Shuttered stores, thinning crowds, empty parking lots, and retailers filing for bankruptcy. These are tough times for shopping malls and the major retailers who serve as their anchors. Product oversupply and the rise of e-commerce are squeezing margins, and customers are demanding unique and personalized experiences, not just the same thing every time for everybody. If you follow the headlines heralding such woes, you might think the digital age is an extinction-level event for malls.
It isn’t. There is still a vast opportunity for mall operators to innovate, capture value, and stay relevant for 21st-century shoppers. This is particularly true in emerging markets, where rising incomes, higher discretionary spending, and urbanization have created an opportunity for social and commercial “destinations.” As McKinsey noted in a recent article, malls of the future will be less about in-store shopping and more about giving people novel in-person experiences they can’t get on their smartphones—what some call retail-tainment.
Leading mall operators have already begun transforming their properties into destinations that look, feel, and operate very differently from their predecessors. In China, malls already allocate 30 to 40 percent of their floor area to food and beverages. Certain developers, such as Wanda Commercial Properties, which integrates retail, leisure, and residential into a single large complex, allocate as much as 50 percent of their footprint to public space.1 In the United States, operators are courting unexpected tenants, such as the Michigan Women’s Hall of Fame, which recently relocated to Michigan’s Meridian Mall. Others are considering zoning changes that will allow for medical offices or light industry.
Yet even the most innovative operators are facing economic and profitability challenges associated with all these changes. Malls with large amounts of public space tend to have poorer space utilization than traditional malls, and the shift away from the tried-and-true mix of high-paying retail tenants and loss-leading entertainment categories is generating lower mall revenues.
Based on our experience working with mall operators around the world, we believe that malls can still thrive. But to do so, there are four areas in which operators will need to focus their energies:
1. Reinventing lease agreements
The traditional model of charging retail tenants rent based solely on their sales will not enable operators to capture the full value from retailers. Companies must be willing to challenge past practices and look ahead to new leasing models. As malls invest in new features and attractions that generate increased foot traffic, they can explore novel ways to structure financial arrangements with retail tenants. We see two primary possibilities, which could be adopted in addition to, and not necessarily in lieu of, existing revenue mechanisms:
Footfall-based charge: Tenants pay based on either the traffic that’s coming into their stores or moving through the area of the mall where they are located. This model allows mall operators to capture value from the growing trend of customers coming into stores to touch and feel products but completing the purchase online.
Online revenue sharing: In an even more direct capitalization of “browse offline, shop online” behavior, tenants pay a portion of their brand’s online sales that occur within the mall’s geography, normally mapped according to zip codes. A few leading-edge retailers are already pursuing this approach with their salespeople