The performance gap between high-quality class A and lower tier shopping malls continues to widen. Though several factors determine the size of this gap — from demographics to competitive landscape — one of the most critical components is merchandise mix.

THE PROBLEM

On average, department stores occupy nearly 50 percent of the gross leasable area in U.S. shopping malls, with apparel and accessories stores occupying another 29 percent, or 57 percent of in-line space (i.e., side-by-side locations as opposed to more visible and accessible corner locations). These are two of the slowest-growing categories in retail today, contrasting with higher-growth categories like restaurants, home furnishings, and health and beauty. In short, the traditional mall model that was developed nearly 70 years ago is heavily dependent on categories that are no longer fast growing or meeting today’s consumer demands.

THE SOLUTION

A new model of merchandise mix for American malls may be necessary. Merchandise mix is not an easy or quick standard to change given the structure and length of retail leases (typically 10-plus years). Most department stores hold reciprocal easement agreements that essentially hinder major changes to malls without the department store’s consent. Many department store chains gradually have become more accepting of change, but it is not a given. Those who reject change may do so at their own peril: There is a growing trend of mall owners buying out department store leases and redeveloping the space into restaurants and specialty stores. Taking advantage of such opportunities to shift the tenant mix toward higher growth, lower e-commerce penetration spending categories can create room for revenue growth.

The sharp divergence in net operating income growth between regional and super-regional malls provides some evidence that this solution may work. In addition to its larger size, one distinguishing feature of the super-
regional mall is its more diversified mix of restaurants and entertainment tenants (such as movie theaters or bowling alleys) than their regional mall counterparts. As spending has shifted away from apparel and department stores to the Internet, this has shielded super-regional malls from revenue losses more than is the case with regional malls.

Looking ahead, mall landlords must view retail closures as opportunities to diversify their tenant mix away from the traditional approach and toward an updated model that blends a wider range of tenant types and minimizes their exposure to low-growth segments.

Melina Cordero is Americas head of retail research at CBRE.