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Is Forever 21 a wise investment for its new mall landlord owners?
Mall operators Simon Property Group and Brookfield Property Partners, along with the licensing firm Authentic Brands Group, have made a deal to acquire virtually all of Forever 21’s assets for $81 million just months after the fast fashion retail chain filed for Chapter 11 bankruptcy protection.
Forever 21 had previously announced plans to close around 350 of its roughly 800 stores around the world, including 178 of its 549 locations in the U.S., as part of the bankruptcy process.
The move by Simon and Brookfield is the second time in recent years that the two mall operators have joined together to try and save a retailer important to their facilities. In 2016, Simon and General Growth Properties (later acquired by Brookfield) were part of a $243 million bid to acquire Aeropostale’s assets. In that scenario, the mall operators kept 229 stores operating.
Last July, Simon CEO David Simon told analysts that his company was open to additional investments in retail with the right partners in “distress situations.” During the call, Mr. Simon said his company had “made a ton of money in Aero” and had positive experiences working with Brookfield and Authentic Brands Group in the past.
Many link Forever 21’s problems in recent years to a decision by the chain’s management about a decade ago to rapidly expand and to do so in larger boxes. At the time, this ran in direct contrast to the retail industry’s trend of opening smaller stores. The chain, whose original store measured 900-square-feet and which gained in popularity with footprints of between 10,000- and 20,000-square-feet, began opening stores that measured 85,000- and 90,000-square-feet.
- Mall Owners Among Group Bidding $81 Million for Forever 21 – The Associated Press/The New York Times
- Forever 21’s landlords offer a cut rate of $81 million for the L.A. retailer – Los Angeles Times
- Can Forever 21 come back from bankruptcy? – RetailWire
- Should Simon Property Group bail out (invest in) more retail tenants? – RetailWire
- Simon Property Group, Inc CEO David Simon on Q2 2019 Results (Earnings Call Transcript) – Seeking Alpha
- Why did mall landlords step in to save Aeropostale? – RetailWire
- Forever 21 Thinks Big – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: How likely is Forever 21 to be successful under ownership by Simon Property Group, Brookfield Partners and Authentic Brands? What will the chain have to do differently to succeed going forward?
Poll
BrainTrust
Paula Rosenblum
Co-founder, RSR Research
Jasmine Glasheen
Content Marketing Manager, Surefront
It’s an interesting move, but I don’t think it’s an “automatic” they will be successful. There’s nothing like having financial backing as a core element of a successful strategy – Simon and Brookfield have plenty of financial capacity. I’m not sure the involvement by the mall operators will save Forever 21. Once a brand falls out of favor with consumers – especially in fashion – like night clubs and restaurants, consumers move on to the next thing. I’m also not sure what Forever 21 needs to do under this new arrangement, but I am more curious about what this means long-term. Can we expect mall operators to jump in and save every struggling brand? I doubt that this is a sustainable strategy. At the same time, it is in the best interests of the mall operators to have strong/successful tenants.
The thing here is, at the end of the day, the store still has to perform meeting their sales per square foot projections. At 85,000 to 90,000 square feet, that is a hard hill to climb even for the most successful mall locations. Would there be a consideration to pare these stores down so other retailers can occupy some of that space and make up some of that revenue?
Forever 21 has two major issues: inventory problems (imagine a whole store where the only size available is XS), and a belief that its customers are all teenagers. New owners, whoever they are, will have to start there.
Even if as the name implies their target customer is a female 15 to 25, the reality is that size XS represents only about 5 percent of that target customer segment. Merchandising and operations need to fix the basics. As you say Cathy, they can have the most awesome styles but if they miss the right size and fit they will continue to fail.
Simon et al. will do just fine with the bargain basement purchase price. Whether Forever 21 will flourish is another question. While I’m personally a fan, Simon is a Real Estate Investment Trust. Their interests align more with Eddie Lampert’s than with Sears.
Well, first off, it’s unclear that this is the final bid. “Stalking Horse” bids set the floor and say “This company will exist.” Other bidders may emerge.
But let’s assume the chain survives, regardless of who the owner is. I think they’ve got to build smaller stores (they were getting crazy large and those should be closed), probably need to go slightly more upscale as fast fashion is over-saturated and probably be better corporate citizens. I don’t think these owners can tolerate the lawsuits that used to surround Forever 21.
Differentiation is the key, of course, but I think Forever 21’s biggest problems were over-expansion and over-sized stores. Normalize those two things, and the company should find its niche again.
Here’s a thought. Rather than close the stores, maybe they are in a good spot do what Mansell did at Kohl’s. Remodel and lease out square footage to adjacent businesses. Gets you to a smaller format, can increase foot traffic, and the new owners execute on something they have core skills in.
At nearly $5.5 billion in revenue for Simon group, buying Forever 21 for 81 million is not even a rounding error. For one, this is a distress sale so they may got excellent value. And second there are readymade synergies with the existing store foot print. This is not a significant size to be of a meaningful strategic importance.
Significant issues need to be addressed, quickly, for the new owners to make Forever 21 successful. The brand has lost touch with its core customers and it has opened too many stores too fast. Bringing in a new merchandising team and closing many of the unprofitable stores (especially those not at malls managed by the new owners) will be likely first steps.
What does success look like here? To Simon and Brookfield, is success based on the fact that they don’t have another empty space in their malls to try to fill? Then the answer is yes. The brand still resonates with the Gen Z customer – it is consistently in the top 10 in surveys – even as digitally native brands start to emerge, so it’s not too late. Forever 21 does need to pull way back in terms of in-store inventory and rethink their digital strategy among other things to succeed in the future.
This is like the Aeropostale deal on steroids, because of the importance of Forever 21 to these and other mall developers around the country. The venture has a good chance of success but it’s an opportunity to fix what’s not working:
First, look at the real estate portfolio and weed out unprofitable locations — even though it’s in the investors’ self-interest to maintain plenty of sites, it’s time to right-size the business after years of overexpansion. This extends to the locations that took over mall anchor locations and now need to be brought down to rational size.
Second, revisit the “treasure hunt” format of a typical Forever 21 store. Off-pricers have captured this segment of the market more successfully, so it may make sense to clean up the assortments along with the stores. Put your best foot forward on being a trend merchant, not just displaying a “bunch of stuff,” and drop categories that don’t belong.
Finally, moving away from the lowest common denominator of “disposable fashion” might draw slightly older or more affluent customers. They would like an alternative to Zara (which is still in a limited number of malls), and an upgrade of merchandise quality would be a smart move by Forever 21.
Assortments will make or break Forever21 in the future. Store size will certainly be an issue, but first they must work to adapt their assortments to shifting consumer trends – and possibly expand their core customer segments.
This is a real estate move, not a retail move.
In reorganization, the mall guys probably “bought” the company on the cheap, including debt due to them. For almost nothing, they have someone to fill a space that they could not fill otherwise. They will control their revenues (rents) from these stores. If successful, take a lot. If not, take a little. This is much better than getting nothing from failed retailers.
It is a smart move, as long as they don’t invest too much in trying to make a failed retailer something it will never be again.
That business was run by one family — there’s no leadership chain/successors there. What — is Simon going run a fashion business? I think they’re obviously trying to avoid more vast empty spaces in their malls.
Having Simon Property Group and the others does not guarantee success for Forever 21. However, the companies have a vested interest in restoring the viability of Forever 21, and they acquired the chain’s assets for a bargain basement price. The Forever 21 brand is still known by Millennials, so if the right merchandise, probably in smaller than 80,000 square foot stores comes to market, they should be able to draw many of the previous customers back. To be successful, they should focus on smaller footprints and the kind of lower-cost, fashionable apparel that made Forever 21 a force in the Millennial apparel market.
They will need to listen to professional advice, hire retail pros and put their egos aside. The failure here was clearly avoidable but sometimes founders can’t transition. If the bid is finally won by Simon, Brookfield and Authentic then much of the debt and future liabilities will be wiped out, the mall owners will gain control of the space and hopefully repurpose that space to change the mall journey to be more experiential, more theater.
Maybe the future of the mall looks more like the newly opened American Dream mall in New Jersey where half the space is entertainment and not retailing, a shift from buying things to feeling them according to Amanda Hess in the Sunday New York Times.
If we can take a lesson from the evolution of Aeropostale, then there is a decent shot at success for this venture. I followed Aero closely in 2015 and 2016. It was painful. One merchandising and execution misstep after another. Now they execute with focus and discipline. High marks to ABG for that. A right-sized Forever 21 with focus and discipline might work. Given the size of some Forever 21 stores, that will be the challenge. Mall owners can repurpose some of the space while ABG deals with merchandising and execution. It just might work. High risk but very, very high reward given the price.
Mall operator or not, the fire sale price creates space and a sufficiently long runway for the prospective owner to relaunch and right-size the stores while adding an efficient operational mindset.
It’s simply too good of a deal to bypass with potential for superior financial return for the three participating players. Don’t expect a rash of these deals since they require the right combination of a low entry price tag, strong brand for an important demographic, and strategic soundness with significant operating upside potential.
Here is what I find most interesting regarding the private equity plays that have killed many iconic retail organizations over the last 10 years. The malls have a seriously vested interest in keeping the stores open. What I don’t think most private equity companies get is that when you close a store in a market area not only do you lose the store revenue but you lose the associated e-commerce revenue in that market. There is a proven symbiotic relationship between stores and e-commerce that we are now beginning to understand more clearly. Just take a look at Sears’ e-commerce business.
Like many big box retailers of the time, Forever 21’s management focused on expansion over quality control. The stores have huge open spaces without inventory.
There’s no signature smell or style, and the fast fashion clothing (fast fashion being a waning trend in itself) isn’t even remotely sustainable. There’s no feel-good factor to shopping at Forever 21.
For this acquisition to be successful, Simon Property Group and affiliates need to strategize to bring Forever 21 into the new modern age through a more sustainable, transparent production process and a more distinctive brand voice.
I think the Forever 21 customers are still there, the chain just got too big too fast and the revenue per square foot didn’t work out financially. By buying it at a bargain basement price they can buy time to redo the real estate deals, and make it profitable by shrinking store sizes. Not everyone is going to e-commerce even with next day delivery when it comes to fashion and accessories, enough people still go browse and discover.
Mall owners such as the Simon Property Group, and Brookfield Partners have a short term challenge on their hands when brands such as Forever 21 enter into bankruptcy. Forever 21’s imminent insolvency would have left a short term gaping whole in their mall portfolio.
While this makes business sense in the short term for the property groups, there are far more fundamental challenges in play at Forever 21, which have led to years of decline, a lack of customer interest, underperforming stores and assortments that simply didn’t resonate. This move is a short term gap fill, yet the longer-term strategy has to address the core retail business misdirections which have led to Forever 21’s collapse.
There are two issues here: 1) F21’s chances, and 2) the wisdom of a landlord/developer owning (one of) their “tenants.”
The first point I don’t really know: it’s a hyper-competitive market, and they join a long line or retailers in trouble; some made it — or at least are still here — others didn’t, so anybody’s guess.
But as to the second point, I think there’s an inherent conflict of interest in this. For every customer that enters a mall, Simon has an interest in attracting them to its own store, particularly … not the other tenants (yes there might be some happy case where there’s enough business for everyone, but that’s becoming ever less likely). I think ultimately it’s a bad idea, even if it works out as an investment.