A recent decline in the sales of denim apparel is dealing the latest blow to owners and operators of shopping malls, whose traffic has been declining for several years because of mushrooming Internet sales and lingering consumer malaise following the economic crisis of 2008-2009.
CFOs of mall owners — prominent ones include Simon Property Group, General Growth Properties, and Westfield Group — are pressed more than ever to exert discipline in their choice of tenants, Victor Sahn, a bankruptcy attorney with SulmeyerKupetz, tells CFO. “They really have to keep an eye on their tenants and not lease to just anyone who needs space,” he says. “They need to carefully evaluate the future of that company and the industry it’s in.”
Traditionally, malls have drawn traffic to big-box anchor stores — Macy’s, Nordstrom, Bloomingdale’s, Target, etc. — that then fans out to specialty stores. But those in the latter category that are heavily focused on denim sales are in cutback mode, hurting mall owners and operators. Gap, for example, announced on June 15 that it would close 175 of its 675 stores by 2016, and Guess closed 50 of its 448 stores in last year’s second half.
For the denim retailers, “it’s a question not only of sales but of cost,” notes Sahn. “When you have brick and mortar locations and nobody’s coming into the store, the cost factors in holding the real estate are highly problematic.”
Sales of denim products, a $50 billion worldwide market, were down 6% in 2014, according to market research firm NDP Group, in large part due to consumers’ growing preference for lighter athletic wear from companies like Lululemon, Athleta, and Nike. But data suggests that the trend away from denim may be waning this year, according to Sahn.
“I equate denim to Barbie Dolls,” he says. “They’ve been around an awfully long time. Sometimes new toys come around and Barbie sales go down, but they usually come back with the newest thing isn’t so new anymore. So I’m not viewing [the drop in denim sales] as something permanent. But what is permanent, I think, is the decline in mall traffic.”
If denim doesn’t come back big, the roster of companies in potentially dire straights will expand. “Big-box stores can presumably sell other items, but what’s in store for mall tenants like Gap, Guess, Lucky Brand, True Religion, and Miller’s Outpost?” says Sahn. “For them it’s very difficult, as it is for the denim manufacturers. When you’ve been Levi-Strauss for 100 years, it’s pretty hard from a manufacturing standpoint to shift away and do something else.” Other major denim suppliers include VF, Joe’s Jeans, and BDG Urban Outfitters.
If retailers can downsize their brick-and-mortar store roster to an optimal size and ramp up online sales, the decline in mall traffic may not end up being devastating. That doesn’t help mall owners and operators, though. “Internet sales don’t help Westfields of the world prosper,” Sahn notes. “They’re real estate companies.”