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Long before retail was impacted by social distancing, the American mall was fighting for survival. Early signs of this were everywhere: perpetual discounting and promotion, insufficient staffing, stale inventory, and outdated storefronts. A number of these retailers are highly-leveraged assets, a culprit even a junior financial analyst could identify. As a result, a deluge of layoffs and closures began within two weeks of foot traffic falling. What will a healthy retail ecosystem look like when normalcy returns?
Introduction: The Dip and The Surge
With nearly 40% of retail square footage out of commission (and climbing), shopping malls are due for a flood of delinquent lease payments and permanent store closures. The majority of the 3.3 million Americans who have lost their jobs or were furloughed were service industry workers. This historically high unemployment rate will impact Class B and C malls disproportionately. An untold number of those jobs may return and most malls will take years to recover – if they ever do.
We’ve been building malls like there’s no tomorrow. America overbuilt.
Yaromir Steiner, CEO of Steiner and Associates
Select retail categories have seen 200-300% growth month over month between February and March. According to Apptopia, Walmart, Instacart, Amazon, and Target have seen 300-400% growth in app downloads. A number of digital marketing agencies are reporting that, despite growing economic tensions, their clients’ ad performance (and relevant sales) have remained steady. Consumer goods and essential products brands are reporting surges on Amazon. Target, Instacart, and other eCommerce companies are hiring a combined 600,000+ employees. We’ve reached a renaissance in essentials eCommerce.
“Where else do you go [for those items] — CVS? No one wants to leave their house right now,” said Catharine Dockery, founding partner in Vice Ventures, which backs Maude. 
With a growing number of cities under government orders to shelter, the consumer conversation has shifted from physical channels to direct-to-consumer (DTC). The shift trickled along and then happened all at once. The abrupt shift from analog to digital has been drastic. However, the extent in which it exists today will not last. Upon the return to normalcy, consumers will yearn for the public experiences that define our urban infrastructures: concerts, beer gardens, coveted restaurant reservations, and the in-person shopping spree. Initially, traditional retail will return to form in a v-shaped recovery. When society returns to normal, what’s left of restaurants and retail will return with it. But when the novelty of physical freedom subsides, what we will see is an amalgam of two philosophies. Brick-and-mortar retail is ripe for innovation; this thesis explains how I envision that innovation.
Background: America is Over-Retailed
In a December report, 2PM explained the fluid dynamics between mobility, eCommerce, and physical retail. Visualize it as a push and pull between dueling resources capable of great synergy. In most cities, they have reached a new equilibrium. The country’s twelfth largest metropolis, Central Ohio, is at the epicenter of a shift that will mirror in other cities, larger and smaller. The city’s history foreshadowed its next role in determining the landscape of other towns, cities, and villages throughout the United States.
“We are Test Market, U.S.A.,” said Irene Alvarez, director of marketing and communications for Columbus 2020, a trade group that promotes the region. “We decide the fate of cheeseburgers and presidents here in Columbus.” 
Formerly known as Test City, USA for its role in the boom in the fast food economy (Wendy’s, White Castle, and others are headquartered here), Columbus, Ohio is also a retail microcosm. The following mall retailers are headquartered here: DSW, L Brands, Abercrombie & Fitch, Victoria’s Secret, Express, Hollister, and Ascena Retail Group’s subsidiaries. Ascena includes: Justice, Ann Taylor, Loft, Lane Bryant, and Catherine’s.
The following is an excerpt of that December 2019 report :
America is over-retailed. And unfortunately, innovation in online retail will exacerbate this. For Columbus (and many other forward-thinking cities), this is a conflict of interest. As regions shift toward mobile commerce-forward models, old ways of retailing will subside. And given early data – the numerous retailers that are headquartered in and around the city would be placed at existential risk.
It’s for this reason that Columbus serves a microcosm of traditional retail as a whole. The industry will have to choose between its past and its future, both of which are tied to shifts in mobility innovation. Like Steve Jobs said in 1995: “People are going to stop going to a lot of stores. And they’re going to buy stuff over the web.” This is beginning to reflect in public and private markets. What happens when we stop driving to stores? What happens when shopping centers no longer have sufficient demand? What happens when advancements in last-mile delivery becomes carbon negative? This is happening now.
We should begin thinking of malls as operating systems: layers of retailer tools and consumer efficiencies. This next section summarizes hours of conversations, thousands of words of email, and countless hours of ruminating on retail as a component of city planning. This is one part sociology, one part retail economics, and two parts futurism. Whomever executes on this will own that future.
The Connected Mall and RetailerS
This is where things get interesting. I’m of the belief that each major city can support one Connected Mall. Columbus has three candidates: Easton Town Center, Polaris Fashion Place (Washington Prime), and The Mall at Tuttle (Simon Property Group). Each are considered “Class A”, though Tuttle has quickly diminished in quality. According to Placer.ai, the two most vulnerable malls were also designed in nicer suburbs. Founded in 1999, Easton Town Center set out to build its own district – modeled after the vision of architectural pioneer Victor Gruen and his ringstrasse-inspired design.
Instead of relying on a suburban population for demand, Easton Town Center began forging its own demand generation with high end condominiums, hotels, and offices peppered within the development’s core. As the development grew, its core customer moved upmarket from middle-class to upper. This trend will continue, partially explaining Easton’s increase in demand vs. its peers (see 2PM data here). In short, it’s aspirational. The development’s emphasis on experiential retail, which separates it from its peers, is a similar distinction that you’ll observe in a number of cities across the country. Each major city has attempt a town center, few have matched Easton’s depth and appeal.
I typically err on the side of premium as the KPI for sustainability. In this scenario, Polaris would currently earn the vote: it sits betwixt a number of upper-class suburbs and is home to the region’s only mass purveyor of luxury goods, Saks Fifth Avenue. But Polaris and Tuttle are traditional, enclosed malls. This architectural model has a built-in disadvantage: it’s slow to evolve.
Over the course of the last eight to twelve months, I’ve sat with a number of retail developers from companies like Macerich, Brookfield, and Simon Properties. The savviest retail developers are searching for their next innovations.
The Connected Mall is the big idea that may help retail developers evolve with the needs of modernizing cities. This visualization explains the approach:
Easton Town Center is a living, breathing linear commerce model on the heels of completing a $500 million addition. In 2PM’s Connected Mall model, Easton would continue to develop its exurban “city within a city.” Building mechanisms for organic demand is key to retail sustainability. But the next phases of the connected model are two-fold.
A lack of omni-channel fluency has been but one of the weaknesses established in this flash recession. Judging by the swift and decisive layoff actions made by a number of Columbus retail executives – including DSW, Green Growth Brands, and more – few were prepared to shift their attentions to DTC channels. And even fewer mall retailers were prepared for a drastic lapse in foot traffic. While it’s typical for retailers to have eCommerce sites of their own, few have last-mile capabilities to make same-day delivery a value proposition. This is even more the case for Main Street retailers, whose entire models are built on foot traffic.
The Connected Mall is a philosophy that could be applied to Easton’s existing business model: (1) a value-add to existing retailers (2) a recruitment tool for new retail partners (3) a sales-channel for a region’s consumers. There are three layers of execution: marketplace, physical expansion, and last-mile delivery. Below, you’ll find the components:
Hardware: an inventory tracking system.
For the retailers that participate in this format, they’d opt-in to have their inventory tracked and SKUs photographed for presentation within the marketplace and/or associate mobile application. The challenge is establishing one inventory tracking system that could communicate to enterprise-level retailers (department stores, luxury sellers) and independent retailers alike. In the 2PM Report, The Last Mile Marketplace, 2PM explained the prescient Google acquisition of Pointy, a physical device that reads point-of-sale (POS) system data.
Acquired for $163 million, Pointy’s outcome reminds me of Google’s Android acquisition or Facebook’s purchase of Instagram for $1 billion. It’s the type of corporate development deal that could shape the industry for years to come. […] While Facebook is building traditional commerce infrastructure to democratize access to retail technologies, Google took the “OpenTable approach.” By tying into the backend systems of physical retailers, Google now owns a marketplace. 
While Google’s acquisition is just one example of a solution, the precedent has clearly been set to solve this problem at scale.
Software: a localized digital storefront.
There is an opportunity in merchandising a mall’s retail partners, allowing those retailers to sell to regional consumers who prefer to shop online rather than in stores. This approach mirrors Alibaba’s Tmall approach, one detailed in 2PM Member Report: The China Strategy.
Alibaba recently signed Net-A-Porter into their Luxury Pavillion. Owned by Richemont, Net-a-Porter is the internet’s foremost retailer of luxury products. Richemont also owns the likes of Cartier, Montblanc, Panerai, Vacheron, and IWC. These brands will likely make a direct to consumer play through Alibaba’s Tmall invite-only luxury platform, as well. 
Whether through a desktop, mobile, or app-based treatment – this system would allow a city’s residents to interact with the mall without physically traveling to it. This provides the same value as apps like DoorDash, Postmates, and UberEats, but with one added value. Those apps are limited by their inability to track real-time inventory. Few retailers are willing to cede their inventory and sales data to a third-party. Additionally, margin is opportunity. And with the Connected Mall, the retailer’s margin is not shared with the marketplace.
Personnel: a white glove mobility partner.
In Columbus, a well-positioned company called Citrin bills itself as an automotive valet, porter, and employee management leader. With hundreds of citywide employees and last-mile partnerships with luxury car dealerships, Citrin is an existing partner to Easton Mall. The porter service provides valet to a number of businesses on the premises. This is just one example of repurposing existing resources to fill a critical need for an innovative project. With a mandate of one to two-hour delivery, a customer premium of $25-40 per order would cover the costs of most deliveries made within a 17-20 mile radius of the Easton Town Center.
Real Estate Acquisition: innovative expansion and opportunity creation.
In the early days of America’s COVID-19 scare, it was immediately evident that independent retailers would be hardest hit by this catastrophe. In Columbus and beyond, a number of these owner-led storefronts suffered from a lack of foot traffic, forced closures, waning demand, and inadequate technical infrastructure. In theory, the Connected Mall expands throughout the city, repurposing idle or sub-optimal retail square footage to serve as extensions of the primary location.
In this concept, the auxiliary stores are branded with Easton’s trademarks, signaling digital marketplace-inclusion, last-mile availability, and a level of service that is consistent with one of the brightest retail developments in the midwest. The Connected Mall model serves as a retail operating system, supply growth and opportunity to an evolving city.
Not only would a partnership like this make idle retail square footage more appealing, it would redefine the mall in the early stages of an economy that will eventually become online-first rather than online-second.
Imagine a city with its premier mall’s outposts situated throughout its key neighborhoods. In the Bexley area, a row of designer houses: Celine, Louis Vuitton, and a Lululemon Lab. In Upper Arlington, an Untuckit and a Bonobos side by side. And in the college district, a test store for Hollister’s latest attempt at reinvention. And next to it, a Glossier.
It is important to appropriately react to the detrimental impact that immobility is having on physical retail as an industry. We’re not living through a temporary present. Rather, it’s a derivative of the future. Though this exact present will not linger, its effects will. We are witnessing a shade of how retail will evolve. A number of retailers – big and small – will be ill-prepared for a retail blend that is closer to China’s 40% eCommerce penetration.
February 2020’s America sat at 11.2%. March 2020’s America is likely exceeding 60-70% eCommerce penetration. What does this mean? And how can we account for the changes to come?
For two decades, Amazon sat on a patent that provided it a technical advantage: one-click purchasing. And then, Amazon built another advantage that they could not patent – last-mile supremacy. Both are available to innovate upon, today. What this should communicate is that ease and convenience are the forerunners to conversion. Malls will always thrive as experiential distractions. But sometimes, a consumer wants a pair of pants from Saks at their door and before dinner. A Connected Mall can compete for a consumer in ways that Amazon cannot.
This is the opportunity to bridge the past, the present, and our eventual future. The premium experience of the physical mall will remain a component of American consumerism. But what the COVID-19 experience has shown is its vulnerability. The mall is missed but it certainly isn’t necessary. To become so, malls like Easton Town Center must become more of utility. This is how.
Thesis by Web Smith | Edit: Hilary Milnes | Art: Andrew Haynes | About 2PM
For a deeper understanding of an evolving eCommerce GMV, you can read the latest by Channel Advisor.