Dead Mall Walking "A 30 year journey of seeing retail & shopping malls up close and personal"

By Dr.Dheeraj Dogra?“Realty & Retail Analyst”

The success of any shopping mall is directly proportionate to the success of retailers within that mall who in turn are dependent on the consumer.?My retail and real estate journey started in the late 80’s in the suburbs of New York. The small suburban town of White Plains where I lived had two shopping malls. By the early 90’s the second mall which was the newer of the two started redoing its tenant mix, they brought in a strong anchor like Macy’s added the missing cinemas to the mix and revamped the food offering. The first mall at the same time showed a rapid decline in terms of quality of tenants and the management did not really bother and retailers slowly started moving out.?Then suddenly a third retail development started coming up just half a mile away. This development was anchored by Neiman Marcus and the first Nordstrom department store in Westchester, promised to turn White Plains into a high-end shopping destination.?Slowly, the second mall changed its positioning, from being an upscale mall to a new tagline “Shopping for the real world” Fortunately there are enough retailers in America to keep that positioning in place. The first mall in the meantime moved away from retail leasing to office leasing. The best part is the last two malls were owned by the same company “Simon Property Group “. They knew exactly what they were doing hence were able to make both their properties profitable by changing the positioning.

???????Then in the mid 90’s came Amazon an online bookstore. Slowly stores like Barnes and Noble, Borders started biting the dust. Then Amazon expanded into other categories like CD’s and Dvd’s??so the music and movie stores started taking a hit. I call it the early casualties.

Fast forward to 2015, Amazon surpassed Walmart as the most valuable retailer in the United States by market capitalization. The reasons for Amazon’s unprecedented success can be attributed to disruptive products, selection, price, and long-term perspective.?However, what makes the company truly exceptional is the way in which Bezos and team bring these basic concepts together with a singular focus on the customer. If I was to quote from Hindu mythology epic Mahabharata it is like Arjun’s undivided, absolute & complete focus on the eye of the fish, the eye being the customer and the fish being the market ecosystem.

Retailers are closing stores at a staggering rate.

About 2,000 store closures have been announced just within the last six weeks, bringing the total number of planned closures this year to nearly 5,100. That number is expected to keep growing, and reach more than 8,600 before the end of the year, according to Credit Suisse. As I write this piece another legendary US retailer ”Toys r Us” files for chapter 11 bankruptcy protection. It's important for anyone interested enough to pay attention to store closings to remember that store closings in an Omnichannel world don't have nearly as much significance as they did when a physical store was the only sales outlet.?For most retailers with the Internet and mobile presence, store closings represent not much more than a shift in focus. And that focus is, for the most part, being directed by consumers, not the people sitting in the leather boardroom seats.

The rapid descent of so many retailers has left shopping malls with hundreds of slots to fill, and the pain could be just beginning. More than 10 percent of U.S. retail space, or nearly 1 billion square feet, may need to be closed, converted to other uses or renegotiated for lower rent. Clearly, of malls is a result of “Domino effect” of retail stores closing. The overall American shopping mall scenario is that out of the total of around 1211 malls about 300 are slowly reaching a dead end cause somewhere down the line they lost focus. The rest are surviving because they continue to reinvent themselves keeping the customers changing preferences into perspective.

?????????????????Domino effect of Store Closings leading to Investor losing money

So in order to break this domino effect we need to first stop the closings of stores which in turn would prolong the life of the shopping mall. Hence the key to success lies with the relationship retailer has with his customer.?The American consumer is demanding and the retailers bend over backwards to satisfy their consumers. I can vouch for that first hand. It was my first assignment with the category killer store Bed Bath & Beyond. Warren Eisenberg the cofounder would make it a point to visit the Scarsdale, New York store over the weekends, he would walk the aisles and didn’t mind picking up pieces of paper from the floor so the store looks spick and span to the customers. If he saw customers lining up on a cash register, he would immediately get another register opened so the customers did not have to wait.?Being one of the key managers with the organization I learned so many pioneering concepts like the "racetrack" format where customers must pass by a maze of goods before they reach the product that they came for. The idea is to encourage more impulse buying with lots of tempting merchandise. I also learned and how to make optimum use of the available floor space by stacking merchandise from the floor up to the ceiling, hence achieving more sales per square feet than the competition. I still recall talking to Martin Eisenberg (the owner’s son) about how to decentralize authority to the individual store managers. Individual store managers had the authority to stock specific merchandise for specific climate conditions and also based on local preferences. If we were out of stock on a certain size of Wamsutta comforter, it was picked up immediately from a location which had it in stock and shipped directly to the customer at no cost. From operations to the opening of new stores from a 2000 sq. ft. format store to a 20,000 sq. ft. store to an 80,000 sq. ft. store it was quite a journey. Incidentally, Bed bath and beyond now ranks 233 amongst fortune 500 companies with an employee strength of 62,000 employees. As I moved jobs to Federated department stores (Macy’s and Bloomingdales) and then others the level of customer service in America never cease to amaze me. Another wonderful aspect was consistent training programs sponsored by the employers to increase the skill set of the employees. Employee motivation was given prime consideration and all achievements small or big were recognized and applauded. The high point of my career was being adjudged employee of the year at a division of Macy’s no small feat for a brown skinned short Indian in a trade dominated by Caucasian Americans in the 90’s. The grand celebrations to me were held at “Tavern on the Green” an iconic restaurant in NYC, with a stretch limo to pick me up and a band in a attendance. Needless to motivated employees would strive to provide an enriching experience to their customers.

Customer Satisfaction “The India Story” ……

Unfortunately, I am yet to find one retailer in organized retail or a developer with the same zeal to please their customers here in India. With all due respect to the retailer and developer community in India. the management seems mostly interested in cutting costs and would rarely talk about excellence. However, things even in India are about to change very soon. A live example is UBER, the cab experience in India was so crappy when UBER started their services the customers embraced it with open arms and now there is no looking back. So going by that logic when better retailers and developers enter the Indian market the old ones who do not change their ways would disappear sooner than later. I recall in my various assignments here in India when I suggested excellence to my employers and offered to train the employees to create a pleasantly engrossing customer experience, sadly there were no takers. Having pioneered the concept of free personal shopping in the 90’s while with federated department stores once in India I tried to integrate it with CRM a combination which I strongly felt could have amazing results. However, most employers in India are looking at instant gratifications and for a majority of them investing in customer service is more of an academic exercise best suited for teaching case studies in marketing books.?Or at the most, you would see it on business cards or in ad campaigns as a feel-good tagline proclaiming undying love for the customers. As a certified trainer for mystery shoppers, I have rarely come across examples of exceptional customer service as a?company-wide strategy in build within the ethos of the company, apart from a rare individual effort. Surprisingly, the so-called unorganized retailers fared much better in my interactions with them when it came to customer satisfaction.

India’s Tryst with Malls

Considering the mall scenario in India, out of all the total malls functioning currently in India an overwhelming majority are being run on a strata selling model. Strata selling model for a large shopping mall is a nail in the coffin, it can’t be fixed simply because strata selling leads to losing control over the mall as an entity. Strata selling of shopping in India is driven by the fact that the developers are cash-starved and the easiest way to raise capital is by strata selling. However, a few brave developers have ventured into 100 percent lease models which is why they are relatively more successful than their majority strata sold cousins.

While the Indian shopping mall industry still in its infant stage was struggling to find a foothold, the online shopping started making inroads in the Indian retail scenario. With lack of quality retail space and sky-high rentals, several newer brands are finding refuge in e-commerce websites. As a matter of fact, some of them have made their debut directly online instead of a brick and motor store American brand called Under Armour.?

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Then there are others who have curtained their initial plans of opening several new stores and are being extremely cautious in their approach with openings restricted to grade A mall in tier one cities. No wonder many retailers post media announcements of the opening xx number of stores end up opening much lesser numbers. A case in point a US retailer Gap initially announcing of 40 new stores in four years, two years down only ten have opened. However, Gap has established a strong e-commerce presence in India. Hence grade B and C malls would obviously have to take the brunt of increasing vacant spaces. For the cash and carry fraternity, the likes of Walmart and Metro, things can also change for them now that Amazon is slowly getting into the wholesale business. I understand they too are expanding their presence?in the e-commerce world but when we look at Amazon the phrase that comes to mind is “He came, he saw, he conquered” !!

Another typical phenomenon is what I call the flood or famine theory. A city like Gurgaon with a population of about two million can support around four half a million sq. ft. malls. In a classic case of flooding, Gurgaon has over 40 malls and more in the offering. The famous mall mile on MG road alone has over ten malls, anybody’s guess why a majority of them are struggling. The worst part is almost all of them are running only on diesel generators further harming an already choked environment. As a diehard supporter of sustainable development, I strongly feel the shopping malls operators in our country need to play their part in promoting a safe environment. time to walk the talk.

Now let’s look at the famine part of my theory. I took up a challenging shopping mall a few years ago in a remote town of Tirupur a border town between Tamil Nadu and Kerala most famous for being the hosiery capital of India with an export turnover of more than Rs. 23,000 crores($ 3.54 Billion approximately). Some of the world's largest retailers like Polo Ralph Lauren, Diesel, Tommy Hilfiger, H &M, Nike, Adidas, Marks & Spencer import textiles and clothing from Tirupur. This was to be the only mall of the city of about a million people. I was truly inspired by the promoter’s vision of building a shopping mall completely powered by green energy. I remember being ridiculed by industry bigwigs while speaking at a retail forum asking for their support for this path-breaking initiative from a small town in south India. Once again we need to “walk the talk”.??We need to get out of the mindset of knowing it all, simply because we don't.

Trained Manpower: Even the grade A mall in tier one cities have their own set of challenges. The biggest being finding the right manpower to plan, organize and run the In absence of trained manpower, the management takes the next best option of hiring professionals from the service industry like hospitality who have to go thru their own learning curve of learning the nuances of the shopping and retail trade. The results can be mixed, imagine an American baseball player trying to play cricket for the first time thinking the two games seem similar, the result in most probability would be either a sixer or a clean bold.

Market Research: Seldom are market research studies done to get a feel of the target audience, their preferences and other data pertaining to demographics. Even by a remote chance research studies are conducted they are rarely followed and their findings are restricted to well-bound reports done by market research companies which at the most are used to generate funds from the lending institutions. The research companies have their own set formats of reports which they get from there principals in the west with slight tweaking to align with Indian conditions. No one can be blamed for this or other irregularities, we trained shopping professionals, there were no schools or colleges which specialized in the genre. In my personal experience with what is now an iconic mall, I told the management since I was unfamiliar with the city the mall was coming at I requested about two weeks to understand the people, cultural attributes, their buying habits by meeting local retailers and talking to consumers to get a sense of what would be an ideal positioning for the mall. To my complete surprise I was advised to get on with the assignment and whatever little had to be learned would come with my day to day interactions. As a professional, I decided to use my days off from work to do my own recce.?

Terms of Agreement: Another case in point is the current practice by retailers to go with revenue sharing agreements with or without minimum guarantees. Once again to decide what would be the right revenue sharing percentage the developers need to understand the margins on what a retailer works to create a win-win for both the stakeholders. For example, there is a considerable difference between the profit margins of two categories of the same brand. Let’s take an example of an apparel brand the profit margins of apparel would be different from in the accessory category. Then again the margins on apparel which are manufactured domestically in India under license would be different from ones which are imported. All these categories are being sold under the same brand name under the same roof and the developer is getting one fixed percentage despite the difference in margins.

Similarly, the developer may insist on standard leasing agreements to safeguard their future income without understanding the dynamics of the retail trade. How the consumers would react to a first-time brand entering the market is anybody’s guess. While working on Express Avenue in Chennai, out of the total number of brands a little over 25 percent were making their debut into Chennai and in a few cases first time to India. In order to be fair to both the parties, I insisted to both my management as well as the retailer to look at short-term leases instead of long-term ones basically just to test waters and then take it from there. a strategy which worked well. After all better safe than sorry.

Private Equity Firms join the bandwagon

Private equity firms are increasingly exploring opportunities to invest in India's shopping malls as such retail assets can be listed under Real Estate Investment Trust (REIT) portfolios. Private equity firms like Blackstone and Xander felt there was enough traction in the Indian retail asset class with shopping offering lucrative opportunities for consolidation in India. Since it was a first come first served market both of them went for the kill picking up several assets at record prices.

Looking at REITS in the western part of the world because of the “Amazon Effect”, retail REITs share prices have suffered even though several of them continue to perform above the market's expectations. Even with store closings still stay attractive because it gives the management a chance to bring in new and better retailers. This is due to the fact that even when large chains like Macy’s, Sears or JC Penny announce multiple closings there are others like Nordstrom, Target, Costco, Dollar General, TJ Maxx or Burlington who are ready to take up that space. Hence large REITs like Simon Property Group or Taubman have nothing to worry.?However, organized retail in India lacks the depth due to the paucity of retailers as well as the paucity of in any product category.?Any large existing retailers closing down can be detrimental to the profitability of Several years ago on my first assignment in I recall working on what was supposed to be India’s largest shopping mall with over four million sq. ft. of space, post a recce on all the retailers present at that time in India?I came to a conclusion there was no way?one could fill a mall that size even if the existing retailers were to double up there unless the developers were willing to do sizeable?investments in making it into a destination mall by adding theme parks, hotels, and other entertainment avenues.

The base of any REIT is the rental incomes it can generate. There have been several instances of retailers renegotiating a valid contract and in some instances simply walking away midway thru the contract in case the sales are not happening as expected. Enforcement of contracts using legal means in the Indian judicial system can take forever.

DLF mall retailers demand 50% reduction in rent ( Archives)

All things said and done would bring considerable comfort to cash-starved developers and additionally it would give a smaller investor an avenue to invest in real estate without them putting in their life’s savings at stake.

Keeping the malls Relevant in the Amazon era…

In the face of these considerable challenges, malls are seeking to stay relevant, drive growth and boost efficiency. We see successful players investing along five key fronts.

?1. Differentiating the consumer offering, with a focus on experience and convenience.

Online shopping provides consumers with ultimate levels of convenience. Malls will never be able to compete with the endless product selection, price comparisons and always-on nature of online. Nor should they try. Instead, malls need to move in a different direction, away from commoditized shopping experiences and toward a broadened value proposition for consumers.

Innovative malls are incorporating value-added elements that attempt to recast the mall as the new downtown, including concerts, spas, fitness clubs, and farmer’s markets. These services provide a level of leisure and entertainment that can never be satisfied online. In the face of these considerable challenges, malls are seeking to stay relevant, drive growth and boost efficiency. It is critical that malls be about much more than stores.?Another way is changing the mix of tenant/public space, moving from the current 70/30 to 60/40, or even 50/50. When this happens, these expanded public spaces will need to be planned and programmed over the year much like an exhibition. They will be managed more like content and media, instead of real estate.

2. Enhancing the customer experience with an eye on the bottom line.

Among the large universe of options for enhancing the customer experience, it is possible to identify initiatives that will be both ROI-positive and substantially boost the satisfaction customers have toward malls. To do this, mall players must first isolate and quantify the consumer touch points that are most responsible for driving satisfaction. Use these touch points to prioritize areas of investment and to design a cohesive customer experience program that will yield higher visit and/or spend rates, and ultimately greater consumer loyalty. Increase productivity and efficiency of the current mall base through a strategic review of the tenant mix, taking into account consumer needs and retailer economics. This analysis should guide the management of rent pricing and overall commercial planning. On the cost front, the focus should be on strict management of direct and indirect costs, combined with operational efficiency, which is critical for successful customer experience transformations. The asset manager to think surgically about where and how to grow in a way that won’t jeopardize returns

3. Transforming the mall experience by leveraging technology and multichannel strategies.

The digital transformation of retail is great news for malls. It starts extending their relationships with customers to before and after the mall visit. This is about engaging customers through compelling content and creating deeper bonds with them through social media and proprietary sites and apps, as well as loyalty programs. Social media can be used, for instance, to create buzz about new tenants or solicit ideas from consumers about ideas for new stores. One mall company has utilized segmented Facebook communication to speak to different communities, such as different geographies or interest groups or specific malls. Mall loyalty programs can provide the means for malls to establish a direct relationship with customers that goes beyond each visit to the while allowing malls to collect precious information about customers.?

Similarly, when it comes to usage, technology can again be used by malls to decrease customer pain points, while simultaneously creating entirely new delight points. Technology, for instance, can be used in finding parking. Sensors located in parking lots detect how many spots are available on each level and give visual indicators to drivers. Once within the mall, mobile apps can offer quick, easy guides to help shoppers find what they’re looking for at today’s increasingly large and multi-level malls.

Next, comes the usage of analytics-based metrics that are for shopping in optimizing their layouts:

·??????heat maps - understanding hot/cold areas as well as crowding

·??????benchmarking - compare the performance of different stores against each other

·??????paths - typical paths at malls, segment-specific paths

·??????loyalty - patterns such as repeat visits and cross-shopping?

·??????zone analytics - how different sections of the mall are performing against each other

·??????conversions - e.g. mall-to-store, store-to-store and zone-to-zone

·??????traffic - analyze/compare popularity of different parts & retail locations within the mall

·??????attribution - measure the impact of campaigns, displays, physical ads on shopping mall level

·??????utilizing analytic tools to collect information which can be used for positioning digital signing boards for generating income.

4. Exploration of new formats

?Creating innovative formats like mixed-used developments that offer consumers an attractive, integrated community in which to live, work and shop. They also serve to generate additional traffic for the malls while maximizing returns on invested capital.

5. Enhance the quality of manpower which would, in turn, enhance the customer experiences

The shopping operators need to conduct regular training in skill set enhancement. Another very important area where training plays a crucial role disaster preparedness. Our country is vulnerable to both natural and man-made calamities. Nothing is more valuable than human lives. Safety and security of the patrons should take precedence over anything else. For example, the average time to evacuate a building should be about 2.5 minutes. The management has to have sop’s in place for any eventuality. As a trained disaster management specialist and a decorated veteran on a scale of one to ten (ten being the best) I find most of our shopping malls to be two or below in disaster preparedness.

6. Be in a business of touching hearts

The only thing separating a mall owner / from e-commerce retailer is the human interface. The moment you lose track of your customer your countdown to doomsday has begun. Despite all the technological advances the world has made the human connection would always stay supreme, simply because as humans we are emotional beings, the degree might vary. Hence if we are looking for sustainability in the shopping mall business the easiest way is to create win-win for all the stakeholders concerned, customers, retailers and the developer in that order.

On a personal note, my professional journey in India could have been a cakewalk had I just succumbed to the go with the flow temptation. My quest to make a difference, add value and do the right thing stays on ...

**The views in the article are my own and some readers might find it a bit harsh,?rest assured?they are certainly not meant to offend any person or organization.