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Will Amazon install distribution hubs in malls across America?
The Wall Street Journal has reported that Simon Property Group is in talks with Amazon.com to turn some anchor locations in its malls, which currently are home to or formerly housed a J.C. Penney or Sears store, into local distribution hubs.
The struggling department store chains, each having filed for bankruptcy in recent times, have shuttered large numbers of stores with more closures to come. Simon, the largest owner of malls in the U.S., has 63 Penney stores and 11 Sears on its properties, according to the report.
The value of the properties for Amazon are their central locations, close to population centers, giving the e-tailer the ability to speed its last mile delivery execution. The stores, typically with multiple floor layouts, can be converted into distribution hubs with plenty of available space in the mall’s lots for Amazon’s trucks. Amazon, Home Depot and others have been testing multistory warehouses in urban areas, including a three-story facility in Seattle owned by Prologis. Amazon, as previously reported, has acquired failed malls in recent years and converted them into fulfillment centers or warehouses.
For Simon, having Amazon occupy anchor locations will enable it to fill idle space, albeit at rates well below what other tenants pay and possibly causing friction since many retailers already view Amazon as a rival.
This is not the first time Amazon has been connected to J.C. Penney. In May, WWD reported that an unnamed source had said that Amazon had “a team in Plano (TX) to speak with the department store’s executives.” The exact nature of the talks, if the report was accurate, were unclear. Amazon has reportedly expressed interest in turning some closing Penney locations into its new namesake grocery concept.
Simon’s talks with Amazon could also prove premature if the mall operator is successful in its bid with Authentic Brands Group and Brookfield Property Partners to acquire Penney out of bankruptcy. The trio, which have joined together in the past to acquire Aéropostale and Forever 21, are among a number of parties bidding to acquire the department store chain on the cheap.
- Amazon and Mall Operator Look at Turning Sears, J.C. Penney Stores Into Fulfillment Centers – The Wall Street Journal
- Is Amazon about to buy J.C. Penney? – RetailWire
- Who will come to J.C. Penney’s rescue? – RetailWire
- Will multistory warehouses mean faster deliveries from Amazon, Home Depot and others? – RetailWire
- Who will seize the opportunity to turn stores into fulfillment centers? – RetailWire
- Are malls better off as fulfillment centers? – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: Would Simon Property Group benefit from a deal with Amazon to lease former anchor tenant positions in its malls? Do you expect other mall operators with vacant anchor space to make similar deals if an agreement is reached by Simon and Amazon?
Poll
BrainTrust
Gene Detroyer
Professor, International Business, Guizhou University of Finance & Economics and University of Sanya, China.
Peter Charness
Retail Strategy - UST Global
Simon Property Group and other mall owners’ primary concern is maximizing lease revenues and many retail chains are precarious tenants in today’s economic climate. As long as tenants pay rent and are not a hindrance to existing mall visitors, mall owners will be smart to lease space to alternative tenants like Amazon.
Amazon is about to have a role in a whole bunch of malls in the U.S. I suspect in both distribution and retail. Retail including grocery — in the malls. Buckle in.
This looks like an attractive proposition for both Amazon and Simon Property Group. I have no doubt that other mall operators are already looking for similar deals as they grapple with the glut of space available in their malls — regardless of whether Amazon and Simon make a deal or not.
From Simon’s perspective the benefit is obvious: it gives them a paying tenant to occupy space that they would otherwise struggle to fill. However there are issues.
First, converting space is not always easy. These stores were designed for retail, not fulfillment or industrial use and, in some cases, considerable alterations and investments are required to appropriately convert the space.
Second, unless Amazon is pulling loads of people into the mall, there might be an impact on traffic.
Third, that reduction in traffic and the potential competition on their doorstep may impact other retailers in the mall and may erode the rent they are prepared to pay.
Fourth, I cannot see Amazon paying top dollar for this space. They have loads of choice when it comes to fulfillment locations, and this is only one of them.
I applaud Simon for innovating and looking at different options to make their spaces work financially, but let’s not pretend this is a panacea. It is a partial solution to a huge, and growing, issue.
Well, this is one way to kill off the mall concept once and for all.
They called them “anchor tenants” for a reason. They were meant to be the main draw and basically were a big part of the justification for high rents the other retailers paid to the mall. If I were a specialty store, I would immediately re-negotiate my lease — and eliminate “percentage rent,” which is the percentage of sales retailers pay malls because it’s presumed the malls are responsible for bringing traffic. I’d probably request a reduction in base rent as well. I mean, hell — who wants to be in an industrial zone?
I get that this is a big problem as it sits. Two dead chains anchoring malls. But can’t we find something more creative to do with the space? Now I did always think Amazon should buy Sears, but more to create a terrestrial presence than to be a distribution center. That’s just wrong.
If Amazon pulls this off, it would be a good win for them. Simon doesn’t have much to gain strategically. They get increased utilization and revenue. The existing tenants will not be pleased with the conversion to mixed use and the dilution of the mall appeal.
I think this came up sometime last year maybe? I believe a lot of us agreed (if I remember correctly) that it was definitely a good idea for Amazon to lease former Sears locations (and now J.C. Penney stores) for warehouses/fulfillment centers. I also remember reading that these locations would be good choices for expanding their brick-and-mortar presence. The mall concept is in the process of a re-invention and any solution that utilizes the space efficiently should be considered.
Simon would benefit primarily in terms of increased cash flow and leasing occupancy. However there are longer-term considerations that would need to be assessed in terms of the greater impact on the mall: its visual appeal, traffic flow, and community perception. If those can be addressed successfully, then it could also end up being a strategic win-win-win for Amazon, Simon and the end customer. I would expect any owner of vacant space has to at least be considering creative ways to reach similar deals with Amazon or online fulfillment providers.
Unfortunately, there is a lot of open space in malls. Finding ways to use that space is important for companies like Simon Property Group to have a steady stream of income, even if not at typical retail market rates. It is simple: As the market for retail space continues to decline, finding alternative uses for that space is paramount to the survival of the mall developer. Even if the space was built for retail, it doesn’t mean you have to use it for traditional retail.
Amazon will have competition for that mall space going forward. Owners would prefer those anchor positions to be something synergistic to the other tenants in the mall, so are trying to attract healthcare-oriented and social organization renters like urgent care, gyms and even schools. I see the synergies with Whole Foods and the Amazon food store, but not with a fulfillment center. It seems Simon may be running a little scared from the current retail property environment.
Traditional malls and their traditional anchor stores were struggling long before COVID-19 hastened their demise. There is little evidence of any significant rebound post-pandemic. With this as background, Simon may be the first but not the last mall operator to develop hybrid alternatives.
I see this as rather unlikely at any scale.
While Simon (and others mall owners) are increasingly desperate to generate cash from growing vacancies, anchor tenant space is generally not well suited to be turned into an efficient fulfillment center. While many department store locations offer some proximity advantages — and presumably could be picked up by Amazon at what amounts to fire sale prices — their layouts are problematic, which would be very costly to address relative to finding single level space that could readily accommodate a large number of trucks and delivery vehicles. I also suspect zoning hurdles are not trivial. I’m also not sure why a consumer oriented mall would want to bolt on a distribution center from a branding perspective.
I do see — and have seen for a while — the need for Amazon to get more deeply into physical retail to support its fashion apparel and home growth plans, so I would not rule out an acquisition of Macy’s, J.C. Penney or Kohl’s where BOPIS, BORIS and local home delivery fulfillment could be expanded. But these store would be harmonized retail locations, not true DTC fulfillment centers.
Simon would benefit from being able to lease space to Amazon. However in almost every case mall locations are in the right place but logistically constraining for Amazon’s operational needs as they do not have enough physical loading doors or loading dock space to be efficient distribution or cross dock facilities. In areas where the majority of the mall is going to shutter it may make sense to invest in modifying the building to support the logistical demands. Additionally, what might be interesting is the concept of a consumer pickup model using the mall locations as pickup centers if they could get a less than a 30-minute turnaround time.
The benefits to Amazon are obvious and have been well stated and Amazon will have a future and lasting presence in America’s malls. For Simon Property Group, unlike retail’s cyclical risks, the company will have a valuable and secure stream of income in Amazon.
While some see a risk of foot traffic reduction, I wouldn’t be surprised if Amazon creates a “will call” section as a storefront for these new age distribution hubs, which can serve for customer order pickup and return and a potential showroom for their in-home devices (connected homes and lives). Although this would add complexity to Amazon’s delivery optimization algorithms, the increase in delivery volumes will make up for any potential inefficiencies. With Amazon, we ought to expect the unexpected.
No. Distribution hubs require entirely different footprints — from the loading docks to the interior access and racking, to the height and power requirements, etc. It would require tremendous cost outlays to transform a mall store into a state of the art distribution hub. Just the destruction costs would be immense. It would be better to build these from scratch. If any of the property owners are willing to offer this as an incentive, I am certain that Amazon would consider this.
This has bad written all over it. Come to the floundering mall you helped kill, we’ll give you sweetheart below market rents while we pay for floundering retail brands to stay in business. Of course, Amazon would open their Amazon Go stores, grocery stores, etc. and suck even more value out of the mall than they already have. And all those semis and delivery trucks going in and out of a working mall – how does that work for shoppers?
If they want to take an entire mall that is fine, my beef is with doing this while retailers are still at the mall.
There is only one winner here: Amazon — with this Trojan Horse of an idea that will hasten the erosion of those C and D malls which take this offer instead of innovating around mixed use.
Amen.
Maybe we shouldn’t assume lines of Amazon trucks and loading docks as a visible detraction to the mall. Most malls are configured in some sort of linear fashion with the anchor stores on the ends and multiple entrance/exits to streets. If Sears is the anchor, the automotive department provides a convenient location for handling operations. Screen off the end store from (now Amazon Distribution Center) visually inside the mall and add some strategic wall/landscaping combination to the parking lot and suddenly you have two physically (or at least visually) separate spaces with separate traffic flows. It can work.
At this point I don’t think SPG is worried about the remaining retailers. SPG has already raised the white flag. I don’t know if they are correct or not, but they have already (based on your scenario), decided that their properties are no longer best suited for a retail future.
Simon Property Group is sending a huge message, loud and clear: “department stores are done and there is no hope for resurrection.”
Going further, they have also realized that there are few alternatives to use the vacant space to generate traffic, which leads to another conclusion regarding the future for the mall itself.
Survivors in the “retail” property management group will be few. Those who do survive will make bold changes. We shouldn’t lose sight of the fact that Amazon is an accomplished retailer in evaluating this deal. Perhaps our focus on their logistical and cloud services expertise lately is causing us to forget that. Amazon could wind up being a net traffic draw for specialty and service operators in mall locations — not a negative.
It is not surprising that Amazon is looking at this option. It would give them very centrally located distribution hubs with which to service the local community. We have talked in the past about retailers doing exactly this and once again Amazon are at the forefront of the new thinking. They have already proved the concept, these sites offer them the opportunity to roll it out to more locations. Watch out traditional retailers, if you do not make these things happen others will.
The move also provides Amazon a location for BOPIS collections, possibly even curbside pickup which would give them even more options for servicing their customers. This I am sure would be more acceptable to other mall tenants as it would bring people to the mall, driving traffic. The rent may be an issue but it’s better than these large sites remaining empty for a long period of time.
Talk about Prime real estate! This smart, mutually-beneficial deal benefits both companies and consumers.
Simon Property Group would boost revenue by filling vacant urban real estate, which few retailers can afford.
Amazon would expand its metropolitan reach beyond upscale Whole Foods neighborhoods. It would also gain strategic distribution locations to guarantee fast, local fulfillment, including same-day delivery. Amazon’s bounty of detailed HQ2 insights could help to pinpoint ideal locations.
Rival mall operators will certainly watch to see how this plays out to consider similar deals.
It’s a good move for Amazon as malls are located in areas that will make last-mile delivery easy. It’s not so great for existing mall tenants or for malls in general if they have any hope of reversing the drop in foot traffic. Converting the space into industrial use will likely lead to retail traffic dropping even further.
Obviously a smart move for Amazon. I have long feared the day they begin getting aggressive with cheap retail space for fulfillment centers. To compound the threat to retailers, they would be smart to include customer pickup and return options in these spaces — yikes.
“…if the mall operator is successful in its bid with Authentic Brands Group and Brookfield Property Partners to acquire Penney out of bankruptcy.” Does anyone feel like I do? This makes me feel like I entered a time capsule and am reading about the salvation of Sears. Could this Amazon thing help left over retailers? With their knowhow, money and sharp minds, maybe they could create some serious traffic for these malls, if they were to put their mind and money into it. I would think that the remaining retailers do have a Major Tenant clause in their leases which can/will reduce their occupancy costs dramatically. That should make Simon want to move on something.
This is clearly a boost for Amazon, less so for Simon unless you buy into the idea that some rent (albeit low as Amazon is not going to pay a high price for this space) is better than no rent. It’s a desperation move for Simon, strategic for Amazon. The question is, what will the other retail tenants think? Why should they pay the rent and fees they pay for a location now being used as a fulfillment center for one of their biggest competitors? I don’t see this helping the traffic issues in Simon’s malls. I’m also not sure this is an ideal space for Amazon unless they use it as a combination of fulfillment and physical retail space. Perhaps a larger format Amazon 4-star store? Imagine the data they will gather from consumers in that scenario!
Not just a distribution center. Amazon curbside, with two hours to pick up. How about “Amazon Emporium?” Selling off all the returns at great prices and saving all the reverse logistics of getting product back to the original suppliers. Fits the mall idiom and keeps traffic coming in for other tenants.
Smart, Peter!
Effectively a treasure hunt of what is consignment goods, with a commission to Amazon upon sale. Send that consulting contract my way….
I think this is a win for Simon – a tenant in solid financial health who could lease obscene amounts of open space. It would also be smart of Amazon – centrally located warehouse space to maximize delivery efficiency. For the rest of retail, this could be a major concern. Would Amazon have influence on other leasing decisions in the malls? Would they be able to insert co-occupancy clauses to lock certain retailers out of properties?
Other than lowering vacancy rates for Simon’s underperforming malls (only a few of them), there is limited benefit for Simon. A shift of malls towards warehousing or micro-fulfillment may make some sense but, for Simon, a baked-in real estate company with enormous success in retail, they would be lowering property value and tenancy rates across the board. Such a deal might make sense in select properties but not as a broad strategy for the company. For other mall landlords the option is even less desirable unless the intent is to leave the retail investment space altogether. Retail leasing is far more lucrative than warehouse leasing. It would be smarter to fill in the locations with smaller retailers, other types of businesses, office space or even special purpose industrial property.
There is a parallel race for Amazon to mitigate the last mile of fulfillment and for Simon Property Group to find financially stable tenants to occupy the prime anchor tenant space that the national and regional department stores once dominated. Simon and other mall landlords have been dealing with the retail consolidation and disruption for years by investing in brands, providing flexible lease arrangements, and doing everything possible to avoid significant tenant gaps within the malls.
However with the COVID-19-driven Great Acceleration, department stores such as Sears, J.C. Penney, Macy’s, and others are facing unprecedented levels of disruption, and the Simons of the world need new tenants. As Amazon races to dominate the digital commerce space against Walmart, having a local distribution network is a key differentiator. Perhaps there will be a section dedicated to an Amazon Go-like environment, and another space focused on BOPIS and curbside pickup operations.
Either way this is a clear sign of things to come, as the department store model’s relevancy and sustainability are questionable at best.
Mall owners are certainly on the move in finding concepts that work for their spaces. The biggest problem I see is the price. Amazon does not need high rent locations in order to make the last mile so mall owners will have to make it very attractive. I don’t know the numbers in that industry but I would think it could be a mall buster if they’re not careful. For my 2 cents.
The opportunity now being presented to mall operators as retail store lights go out across the country is part of a larger decision that many mass market retail channels will face over the next several years: how to serve a growing online business. Do you construct central fulfillment centers or micro-fulfillment centers frequently based on stores? Amazon does both. Kroger has also gone the central fulfillment center route with Ocado, but many supermarket chains such as Albertsons are opening micro-fulfillment centers in conjunction with their stores. Mall operators can validly look upon this as a business opportunity. The process of coping with online business is just starting and perhaps mall operators may benefit by actively participating with retailers in resolving this issue. Many of the stores aren’t coming back but retailers are now seriously grappling with digital selling.
Although Jeff (Bezos) has not phoned me for advice, this is an opportunity that properly hatched could save mall space and make Amazon the real victor in less-than-prime-priced property.
What would I do? If Simon Property Group, definitely lease to Amazon! If Amazon, I’d structure the fulfillment operation with a “showrooming” capability to allow certain items to be experienced. Could such an offering make Best Buy vulnerable? Yes. Could it move Amazon more soundly into furniture? Yes. Home and Kitchen stealing sales from Container Store and Crate & Barrel? You bet.
Amazon is far too smart not to negotiate something game changing (again!).
My immediate thoughts (as usual) are around shopper experience. The whole point of the mall is the socializing, browsing and shopping experience of stores and storefronts that provide an inspired or engaging experience. How does one do this with a fulfillment center? What message does this send to shoppers walking the mall — looking for an experience? How does this impact smaller stores (some, barely hanging on) that see Amazon as a competitor?
Other than malls, there are few positions left for anchor stores like Sears on Penney’s. These stores serve a certain consumer that may not be prime for Amazon. Malls are part of the community. When you replace shoppable stores with unshoppable fulfillment centers, in some communities, you’re taking away more than just a place to shop. Is it possible to re-imagine the mall experience and still keep it shoppable?
As with much else in America, there seems to be a firm divide on the “malls as distribution centers” question. Some see the repurposing of former department store space as logical, perhaps even inevitable. Others feel the supposed attractiveness is chimera (indeed the spaces are particularly UN-suited for the purpose).
I have been and remain in the latter camp, but recognize there’s no better way to resolve the dispute than to test the idea (… so good luck guys!)
I think Simon should follow a parallel strategy that also includes Micro-Fulfillment Centers (MFCs). These MFCs would also take up space currently or formally occupied by the anchor stores and provide pick, pack and ship or pick-up for customers who shop the mall. The mall stores would be showroom only and the product would be robotically processed in the MFC for customer pick-up as they exit the mall. These robotic MFC are fast, reliable and real. They operate in a high density cube and can process over 10,000 orders per day. They are coming to a supermarket near you, so why not a mall?
Driving past a shuttered Super Kmart yesterday here in Tucson, I commented to my companion that before long, Amazon would turn it into a neighborhood distribution facility. Pure speculation on my part, but such single-level locations with multiple loading docks have certain logistical advantages compared with three-story buildings attached to shopping centers.
Amazon can have its pick, I suppose — both types of real estate are in excess supply, and top mall operators like Simon are hard-pressed to fill their anchor spaces.
I drove past a new million square foot delivery hub that Amazon is building across the highway from its existing (equally big) distribution center in Kenosha, WI. I have trouble visualizing how Amazon would use a 150,000 square foot building given the scale of its logistical needs — but maybe another BrainTrust member can enlighten me!
I’d rather see Amazon use these relatively small boxes (by their standards) for a variety of reasons — as a hub for customer pickups and returns, and as a collection of its own retail concepts, from grocery to best sellers to convenience. But even a mini-warehouse would have the benefit of driving employment to the mall — and maybe those employees would shop at other stores there.
If this happens, and I wouldn’t bet on it for either Simon or Amazon, it will likely fall under the category (pardon the movie reference) of “it seemed like a good idea at the time.”
Simon needs this much more than Amazon as the value proposition and economics of Amazon Prime is unlikely to drive customers to malls to pick up goods that arrive on their doorsteps today.
Many, many malls, and many of their tenants, are toast, but less relevant than something you can eat for breakfast (or at every meal, like Elwood Blues).
We call them shopping malls but they are really real estate operations with a current focus on retail. In the future, the focus by many B, C and D class malls will not be exclusively retail. It is in their self interest to make deals with Amazon or any business that will fill empty spaces left by retrenching brick-and-mortar retailers, so I believe these kinds of deals will expand.
One interesting retail story that is relevant to this thread is about Vornado Realty Trust, which currently has assets of $18.7 billion and just signed an agreement with Facebook leasing 730,000 sq. ft. of office space in NYC. Vornado started out as a mass-merchant-type retailer and boomed through the 1950s and ’60s however, in the ’70s it began to make more money by selling the property under its 200 stores. By 1980, it began the process of moving out of retail entirely and becoming a real estate trust and has since operated on an arc of steady and reliable success. Some less successful malls will no doubt try to emulate this arc.
This solves the short-term problem of generating rent for the mall owner without heavy remodeling, however, it doesn’t solve of the problem of driving traffic to the mall and the other tenants within it. Part of the reason you open in a mall is the traffic driven by the anchor stores. Without the anchor stores, it decreases overall flow and doesn’t contribute to the success of the mall.
Even though Simon would get (some) revenue from dark anchors, It’s a better deal for Amazon.
Whether we like it or not, significant empty space in malls isn’t good for anyone. If Simon can’t achieve a sustainable financial model it puts everyone at risk, including the other retailers who have space in those malls. At the end of the day, the entire mall model needs a revamp that won’t happen overnight — can they be made destinations for other kinds of mixed use purposes like businesses + retail? Can more services become tenants? It’s going to take time to get from here to there, and if having Amazon pay the rent to keep the mall open at all, is the interim step, then it at least buys time for reinvention.
These are nice large spaces, recently occupied, in a good state of repair, near their customers! Amazon SHOULD take advantage of these spaces!