November 7, 2016 Traffic Is Down, but Malls Are Still a Fixture Deep Dive: This is the first rePort in a three-part series in which Fung Global Retail & TechnologY analYZes the US mall landscaPe. 1) There are 1,221 malls in the US todaY, according to the The Mall Is International Council of ShoPPing Centers (ICSC). The number of malls increased bY more than 300% from 1970 to 2015. Given Not Dead : the oversaturation of malls in the US, we believe that at least 30% of malls—mostlY within the C and D classifications—need to be closed. Part 1 2) Malls classified as A ProPerties are the most Productive: theY account for onlY 20% of all malls, Yet rePresent 72% of total mall sales. 3) Even though retail traffic at malls has declined, retailers such as Tesla Motors and APPle are choosing to locate stores in malls in order to exPose their brands to meaningful traffic. 4) The toP 10 malls in the US see average sales Per square foot of over $1,000. Four of these malls are located in Florida and two are in New HamPshire, which has no sales tax. Two are in tourist locations and two are outlet malls. 5) Other rePorts in this series will analYZe dePartment stores in DEBORAH WEINSWIG malls, trends impacting malls, malls’ evolution and store Managing Director , Fung Global Retail & Technology concePts that are exPanding. [email protected] US: 646.839.7017 HK: 852.6119.1779 CN: 86.186.1420.3016 DEBORAH WEINSWIG, MANAGING DIRECTOR, FUNG GLOBAL RETAIL & TECHNOLOGY 1 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2016 The Fung Group. All rights reserved. November 7, 2016 Table of Contents Executive SummarY ........................................................................................................................................ 3 Malls Have Not Evolved Much Since the 1960s ............................................................................................. 4 The Number of Malls Doubled from 1970 to 1980 ........................................................................................ 7 Some of Today’s Retailers Were Founded in the 1800s ................................................................................ 8 Just 20% of Malls, the A Malls, Generate 72% of All Mall Sales ................................................................... 11 To Increase Retail Sales at A Malls, 30% of Malls Should Be Closed ............................................................ 12 Sales at A Malls Have Grown bY Double Digits Since 2012 .......................................................................... 13 Mall OccuPancY Rate StabiliZes at 94% ........................................................................................................ 14 Mall Traffic Still Meaningful DesPite Declines .............................................................................................. 15 Conversion Rates Are Higher Despite Drops in Traffic ................................................................................. 15 Number of Outlet Malls Has Increased bY 47% over the Past 20 Years ...................................................... 16 Conclusion ................................................................................................................................................... 17 DEBORAH WEINSWIG, MANAGING DIRECTOR, FUNG GLOBAL RETAIL & TECHNOLOGY 2 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2016 The Fung Group. All rights reserved. November 7, 2016 Executive Summary The mall is not dead. It is, however, evolving at a pivotal time in the context of a changing retail landscaPe and shifting consumer demand. The new mall is an exciting, hybrid format encomPassing retail, entertainment, food, outlets, housing, education and even medical facilities, in some cases. Traditional mall tenants such as movie theaters and restaurants are returning to malls and newer tenants, including the likes of Tesla Motors and APPle, are choosing malls to expose their brands to meaningful traffic. Although traffic at malls has declined by 9.1% since JanuarY 2015, it is still significant—and conversion rates are increasing desPite the droP in traffic. Furthermore, even though some stores have closed, manY new ones are opening and creating hybrid formats that we have not seen in malls before. The number of malls in the US has grown by more than 300% over the last 45 years. The 1970s was the biggest Period of growth, and the number of malls doubled during the decade. In the 1980s, shoPPing became an American pastime and malls became ingrained in our culture; theY were featured in movies, songs and television shows. The megamall concePt was developed in the 1980s and, in 1992, The Mall of America opened, featuring over 500 shops and three roller coasters. By the 1990s, mall growth had Peaked and begun to slow; an average of 15 new malls were built everY Year in the 1990s comPared with 25 in the 1980s. E-commerce also came onto the scene in the 1990s, and retail outlet stores started to gain momentum. The number of new mall openings has continued to decline since 2000, averaging just eight per Year. The last enclosed mall was constructed in 2006, and the next planned enclosed mall is set to be built in Norwalk, Connecticut, over the next three Years. Given the current oversaturation of malls in the US, we believe that at least 30% of them—mostlY within the C and D classifications—need to be closed. Malls classified as A properties are the most productive; theY account for onlY 20% of all malls, Yet represent 72% of total mall sales. The toP 10 malls in the US see average sales Per square foot of over $1,000, which is more than twice the mall average. Sales at A malls have grown bY double digits in the Past five Years, and most A malls are in urban or tourist areas. The retail outlet format has grown in PoPularitY, and the number of outlet stores has risen by 47% over the past 20 Years. Since 2012, 41 outlet centers have opened in North America and another 57 new outlets or expansions are set to oPen bY 2018. Six outlets are Planned to open in 2016. In this rePort, the first in our three-part The Mall Is Not Dead series, we analYze the US mall landscaPe. We review the history of malls in the US, as well as mall tyPes, sales growth, retail occuPancy rates, traffic and outlet malls. Other rePorts in this series will analYZe department and sPecialtY stores in malls, trends imPacting malls, the evolution of malls, and store concepts that are exPanding. Our research shows that the mall is not dead, but that it is transforming in order to accommodate shifts in consumer demand. In many cases, malls will need to rePurpose their space to become hYbrids or A malls in order to become relevant in todaY’s economY. DEBORAH WEINSWIG, MANAGING DIRECTOR, FUNG GLOBAL RETAIL & TECHNOLOGY 3 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2016 The Fung Group. All rights reserved. November 7, 2016 Malls Have Not Evolved Much Since the 1960s Victor Gruen, an architect and émigré from Vienna, Austria, is credited with inventing and oPening the first US mall in 1956. He created the mall, in Edina, Victor Gruen developed the First Minnesota, southwest of MinneaPolis, to be a civic center as much as a commercial center, with a daY care, librarY, Post office, community hall and art. US mall in 1956 in Minnesota. Gruen’s vision of the first mall was never fullY realiZed: it was suPPosed to be the centerpiece of a 500-acre area that would include houses, aPartments, office buildings, a medical center and schools. Author Malcolm Gladwell suggested that, as creator of the mall, Gruen was the most influential architect of the 20th century. In the 1960s, the economY was doing well, and striP malls became PoPular before larger malls became commonPlace. The American consumer was introduced to branding, particularlY in the grocerY store, via readY-made meals, yogurts and desserts. Kellogg’s PoP-Tarts and APPle Jacks, General Mills LuckY Charms, Yoplait Yogurt, Campell’s ChunkY souPs, and Pringles Potato chips were all introduced in the 1960s. The 1970s were a Period of growth that saw the develoPment of the festival mall format, which utiliZes historical architecture and real estate and features local artists as tenants. Designed to revitalize an area, festival malls include Faneuil Hall in Boston, Station Square in Pittsburgh, NavY Pier in Chicago and HarborPlace in Baltimore. The traditional American mall also started to gain popularitY during the 1970s as Americans began to enjoy the convenience and pleasure of shopping at them. The number of regional malls grew by 130% over the 1970s. Source: Shutterstock The 1980s rePresented a great time for the American mall, and saw the The mall became a part oF the development of the megamall format. A GalluP Poll found that Americans American culture during the averaged apProximatelY four triPs Per month to the mall during the 1980s. Hit pop songs such as “ValleY Girl” specificallY referenced malls, and teenagers 1980s. spent their free time hanging out at malls. There was a 42% increase in teen spending during the 1980s. The word “shopaholic” was coined, and shoPPing DEBORAH WEINSWIG, MANAGING DIRECTOR, FUNG GLOBAL RETAIL & TECHNOLOGY 4 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2016 The Fung Group. All rights reserved. November 7, 2016 became an American pastime. Food courts were introduced