An iconic symbol of American consumerism and prosperity is the shopping mall. What a shame that so many are hurting, as they are the casualties of the decline of the U.S. middle class.
Everyone knows the scene: the cavernous arcades filled with people happily darting in and out of specialty stores as they glide along toward a big anchor like Nordstrom or Macy’s. True, many high-end malls are doing quite well, but mid-tier and lower-end shopping centers are struggling or closing. And all those dying malls are taking some retailers down with them.
“Retail is undergoing a transformation. It’s always been a business of creative destruction, but the pace is accelerating due to the introduction of e-commerce,” says Tad Philipp, director, CRE Research, Moody’s Investors Service in an interview withTheStreet.com.
The Great Recession, which started in late-2007, and the subsequent sluggish recovery lowered mall sales volume in general. Add in the stagnant wage growth for the past two decades that shrinking consumer credit can mask and viola – an eroding middle class. Their diminished purchasing power has put mid-tier department stores under pressure, as some customers who have traditionally shopped there are either traded up to better retailers or down to discounters.
Finally, developers built too many malls in previous decades, using the false assumptions that consumer purchasing power, without increases in real wages, would continue to rise. That has lead to the current correction.
Perhaps the success of the higher-end malls speaks to how well high-income Americans have prospered, while the less well-heeled have struggled. One indication: Real estate investment trusts specializing in malls had a good 2014. The secret of these REITs, which are landlords for the properties, is that they can pick and choose among malls to own. David Simon, chief of the largest mall REIT, Simon Property Group (SPG), told TheStreet that it has embraced specialty retailers like fashion purveyor H&M. Plus, it has strong anchors such as Nordstrom. Simon’s shares are up almost 30% from 12 months before.
Alas, the good news is far from universal. Competition from e-commerce (especially Amazon) has led to the poor performance of more downscale national anchor stores. Moody’s Philipp mentions J.C. Penney (JCP) and Sears Holdings (SHLD), which have both been struggling for some time, as examples. “[Moody’s has] them rated in the Caa category, which is deeply into speculative grade. Between the two, we think J.C. Penney has the more established recovery strategy.”
The smaller stores at the mall, which rely on the anchors for traffic, suffer as a result. “The traditional mall is shaped like an ‘X’ with a big box anchor on the sides and maybe a food court in the middle, and the people walk back and forth,” he explains. Unfortunately, many Sears appliance customers decamped flock to Best Buy (often not at the mall) while Penney is fighting both online competition and other non- mall retailers like Target and Kohl’s.
There are some chains that are tied so closely to malls that the fallout effect is deadly. Case in point: electronic retailer Radio Shack, which filed for Chapter 11 bankruptcy protection in early February. The 94-year-old chain plans to unload almost half of its 4,000 stores, which will turn into Sprint wireless outlets, and close the rest.
Last year, pizza chain Sbarro made its second trip through bankruptcy court, emerging only after shedding 180 of its 400 locations. Analyzing the reason for its troubles, the Huffington Post wrote it’s “because most of its stores are in malls, places Americans don’t really go any more. There’s even a whole blog, deadmalls.com, dedicated to our waning interest in those palaces of consumerism.”
At core, the malls’ problem is how badly middle-class households are doing. Some major economic trends really have made it more challenging for households with mid-five-figure incomes and even those with six-figure incomes too.
By many economic standards, today’s middle class has it harder than that of generations past. Some telling statistics point to this:
- Since 1999, the median income dropped in 81% of U.S. counties. Since the economy began to recover from the recession, job growth is largely confined to the service industry, mostly in retail. Trouble is, the average full-time U.S. retail worker makes around $21,000 yearly.)
- From 1989 through 2014, the U.S. economy expanded by 82%, inflation adjusted. But real wage growth is largely non-existent for middle-class households.
- In the early 1960s, General Motors (GM) was the top U.S. employer. The automaker’s average full-time worker then earned the (inflation-adjusted) equivalent of $50 an hour, plus benefits. Wal-Mart Stores (WMT) now has the nation’s largest workforce; it pays its average sales associate less than $10 per hour, sometimes without benefits.
Fundamentally, the middle class has to get by with less inflation-adjusted income. Nearly half of U.S. households (47%) say they spend all of their income, go into debt or dip into savings to meet their expenses, according to a recent analysis of Federal Reserve survey data from the Pew Charitable Trusts.