The future of retailing is in upheaval, and the country’s malls top the list of potential collateral damage. Tenants are pulling out as chains scale back and retailers continue to struggle with how to adapt to the rise of e-commerce and other changes in shopping behavior, and to better target a population that is bucking the demographic trends of past years and moving closer to city centers. 

Combine those moving parts, and the disruption faced by retailers and malls has led to the following recent headlines: 

  • Simon Property Group made a hostile $23.2 billion bid for rival mall operator Macerich and owns 3.6% of shares as of March 27. Simon CEO David Simon said Macerich’s assets would “represent a strong strategic and geographic fit for Simon.” (Simon later pulled its offer.) Simon owns malls and outlets such as the King of Prussia Mall near Philadelphia and the Houston Galleria in Texas.
  • Wet Seal on January 7 closed 338 stores out of 511 locations to concentrate on its online business. On January 15, Wet Seal filed for Chapter 11 bankruptcy protection. 
  • Sears has been closing stores regularly and has subleased space in seven locations to Primark, a fashion retailer in Europe. Rival J.C. Penney generated $57 million in positive cash flow for 2014 but still faces a heavy debt load. Belus Capital Advisors CEO Brian Sozzi has said that rent increases from Simon could force the companies to raise prices for merchandise or cut back on investments in online and mobile shopping. 
  • Macy’s announced that it will close 14 stores as part of a restructuring, but add seven more. Macy’s is hoping to make $140 million in savings from layoffs and store closings to reinvest in technology and its e-commerce strategy. 
  • Abercrombie & Fitch, another mall staple, announced it would close 60 stores in 2015 as leases expire. Another smaller retailer in malls, Delia’s, liquidated assets in December. Delia’s had 95 stores as of August 2.

“It’s not like stores are dead, but you’re going to see a reimagining of retail and malls,” says Barbara Kahn, a Wharton marketing professor and director of the Jay H. Baker Retailing Center. “Many smaller retailers are going away.”

Kahn says that “A” malls — i.e., destination shopping centers that feature high-end luxury retailers such as Niemen Marcus, Macy’s, Bloomingdales, Nordstrom and increasingly, Apple — are thriving, investing in their locations and providing a differentiated experience for customers. Brands have to be in these malls to be seen, explains Kahn. The malls, which have fashioned themselves as regional attractions with a strong selection of entertainment and retail destinations, can command premium rents in exchange for the foot traffic retailers garner. 

“It’s not like stores are dead, but you’re going to see a reimagining of retail and malls.”–Barbara Kahn

The mall shakeout is occurring in the “B” and “C” malls, which are anchored by the likes of Sears or J.C. Penney and surrounded by smaller stores that feature commodity products more easily procured at Amazon and online outlets, says Kahn. Without many of their once-stalwart tenants, many “B” and “C” malls are filling their empty storefronts with drug stores, health clubs, clinics, churches, spas and beauty services. 

According to Wharton real estate professor Susan Wachter, some of these complexes could eventually take on new life as multi-family residential rental units, or otherwise be reinvented and redeveloped. A November report from consulting firm McKinsey said that “a storm of global trends are coming together at the same time to cause malls to change the role they play in people’s lives. No longer are they primarily about shopping. Now, when consumers visit malls, they are looking for experiences that go well beyond traditional shopping.”

McKinsey also noted that the U.S. mall crisis is well underway because the country has the most malls per inhabitant. Thanks to websites like, abandoned or declining malls have become pop culture icons, with consumers sharing photos and stories of what various sites were like in their halcyon days. 

Social, Touch and Feel

While upscale malls like many of those operated by Simon are likely to attract visitors and retailers for the foreseeable future, it’s unclear what will happen to the “B” and “C” malls.

“While we expect some retailers to close stores in the competitive retail environment, there is a long list of domestic and international retailers looking for space in high-productivity malls and … Simon Property Group will backfill any closures relatively quickly,” Nathan Isbee, an analyst at investment firm Stifel, said in a research note. “Simon will view any store closures as an opportunity to mark rents to market and sign a lease with a stronger retailer.”

As the vacancies pile up in lesser malls, real estate developers will be faced with a series of choices. Should they stick with a retail formula and upgrade the sites’ infrastructure? Or should these developers work to land non-retail tenants that provide an experience, such as health clubs and indoor amusement parks? After all, some malls have already become de facto health clinics. Or should developers pursue strategies to create multi-family rental units with adjacent retail?

“You are seeing a reimagining of what a mall should be,” says Kahn. “Anecdotally you’re seeing a lot of nail salons, spas, health clubs and restaurants [move into malls]. You can’t do that online. Malls will be for the social and touch and feel you can’t get online.”

In addition, retailers will increasingly use technology in stores to really use their physical locations to generate data and tailor the customer experience. Kahn says that everything from the dressing room to clothing recommendations will have a technology component in stores. 

“Omnichannel goes both ways,” adds Wharton marketing professor Peter Fader, who also co-directs the Wharton Customer Analytics Initiative. “Pure play e-commerce firms are making a mistake by staying only online. And traditional retailers need to see the in-store experience as data oriented.”

“There is demand for multi-family housing, and these centers in the inner suburbs have value because they’re closer to cities and job centers.”–Susan Wachter

Kahn says that some retailers will begin using their mall locations as distribution centers to cater to online shoppers. Best Buy, Walmart and Macy’s are just a few of the retailers increasingly treating physical stores as delivery and return hubs. “The problem is that the last mile is expensive to deliver to,” says Kahn. “Using stores for online pickups means customers incur the delivery costs.”

The other change that will likely come to mall retailers is an approach designed to encourage impulse purchases, says Kahn. Kahn highlights Duane Reade, a New York pharmacy chain owned by Walgreens, which has put food, the pharmacy and health and beauty in the front of the store. “Duane Reade is strategically reimagining its stores in a way New Yorkers appreciate,” says Kahn. 

The Real Value of Dead Malls

But the fact remains that there are still too many malls in the U.S., and many of them are no longer in prime locations for attracting customers, says Wachter. 

“Many of these malls are old — built in the 1950s and 1960s,” explains Wachter. “At the time, Americans were moving farther out from cities. Today, they’re moving back into cities.”

The real value of these struggling malls is that they are already zoned for development, says Wachter. As a result, it’s much easier to turn malls into multifamily rental units or office space. The rezoning is unlikely to become a local community issue relative to brand-new development, she adds. “What’s worse? Multi-family dwellings or having a dead declining mall next to you?” asks Wachter. 

Since 2006, there has been no net gain in homeowners, but rentals have surged, says Wachter. “There is demand for multi-family housing, and these centers in the inner suburbs have value because they’re closer to cities and job centers,” she says. 

As a result of this value, old malls are being retooled for housing with some retail and new transit lines, she notes. Most of the mall-to-rental unit transformations are designed for “C”-level malls, or those at the bottom of the retail barrel. 

“We are in innings three or four for these redevelopments,” says Wachter. “The plans are there to be implemented and the market is there.”

Don’t Blame Amazon 

One common storyline in the mall plight is that Americans are shopping more online and preferring to have goods shipped to them. That storyline is true to a degree, but also very overblown, says Fader. 

“The issues brick-and-mortar retailers face are largely their own fault. They were fat, happy, lazy, ignorant and in denial about the train coming their way.”–Peter Fader

For instance, the U.S. Department of Commerce reported on February 17 that e-commerce accounted for just 6.7% of the $1.19 trillion in sales generated by retailers in the fourth quarter. 

Fader’s take is that the best way to fix malls is for retailers to get their omnichannel strategies together. “The issues brick-and-mortar retailers face are largely their own fault,” says Fader. “They were fat, happy, lazy, ignorant and in denial about the train coming their way.

“Forget about the online part of omnichannel; retailers need to focus on making the in-store experience better than it is now,” Fader continues. Retailers need to emulate rivals such as direct marketers and Amazon to see the in-store experience as a way to generate data about their customers, he adds.

Fader’s acronym for retailers revolves around AEIOU: “A” stands for advice, which is something that is delivered better in person than online. “E” is for experience and moving beyond simply offering the lowest prices and best selection of goods. “Experience isn’t something that is reserved for high-end retail. Mom and pop stores have known this for years,” says Fader. 

“I” stands for interaction with real humans that will lead to cross-selling opportunities — the “O” in Fader’s phonetics theme. “Online retailers can’t cross sell like you can in person,” says Fader. And finally, the “U” stands for understanding because Fader thinks traditional retailers should be in a better position to capture customer data than any online rival. 

To revamp their operations and approaches, retailers should look to recruit from the hospitality industry, which uses loyalty programs well and focuses on the customer experience, he says. 

“Malls are in the midst of a shakeout because of retail, but it’s only partially due to online,” Fader notes. “Stores and malls were overbuilt and [they] under delivered. Many of the malls will have to be repurposed or disappear.”