Will Amazon install distribution hubs in malls across America?

Discussion
Photo: Getty Images/hapabapa
Aug 10, 2020
George Anderson

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.

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?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"Simon Property Group is sending a huge message, loud and clear: 'department stores are done and there is no hope for resurrection.'"
"Not just a distribution center. Amazon curbside, with two hours to pick up. How about “Amazon Emporium?”"
"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."

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47 Comments on "Will Amazon install distribution hubs in malls across America?"


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David Naumann
BrainTrust
David Naumann
CEO and President, Cogent Creative Consulting
7 months 30 days ago

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.

Jeff Sward
BrainTrust

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.

Mark Ryski
BrainTrust

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.

Neil Saunders
BrainTrust

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.

Paula Rosenblum
BrainTrust

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.

Suresh Chaganti
BrainTrust

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.

Richard Hernandez
BrainTrust

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.

Ryan Grogman
BrainTrust

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.

Shep Hyken
BrainTrust

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.

Ron Margulis
BrainTrust

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.

Richard J. George, Ph.D.
BrainTrust

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.

Steve Dennis
BrainTrust
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… Read more »
Perry Kramer
BrainTrust

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.

Mohamed Amer
BrainTrust

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.

Kai Clarke
BrainTrust

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.

Bob Phibbs
BrainTrust

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.

Paula Rosenblum
BrainTrust

Amen.

Ben Ball
BrainTrust

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.