according to Coresight Research, while a May Gallup survey shows that more than half of American consumers say they’re spending less money in recent months. Triple Five’s Mall of America, the country’s largest indoor shopping centre, has missed two mortgage payments.
There may still be a happy ending: on Tuesday, new data indicated that US consumer confidence rose unexpectedly as stores reopened in certain states. Some American Dream tenants say they expect the mall to open in spring 2021. (A spokeswoman for the mall denied this opening date and declined to comment further.)
But for many clothing brands and the malls that house them, the lockdowns may turn out to be a death sentence. The future of brands that cater to America's shrinking middle class — the likes of Gap, J.C. Penney and J.Crew — is particularly bleak. Their former customers, squeezed between stagnant wages and rising health and education costs, are settling for cheap fast fashion or bargain hunting at big-box stores. These brands couldn't keep up with new competition online, and in many cases were weighed down by debt borrowed during better times.
The pandemic is accelerating all of these trends. The US unemployment rate is at an all-time high since the Great Depression. Consumers who are still employed are nevertheless watching their spending in case the recession comes for their jobs, too.
As these chains falter, the spaces they inhabit are also becoming obsolete. Nearly half of all American malls, for instance, depend on J.C.Penney as an anchor and more than 60 percent count on Victoria's Secret, another brand whose troubles predate the coronavirus, as a tenant, according to Costar. Both retailers plan to close hundreds of locations this year, and their malls will struggle to line up new tenants.
A nearly liquidated JCPenney store in Pennsylvania on July 24, 2017 | Source: Getty
There will always be physical stores, of course. But when the economy emerges on the other side of this crisis, the way people shop will be fundamentally altered. There will be fewer stores and fewer malls, with many of the shopping centres still standing being the ones that cater to the rich. For everyone else, off-price chains like T.J. Maxx, big-box stores like Walmart, and Amazon will reign supreme.
Since the Great Recession, "income inequality rose quite dramatically and we’ll see that again this time around," said Rod Sides, Deloitte’s head of the US retail practice. "Retailers were forced to pick a new position after the last downturn. Those on the high-end did well and those who went off-price have done extremely well ... that [middle] segment really, really struggled because you could buy their products everywhere else, and potentially cheaper."
The Missing Middle
A middle-class consumer isn’t going to walk into a store and drop $800,000 on an alligator-skin coat. But as a group, they contribute more to consumption than the rich or the poor, according to a report from the Organisation for Economic Cooperation and Development.
But the share of households making around the national median income level has shrunk from 61 percent in 1971 to just under 50 percent in 2015, according to Pew Research. Middle-class income grew 28 percent between 1979 and 2014, compared with a 95 increase for the top 20 percent of households over the same period, according to The Brookings Institution.
The shrinking spending power of the middle class has been a driving force behind the so-called retail apocalypse, said Gabriella Santaniello, founder and chief executive of retail consultancy a-line Partners.
It’s no coincidence that many of today’s biggest mall brands — Gap and Victoria’s Secret among them — burst on the scene toward the start of this period and ran aground toward the end of it. Meanwhile, retailers catering to the extreme ends of the income spectrum, from luxury brands at the top to off-price and fast fashion chains at the bottom, are thriving.
The shrinking spending power of the middle class has been a driving force behind the so-called retail apocalypse.
On average, sales for clothes and clothing accessories stores have risen 2 percent annually since 1993, when the Census Bureau began collecting the data, compiled by the Federal Reserve Bank of St. Louis.
“This is hardly exciting growth,” said Andres Vinelli, the vice president of economic policy at the American Center for Progress, an organisation that advocates for improved economic mobility in the US. “It’s basically population growth.”
Brands have seen slim margins shrink even further as they were locked into a race to the bottom on price. Clothes that would have cost $100 in 1993 would amount to only $59 today, according to the Consumer Price Index cited by the American Enterprise Institute.
When consumers are worried about their jobs, no price is low enough, however.
“If you are not in the top 10 percent of the income population, you’re fearful about what could possibly happen, so no one is spending money right now beyond household essentials,” said Vinelli.
Think of this as the financial crisis on steroids.
This mentality can create a cycle of economic deterioration. If no one is spending money, consumer sectors suffer, forcing companies out of business and further driving unemployment. States will see reduced income from sales taxes, resulting in layoffs of public school teachers, municipal workers and postal workers — all bastions of America’s middle class.
“Think of this as the financial crisis on steroids,” said Luigi Pistaferri, a professor of economics at Stanford University. “The  recession took us a long time to recover, but this one will take longer. The amount of debt we’ll have to confront — as banks, as governments, as consumers — will take a long time. The future is not rosy.”
Fashion retailers are already discovering how expendable they are. Spending on apparel plunged nearly 90 percent in April. In states that have reopened, such as Texas and Georgia, foot traffic at T.J. Maxx has rebounded faster than for mall-based department stores like Kohl's and Macy’s, according to Placer.ai.
Too Many Stores
Part of the solution is obvious, if painful: with fewer sales coming in, underperforming stores and brands must close to give the rest a fighting chance.
According to the International Council of Shopping Centers, there are 23.5 feet of retail for every American — more than double most other countries. That wasn’t a problem during the mall’s first few decades; the US is less densely populated than much of Europe and Asia, so retailers needed more stores to ensure they were within driving distance of their customers.
The internet has made this strategy less essential, and so has the rise of big-box stores like Walmart and Target that sell fashion alongside groceries and home goods.
But it’s not easy for brands to walk away from stores, even when they want to. Many are locked into underperforming locations by long-term leases. Some have so much debt that if they close stores, they won’t have the cash to make monthly interest payments. Publicly traded retailers face pressure from shareholders to grow revenue quarter after quarter; closing stores would mean a hit to the top line.
Retailers closed 9,700 stores last year, according to Coresight. Still, even the most troubled chains find ways to stay open long after they’ve been left for dead (Sears and Kmart, the subject of countless business-section obituaries, still operate nearly 200 locations).
If the tenant didn't pay rent, the landlord would evict and replace them. But now, there are no tenants to replace them.
“Retailers cannot go on with this many stores and survive,” said David Bassuk, global co-head of the retail practise at AlixPartners. “Now, there’s a force of attrition that’s unfolding and coming to a new balance, a new normal.”
The coronavirus is changing the equation. Many stores will never reopen while struggling retailers will use the pandemic to cull underperforming locations. Gap, for instance, already announced it would be permanently shuttering a portion of its 3,000-some stores.
Leases are also no longer as big an obstacle. Mall landlord Macerich, for instance, said on May 12 that it collected only 26 percent of April’s rent and 18 percent of May.
“Prior [to coronavirus], if the tenant didn’t pay rent, the landlord would evict and replace them,” said Jay Luchs, a retail broker for Newmark Knight Frank. “But now, there are no tenants to replace them.”
Good Malls and Bad Malls
A store closing isn’t an isolated event, however. It can bring down the whole neighbourhood.
Take J.C. Penney: the department store chain plans to close about 240 stores as part of its plan to emerge from bankruptcy. Those locations anchor many of America’s roughly 1,200 malls and will be hard to replace. The remaining stores in these shopping centres will miss even the dwindling traffic a J.C. Penney brought in. For some, it could be what tips them into bankruptcy as well.
This chain reaction was already well underway before the pandemic. Most malls were built between the 1950s and 1980s, when Americans with discretionary income were moving to the suburbs. But as middle-class manufacturing jobs were outsourced or made obsolete, towns lost their middle-income spenders, and the malls their customers. Americans with money to spend were increasingly concentrated in a few affluent metro areas such as New York and San Francisco.
Consumer tastes were shifting as well. The strip mall became more popular among time-starved shoppers hoping to pick up groceries and browse for shoes on the same trip. Millennials increasingly shopped online, preferring newer brands like Everlane and Reformation.
Total luxury sales from American consumers will go from $86 billion in 2019 to as low as $56 billion in five years.
A 2017 report from Credit Suisse had already predicted that one in four American malls would close by 2022, mostly in the suburbs.
Analysts see luxury shopping centres faring better, as their wealthy clientele still have money to spend on clothes. Before the pandemic, the Bal Harbour Shops in Miami saw traffic grow 20 percent year-over-year and was in the midst of planning a substantial expansion that’s been pushed back a year, according to the mall’s chief executive, Matthew Whitman Lazenby.
But even luxury isn't immune to the changes reshaping retail. Neiman Marcus filed for bankruptcy earlier this year, and American spending on luxury goods is expected to decline over the next few years, according to a recent Bain report. In 2019, Americans accounted for 22 percent of the personal luxury goods market that totals €281 billion ($309 billion). That share will decrease to 16-18 percent by 2025, the consultancy forecasts, which means total luxury sales from American consumers will go from $86 billion in 2019 to as low as $56 billion in five years, while the global luxury market expands.
As for the closed stores and malls in rural and suburban America? Optimistic developers can point to the dead malls that have been converted into entertainment centres, office space, e-commerce warehouses, health care centres and even community college campuses. But the reality is that many have simply ended up as vacant lots.
If you take the classic derelict mall in the middle of nowhere, there's just not much other use for it.
“The mall failed because the area changed: it used to be a good middle-class area and then suddenly everyone left, and now who knows what you can build there,” said Alexander Goldfarb, an analyst at Piper Sandler. “If you take the classic derelict mall in the middle of nowhere, there’s just not much other use for it.”
Something for Everyone?
American Dream factored all of this — rising income inequality, e-commerce — into its plans. The mall will have a Banana Republic and a Pandora, but also plenty of fast-fashion and luxury options, from H&M to Hermès.
And if those stores fail to draw crowds, there are the attractions, including a Nickelodeon-themed amusement park, restaurants and a three-story candy “department store.” Other malls have begun to add services, dining and experiences alongside retail as well.
Post-pandemic, even that may not be enough.
“Who wants to go to a mall anyway?” said Faith Popcorn, a retail consultant and futurist. “They’re putting ski slopes in there just to get people to go. These days we have Fortnite and Animal Crossing and Oculus VR. Malls are exhausting and uninteresting.”
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