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How to Save the Mall

Developers of premium shopping centres are reducing their dependence on fashion retail and doubling down on food, wellness and other lifestyle offerings.
Westfield Century City | Source: Courtesy
By
  • Lauren Sherman

LOS ANGELES, United States — Do consumers still need shopping malls? One in four US malls won't exist in five years, according to a June report by Credit Suisse. This year alone, American shopping malls will lose an estimated 8,640 stores to closures. That's, in part, thanks to digital sales of apparel, which are growing fast and estimated to reach 35 percent of total apparel sales by 2030, up from 17 percent this year.

And yet, for those raised on the west side of Los Angeles, the Century City mall is an institution. On October 3, the latest, gleaming, iteration of the shopping centre — the third place of third places — will be officially unveiled to consumers by Westfield, the multinational mall operator which is doing its best to dispel the idea that the shopping mall is dead.

The new Westfield Century City, re-imagined in partnership with Los Angeles-based (and television famous) interior designer Kelly Wearstler, features outdoor dining spaces, acres of gardens, even a canopy of olive and palm trees. And yes, stores. Over 200 of them, including a three-storey Nordstrom, a Zara and a Bonobos.

Food, too: Lots of it. Along with Eataly, the first location of the high-end Italian food hall to open on the West Coast of the United States, there is an expansive location of the popular local grocery store Gelson’s and plenty of fast-casual and fine-dining restaurants, including Din Tai Fung (the first Taiwanese spot to receive a Michelin Star).

Fitness buffs can join the upscale Equinox gym, or take a class Gloveworx boxing studio. The company has even hired a “creative head of global entertainment” — well-regarded Broadway producer Scott Sanders — to run its live programming across its centres. Out of dozens of retailers, 50 of them have never before done business with Westfield.

But even with all the bells and whistles — Uber waiting lounge included — Westfield Century City is still, of course, a mall.

“The word 'mall' is a dated word,” says Steven Lowy, the corporation's co-CEO. “It’s been lost in the vernacular.” The answer to making the word “mall” relevant again, Westfield and many of its competitors say, is to transform these properties into community centres that aren’t totally focused on apparel retail. The strategy rests on the hypothesis that the internet may be killing the mall, but humans still desire interaction.

In 2007, 42 percent of sales at Westfield developments came from department stores. Today, it’s only 28 percent. The company says that only approximately 12 percent of revenue from its two London malls — two of the most productive in its portfolio — come from department stores.

By shrinking its portfolio to 35 centres globally — which includes properties in the US, the UK and soon mainland Europe — the Sydney-based Westfield (which divested its Australian centres in 2014 to form a separate entity, the Scentre Group) says its properties, mostly located in urban areas instead of white-flight suburbs, are valued at $31 billion, with flagship assets currently making up 82 percent of the lineup. The rest are “regional” properties, many of which the company will likely sell off in the coming years.

'Mall' is a dated word.

“Ten years ago, Westfield had 69 shopping centres in the United States, today we have 33 and two in the UK. We probably will have quite a bit less over the coming years as we focus on being what we would regard as the highest quality retail real estate company in the world,” Lowy says. “We’re not far away from that right now, and the way we do that is by selling non-core assets and reinvesting that capital in assets like London, Milan, New York...Silicon Valley...etc.”

In 2018, after years of red-tape delays, Westfield will begin developing what is being touted as the city of Milan’s largest shopping mall, a €1.4 billion ($1.6 billion at current exchange) investment, built in partnership with Gruppo Stilo, which owns a quarter stake. Now scheduled to open in 2020, its crown jewel will be an outpost of the famous French department store Galeries Lafayette.

Westfield’s strategy is not unlike those of many of its competitors, who are betting that experience — including food, entertainment and health and fitness — will allow a certain sort of development to thrive even as consumers spend more time online.

"Changing consumer behaviours, attitudes and technologies have drastically altered expectations for a shopping experience, and we are facing this trend head-on by transforming our mall assets into community hubs, with varied offers that service each of our communities' specific whole-of-life needs and aspirations," says Skye Fisher, head of strategy at QIC Global Real Estate, a development firm with properties across the US and in Australia. "Offering more than a simple consumer transaction, we are creating places that encourage people to dwell, drawing in the community and ensuring people will visit again and again. By curating a more integrated, experience-led offer that responds to a broad range of customer needs, we're supporting an uplift in sales across all categories including fashion and apparel."

In the 12-month period ending June 30, 2017, Westfield said fashion sales in specialty retailers at flagship properties were up 1.5 percent, while leisure sales were up 6.4 percent. However, sales at general retail — which includes department stores — were down 5.8 percent. Today, food and dining make up 18 percent of the portfolio’s overall sales (from 15 percent a decade ago), while technology and auto make up 16 percent (from 9 percent a decade ago). “In some of our malls, Apple is the highest-grossing retailer, not the department stores,” Lowy says. “Apple is doing that out of 10,000 or 20,000 square feet. The department stores have 250,000 square feet.”

But can doubling down on these growing categories truly supplant the overall retreat from brick and mortar, and encourage consumers who visit these developments to actually shop? “I’ve seen the retail universe adapt to whatever changes consumers have thrown at them, but this generational change has created a conundrum for retailers of all types that it hasn’t been able to deal with,” says Richard Kestenbaum, a partner at Triangle Capital, a sell-side M&A and capital-raising advisory firm with a concentration in fashion and retail. “Every square foot of retail is worth less than it was 24 or 36 months ago. Once that is recognised, it changes the economics of retail. People will lose a lot of money in the transition, but there is money to be made.”

In order to eke productivity out of properties, developers not only have to change the mix of retailers represented, but retailers need to reevaluate the purpose of their brick-and-mortar stores. Today, many consumers view physical retail as a place to easily drop off online returns, rather than an opportunity to browse and shop. In October, the American value-driven department store Kohl’s will begin accepting Amazon returns at 82 locations in an unprecedented deal, underscoring the physical store’s role as a return centre.

Lowy, for one, is okay with that dynamic. “We all just need to evolve and not really care if the store is a store or a showroom. The consumer is going to shop how they want to shop,” he says, citing the prevalence of “click and collect” schemes in the UK and Europe. “I don’t really care whether the consumer comes to the mall and buys something or sees something and buys it elsewhere or returns something. We’ve just got to do what the consumer wants.”

We all just need to evolve and not really care if the store is a store or a showroom. The consumer is going to shop how they want to shop.

In many ways, it’s indicative of the mall’s transformation from a shopping centre to a community centre, and more reflective of way properties have been developed abroad. In the US in the middle of the last century, suburban sprawl and the rise of the automobile encouraged more compartmentalised shopping experiences: 15 minutes to the salon, another 15 to the grocery store, another 15 to do your clothes shopping.

However, now that time-strapped consumers are moving back to cities in droves, a central place to run errands — drop off returns, pick up groceries, go to the gym, stop by the bank — is in demand. It also reflects the model adopted by smaller, ultra-high-end developments, such as the "Country Marts" across California and a slew of properties developed by Jamestown, including Chelsea Market in New York City and Ponce City Market in Atlanta.

For Westfield in particular, the strategy has been to zero in on urban markets, peeling off properties in economically distressed areas where malls are dying. For instance, Lowy and his team are now eying downtown Los Angeles, which has undergone a spectacular transformation in the past decade, with economic growth outpacing nearly any other region of the country.

But it’s also a place where many developers have already set up shop, from Brookfield’s Figat7th — which includes discount favourites Zara and Target — to Row DTLA, a still-in-progress development that will house a mix of independent retailers (like Portland’s Bridge and Burn) and restaurants (including the first Southern California outpost of San Francisco’s famed Tartine Manufactory). Since 2010, 79 developments of 50,000 square feet or larger have either been completed or were currently underway at the beginning of 2017, according to a report in the LA Times. Downtown Los Angeles — a ghost town for many decades — hasn’t seen that scale of development since the 1920s.

Which begs the question: does it make sense to add more retail to highly populated areas where overstoring may already be a problem? Consider Manhattan, where Westfield opened the first iteration of its highly anticipated World Trade Center development in August 2016. While the mall is highly trafficked with 300,000 daily commuters and an influx of tourists, many have questioned whether or not those passersby are actually stopping in to shop when there are several locations of most of these retailers — including COS and Victoria's Secret — all over the city, not to mention right on their smart phones. What's more, consumers are more frequently transferring common errands to the web as well, doing their banking online and having groceries delivered.

“I don’t think, if Westfield World Trade Center didn’t exist, that they would create it today,” Kestenbaum says. “They must make the best of what they have. No one knows yet what retail stores need to change to.”

Westfield has great hopes for its World Trade Center location. "Westfield World Trade Center is off to a good start and is going through a normal stabilisation period for a centre of its size," a spokesperson for the company said to BoF in a statement. "As we have said in the past, we expect it to become one of the most productive retail centres in the US and internationally."

Some of Westfield’s competitors, however, are taking a different approach to location. “I will feel incredibly successful if we never have to do anything in Manhattan,” says Samantha Perry David, founder of Up Markets, a division of the Boston-area development company WS Development.

While WS doesn’t shy away from urban centres altogether — it is heavily invested in Boston’s Seaport District, for instance — Perry has chosen to focus on smaller markets where incomes are high and options are minimal, such as Jackson, Mississippi as well as Tampa and Palm Beach, Florida. “We don’t need to be in cities that are great and full of great retail. We want to serve incredible communities that are not getting the product they need.”

Whatever the solution, one thing is for certain: The mall will be saved, and those who figure out how to save it will reap the rewards. For Westfield, Century City is a show pony that it believes reflects the future of shopping. “All the numbers I see say that there is no other place to buy things in consumer minds than a retail store. You convert a consumer who comes through a door,” Kestenbaum says. "Is the new Century City the ultimate answer? We don’t know, because we don’t know what the answer is. It’ll be about finding the right balance.”

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