The flood of retailers moving to open-air shopping venues is a reflection of costs and changing lifestyles, and the movement is just starting.

The news was mostly lost among all the more pressing headlines, first regarding the COVID-19 pandemic, and then more recently by protests related to racism. But there are reports that several stores brands popular in malls aren’t planning to reopen even if their host mall does … ever.

These stores were already leaving malls in droves; coronavirus-related shutdowns have merely accelerated that movement. Mall vacancy rates hit 9.7% by the end of 2019, according to Moody’s industry research arm Real Estate Solutions (REIS). And REIS predicts malls vacancy rates will soar to 14.6% by the end of next year as individual retailers regroup and rethink their store locations.

Not all of the most familiar names, like Macy’s (NYSE:M) and Foot Locker (NYSE:FL), are completely throwing in the towel on malls. But these retailers, more and more, are finding a friendlier and less-expensive environment in off-mall locations like strip malls, or less conventional locales like downtown settings, or even stand-alone venues closer to neighborhoods.

Retailers making this move are learning a bit about themselves as they go.

Image source: Getty Images.

Moving out, en masse

As my fellow Motley Fool contributor Rich Duprey explained just a few days ago, Foot Locker was already abandoning malls in favor of open-air strip malls. The fallout from the coronavirus simply accelerated that strategic shift.

Foot Locker isn’t alone. Macy’s is doing the same. Earlier this year, it unveiled Market by Macy’s, a smaller and more intimate venue than Macy’s usual department store. More noteworthy is the fact that these stores are meant to be established anywhere but malls, offsetting the impact of the 125 mall-based store closures Macy’s is targeting by 2023.

Health supplement chain GNC Holdings made the bold decision in late 2018 to shutter as many as 900 stores, with around half of those in malls.

Even mall staples like cosmetics and beauty retailers are making the change. Ulta Beauty (NASDAQ:ULTA) and Sephora, owned by LVMH (OTC:LVMU.Y), have both suggested their futures won’t be as mall-centric as their pasts have been.

Sephora Americas vice president Jeff Gaul told reporters early this year that while the company still wants to operate in malls, more of its next 100 store openings would be at off-mall locations that are more convenient to consumers. Ulta indicated early last year that about three-fourths of its store openings in the near future would be at suburban strip malls.

Were it just one or two of these retail names focusing more on open-air locations, it could be dismissed. But when so many of the industry’s stalwarts are singing the same tune at the same time, that’s a paradigm shift.

Why they’re leaving

There’s no single reason for the movement. Rather, there are several tides pushing retailers out of the mall and closer to your home.

One of those forces is burgeoning rent. While most retailers could afford to pay premium prices for square footage at a mall before the advent of e-commerce, online alternatives have made stores’ selling space less productive relative to its cost. REIS reported at the end of last year that retailers were paying a record $43.53 per square foot per year in rent. Mall landlords don’t seem to have adjusted to retailers’ new reality.

Perhaps the biggest reason neighborhood strip malls are displacing bigger and more centralized shopping malls, however, is a change in lifestyles and personal preferences. Sephora’s Gaul explained to fashion publishing brand Glossy in February, after revealing plans to build more off-mall stores, that its average customer “has been showing us that she really has a desire for more ease and convenience in her shopping. We have a terrific network of existing stores in Times Square, on Fifth Avenue, and on 34th Street, but what we have been lacking is being in those neighborhoods where she goes to SoulCycle or picks up pizza on Friday evening.”

And Sephora’s customers aren’t the only ones fitting that description.

An unexpected name in the lead

It’s still the early innings of a paradigm shift that’s long overdue, and it’s too soon to name winners and losers. All the aforementioned names have some learning curve to deal with, including finding the right balance between mall locations and off-mall stores.

But there is one name that stands out as a company capable of successfully operating mall stores and strip-mall venues simultaneously: Nordstrom (NYSE:JWN).

You read that right. It’s not the biggest department store name in the world, nor is it the most inviting to middle-income shoppers who might also visit a J.C. Penney store or Macy’s. But it’s figured out the right mix of mall stores and off-mall stores like Nordstrom Rack, which caters to the more value-minded by offering off-price goods (much of which had previously been inventory in Nordstrom’s full-priced mall locations).

It may not have been the original intent when Rack stores were being built in earnest several years ago, but that building effort leaves the company with 247 Rack stores versus only around 100 mall stores. The company already has the off-mall footprint it needs and has been doing well with it.

Every other retailer? Only time will tell how well they adapt to the move. But at least now they know they have to make it.

James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Moody’s and Ulta Beauty. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy.


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