Why Do All Regional Malls in America Look the Same?

Have you ever wondered why you can walk into a regional mall nearly anywhere in America and find the same chains, the same stores, nearly the same mall layout?

The answer is because Simon Properties, the owner of most regional malls in America, has a winning formula that tends to favor large chains (even if they are small stores) over local merchants. In respect to Simon, the formula has brought riches to its shareholders. Simon has treated its shareholders really well over the years, so you can’t blame them for finding and duplicating a winning formula.

For simplicity's sake, I am going to call the Simon formula the McDonald’s Formula. They have perfected an experience where shoppers know exactly what kind of shopping they are going to find in a mall, even before they set foot into it. Shoppers may not consciously even know that Simon owns a mall, but when they drive into the parking lot, they may unconsciously recognize this fact.

Simon has three or four primary anchor tenants in the mall, pretty evenly spread out across the outside corners of the building. There is usually a movie theatre and food court (many with the same chains). Nearly every Simon regional mall has six to eight jewelry stores in them.

What has slipped out of nearly all Simon properties during the past three years are the local retailers that bring some sort of uniqueness and local flavor to the mall. The way Simon has tried to make up for this is to bring in kiosk-based merchants with very small footprints that sell local collegiate wares, regional souvenirs, and maybe even local foods.

The biggest reason that local merchants have left the regional malls is occupancy costs. Notice I am not using the term "rent." The way Simon and other mall owners work is there is a base rent which turns out to be a fairly small portion of the total cost of occupancy. On top of rent the mall charges common area maintenance (CAM) fees. Such fees include air conditioning for common areas, security, mall marketing, and janitorial services. Though every lease is a bit different, it isn’t unusual to find 10-14 CAM charges added to the base rent charge.

Then there is the “sales overage” fee. If a business passes an agreed-upon sales threshold, it will owe the mall an additional percentage of its gross profits, payable at the end of the year.

In a real case of a local tenent in a regional mall, the tenant occupied space in the mall from the day it opened until several months ago. During the company’s best sales year in 2006, the total occupancy costs were approximately 20 percent of the local retailer’s gross sales. When the recession started in 2007, the retailer’s sales costs went down, but its occupancy costs stayed the same. Over the next two years, things got even worse. By the end of 2010, the retailer was paying nearly 60 percent of its gross revenues to the mall in occupancy costs. Though local mall management was sympathetic, the economic reality was that Simon Properties’ home office could replace the lost local tenant in about 30 days with a large national coffee chain. The difference is because Simon has a national account relationship with the large coffee shop chain, occupancy costs are likely to be much lower as a percentage of sales than the local retailer paid.

In real numbers, the local retailer paid $14,000 a month for about 1,500 square feet of space. My estimate is the large coffee shop chain will only pay about $8,400 per month for the same space.

I can’t fault Simon for their strategy to make profits for their shareholders. I do think it is sad that local retailers believe they should be in these regional malls to start with. Simon, for example, has smaller, quaint centers they call “lifestyle” centers where occupancy costs are much lower. Other retail space owners have smaller properties that are often easier to get in and out of.

With the Internet and social networking tools, a savvy local retailer can create their store location as a destination rather than an impulse as they are now in the regional malls. When the concept of the suburban regional mall was conceived there was no high speed information superhighway available to consumers. Consumers are in the driver’s seat and retailers of all sizes and flavors must bring them what they want for a reasonable price or they will die.

If you are a retail establishment that has only brick and mortar locations, you should strongly consider rethinking your strategy. You absolutely must have a website and even an online store is a good idea. You may not even have to be in a brick and mortar location if you are able to move to online sales only. The beauty of online stores is your cost of occupancy is very low and your sales reach is as far as the Internet goes.

Sam Thacker is a partner in Austin Texas based Business Finance Solutions

Direct Email: sam@lesliethacker.com

Twitter: @SMBFinance