10 Steps to Turning Department Store Lemons Into Lemonade

While we’ve proven the “Retail Apocalypse” is bunk, there are some sub-sectors which continue to lose market share at an unsustainable clip.

Source: U.S. Census Bureau, Davenport Consulting

As you can see in the above chart, U.S. department store sales peaked in 2000, and as of 2020, they had been halved. Let that sink in for a moment. Had the articles about a “Retail Apocalypse” been renamed “Department Store Apocalypse,” we couldn’t argue. The resulting bankruptcies and casualties have been immense – Sears, JCP, Lord & Taylor, Mervyn’s, Neiman Marcus, and the list goes on. The pandemic didn’t cause this – it merely accelerated it.

According to data from Directory of Major Malls / ShoppingCenter.com, there are currently 258 regional and super-regional malls in the U.S. and Canada which are grappling with at least one large anchor closure, which represents 18.3% of the total regional and super-regional mall population they track. Moreover, since data collection lags reality, there are probably more malls battling this phenomenon than the data suggest, with additional closures on the horizon. That’s not to suggest these mall owners are resting on their laurels – they’re not. Data from DMM / ShoppingCenters.com also reflect 282 regional and super-regional malls in the U.S. and Canada are currently in some stage of redevelopment. Still, all of this redevelopment begs the question, what is the highest and best use of a shuttered department store attached to a regional or super-regional mall?

The most common redevelopment efforts we’ve seen include rental apartments, hotels, big box retailers typically associated with power centers, and restaurants/entertainment. We’re not here to argue against any of these new uses/tenants, but we would like to suggest an alternative solution.

Omnichannel retail, which spans all possible customer channels in an effort to provide a consistent customer experience by leveraging reliable data and processes, is the future, but mall landlords seem to have their heads planted firmly in the sand on this issue. However, we believe a shuttered department store is the golden opportunity for landlords to take a more proactive role in assisting their current tenants’ transition to an omnichannel platform, as well as an opportunity to cultivate new tenants by helping e-commerce retailers bridge the transition from online to brick-and-mortar. To be sure, all retail has its roots in brick-and-mortar. Be it a storefront or warehouse, products need to be stored somewhere until purchased. But, omnichannel retail means more than just bricks & clicks. It’s meeting the customer in their preferred medium, offering a relevant selection of goods, achieving an excellent customer experience, and providing a variety of convenient order fulfillment/return solutions – at a fair price for both the retailer and customer. We posit that most retailers cannot achieve a true omnichannel solution on their own; retailers and landlords must harmonize their efforts in order to gain a competitive edge.

How is this accomplished? Take the shuttered department store and redevelop it as a “Micro-Fulfillment Center” (MFC). It’s a win-win-win solution for landlords, retailers, and customers alike.

And, no, we’re not just talking about a big warehouse attached to a mall. We’re talking about a vital link which allows retailers and landlords to connect with consumers on their terms. The game has changed; even the ICSC changed its name to reflect a marketplace solution for commerce as opposed to a purely brick-and-mortar centric organization. In essence, it’s high time to reduce the friction between landlords, their tenants, and the end consumer. Each one must see the others as a marketplace equal, playing their respective role in the (e-)commerce ecosystem. To do this, mall landlords must lead the way. Here’s how:

For a mall to be attractive to shoppers it must have two qualities:

1) Destination attributes – a combination of retail concepts and consumer excitement which continues to draw the community to the space on a regular basis (a topic so extensive it deserves its own article).

2) A clear path to purchase which can be performed with or without a visit into the public space.

It is this second area that is the focus of this next section.

Before attempting the ten-step plan outlined below there is one key constraint with where the anchor is positioned. The vacant store should have at least two external facings which are vehicle accessible, one for inbound delivery trucks (up to 60ft trailers with no risk of pedestrian traffic), one for normal passenger vehicles (with no pedestrian thoroughfare), and both separate from each other.

There are ten broad steps a landlord would have to consider in the realignment process:

1 Lease Agreement Reviews

Some renegotiation could be required for many key areas such as length of the lease term, notice periods, covenants, easements, and restrictions impacting the redevelopment of the target store into a MFC and provision for service level (of fulfillment operations). Key to these renegotiations is a hybrid model of base rent for the storefront gross leasable area and a percentage sales of MFC fulfillment orders.

2 Gather Operational Requirements

Work with individual retailers on their requirements. The operational requirements may require different temperature zones be maintained (esp. food service retailers, entertainment businesses and grocers). Develop strategic solutions options.

3 Civil Works

Preparing any multi-level building for evacuation/strengthening, creation of sufficient dock handling/receiving capacity required, and vehicular access for “click and collect”/drive-through and also collections for home delivery. Establishing paths for product between the facility and individual stores for replenishment/returns.

4 Install Storage and Retrieval Media

Install suitable storage media and mechanical handling equipment (e.g. a Micro-fulfillment center, with possible multilevel operations for different temp requirements). Create SOPs, staffing requirements, skill matrices and training/onboarding plans.

5 Install Connectivity

Create cloud-based systems to connect directly with retailers’ POS (and in-store inventory systems), corporate mobile apps, and the fulfillment facility Warehouse Management System / Warehouse Control System to convert online orders and pass instructions for selection and real time inventory holding.

6 Set Replenishment Policies

Work with individual retailers on stockholding requirements and their replenishment procedures to support online and store volumes, create connectivity to their Distributions Centers for regular replenishment and suppliers for direct or expedited deliveries. Establish yard management and booking controls to ensure docks are fully utilized and demand for receiving is smoothed during the receiving window(s).

7 Populate Facility with Inventory

Receive inventory from retailers’ Distribution Centers to build desired trading levels separate from current deliveries to support their current store-based operations.

8 Develop Fulfillment and Returns Processes

Establish the replenishment frequency from facility to individual retail stores, scheduling receiving and “on demand” items (such as endless aisle items), create operations for click and collect at store, at central kiosk or drive-through, and similar for returns.

9 Carrier Selection

Evaluate carriers for Last Mile Service between the facility and the community served. Develop both scheduled and “on demand” service options, establish track and trace capabilities and integrate with other technology to provide real time visibility for all stakeholders (landlord, retailer, consumer).

10 Testing, Go Ready Sign Off, and Go Live

User Acceptance Test every component and revise processes to create predictable, consistent outcomes, and create training programs to onboard new retailers. Ensure all mission critical elements are “end-to-end” tested, decide on launch approach – big bang, phased or individual retailer soft launch. Provide early life support and ongoing maintenance for product churn and retail concept.

In short, this can be done; we know how to do it. And, here’s the best part, once a landlord announces their intention to pursue micro-fulfillment centers in order to backfill vacated department store boxes, they’ll likely be rewarded by analysts and investors. The whole initiative could pay for itself before it is ever operational as it would elevate a mall’s perceived competitiveness in the marketplace currently dominated by Amazon, Walmart, and Target.

Interested in learning more about converting a shuttered department store into a MFC? Let’s talk.

Hear a further discussion on this topic by the co-authors during a recent appearance on the Retail Insider: Exploring Malls – Reimaging Vacant Anchors

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