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As e-commerce gobbles up sales, brick-and-mortar stores scramble to reinvent themselves, survive

Kmart had been an anchor in this strip mall on Route 191 in Bethlehem Township, but the store has been closed since 2013. No tenant has been announced. - (Photo / Bill Kline)

The influx of physical retail locations in the 1990s and early 2000s may have created a retail bubble that has now burst, according to industry experts.

Several trends are conspiring to deal death blows to traditional retail outlets, particularly department stores and malls, they said.

From Sears to J.C. Penney to Radio Shack to Staples, a growing number of retailers have recently announced store closings amid a changing retail landscape that’s losing in-store shoppers who are increasingly buying products online.

Coupled with the growth of e-commerce, some say a lack of investment in the physical stores has dealt a crippling blow to brick-and-mortar retail as shoppers seek attractive, experiential venues when they venture into an establishment.

A third factor contributing to the demise of many physical retail stores is their overreliance on apparel, particularly for big department stores. These establishments have not been as nimble to adapt to changing tastes in clothing, driving shoppers to boutique shops, specialty stores and high-end shops or off-price retailers for deeper discounts.

A fourth trend is the notion that people are spending more on experiences, including entertainment and services, and less on clothing.

“We’ve had a consolidation that’s been going on for a couple of years now,” said Edward Dittmer, vice president of Morningstar Credit Ratings LLC of Horsham. “The U.S. is over-retailed. A lot of these retailers that are closing haven’t invested in their physical plants and product lives.”

One example is hhgregg Inc., which recently announced it would be closing stores, including the two in the Greater Lehigh Valley. The electronics and appliance retailer faced a lot of competition once it decided to start selling televisions and was not able to compete in that space, Dittmer said.

“It looked like hhgregg didn’t have a good strategy,” Dittmer said.

Other retail sectors, such as Staples, which is closing 70 stores, show the office supply industry is over-stored, Dittmer said.

For department stores, trying to sell apparel is putting them under since there is so much competition, he said.

“Trying to be all things to all people is not something that works in today’s market,” Dittmer said.


Technically, it’s a brick-and-mortar bubble, as the growing e-commerce industry also is considered retail activity.

But that’s little solace to malls and department stores and their landlords. For once stores go dark, what will become of them?

Steve Jellinek, vice president of Morningstar Credit Ratings LLC of Horsham, said he’s seen anchor boxes become office spaces or health centers. In strip centers, urgent care centers tend to add foot traffic and operate well in 5,000-square-foot spaces, he said.

With malls, tenants that replace the anchors pay more rent per square foot and add value to the development, while anchors pay the lowest rents of any tenants, Jellinek said.

Grocery stores also have returned to malls to help draw traffic to struggling areas. As an example, a Wegmans recently opened in Montgomery Mall on Route 309 in North Wales, Dittmer said.


Malls and stores that do well are the ones where owners invest in the properties.

“They are not getting investments in property, and consumers will see that,” Dittmer said. “We are seeing a very, very clear bifurcation in this market. The future of the Class-B mall is cloudy at this point.”

Similar to the different tiers of commercial office space, in retail, a Class-A mall would be one of high quality, strong demographics and attractive amenities. Often, they are in higher income areas and generate more sales per square foot.

Class-B and C mall properties are typically smaller properties that operate in smaller trade areas, do not generate as much sales and may not have an attractive appearance.


On the flip side, some malls are doing well, such as Plymouth Meeting Mall, which recently made additions, and King of Prussia Mall, which recently expanded. These are malls where the owners invested in their property.

Often, the success of retail properties also depends on location.

Those in the more active and populated Philadelphia market tend to fare better than those in more outlying areas, Dittmer said.


It’s not all dire news for the retail industry, though.

The largest mall in the region, Lehigh Valley Mall in Whitehall Township, is doing well with $570 per square foot in sales in fourth quarter 2016, ranked as a Class A- mall.

And a locally based department store chain appears to be thriving, as well.

Boscov’s, which is based in Exeter Township, opened its 45th department store in October near Utica, N.Y. And it will open a new one near Erie, bringing its footprint to 46 stores in seven states.


Jody King, vice president at CBRE Inc. in Fogelsville, said she does not see a retail bubble forming now because an oversaturation of retail commercial real estate probably reached its tipping point a decade ago.

“With the advent of e-commerce and changing spending habits, there is undoubtedly too much retail space today,” King said. “People are buying more online, and spending more money on health care and educational expenses [loans]. But that doesn’t mean all retail is going to suffer.

“Generally speaking, the better-located malls and shopping centers catering to a more affluent demographic will fare better than the less well-located retail venues with less desirable demographic profiles.”


With the closing of many anchors such as Macy’s, Sears and J.C. Penney, some malls and shopping centers with less desirable locations and demographics will see a rapid deterioration in shopping traffic and financial health, potentially leading to redevelopment, King said.

Some of the malls and shopping centers that have better locations and demographics also will lose a key anchor or tenant. However, these retail venues will have a better chance to replace these vacated spaces with new tenants or new uses.

Ultimately, the big boxes will have to be divided into smaller spaces, and new tenants could include entertainment, fast casual and polished casual restaurants, discount retailers and furniture.

“In addition, we are witnessing a strong demand from health services for retail space,” King said. “These are some of the tenants who will replace some of the anchors who will vacate due to an oversaturation of retail.”


But department stores, generally, will continue to struggle, Dittmer said.

“Sears, long term, has a very murky future,” he said. “Penney’s announced 140 stores it will close. It depends whether or not these anchors [spaces] can reinvent themselves.

“They have to find a way to become nimble on the fashion side and also invest in products that will attract people into those stores, and, so far, they’ve been unable to do that.”

Consumers are paying more for services and entertainment and less on clothing, Jellinek said.

This trend also is contributing to the declining sales of traditional retail outlets and department stores.


Outdoor malls, sometimes referred to as lifestyle centers or power centers, appear to be doing better. Hamilton Crossings, which opened last summer in Lower Macungie Township, is a massive retail center with department stores as anchor tenants.

It also has a grocery store (Whole Foods), numerous restaurants and pedestrian paths that encourage walking.

The developers said they designed the project to create an environment where people could buy just about everything they could need on a daily basis.


Retailers, big and small, will continue to try to adapt to changing consumer habits, and time can only tell how successful they will be.

“In short, the transformation of retail continues,” King said. “Yes, there probably is a bit of a bubble, but that bubble has already been deflating for some 10 years, and we don’t see a cataclysmic “pop” in the future.

“Some venues will certainly fare better than others, and some will have to be redeveloped.”


Kim Kmetz of Easton’s Main Street Initiative sees opportunity for small businesses because of the struggles or large and big box retailers.

“I do believe Main Street businesses are better poised to offer people what they want,” said Kmetz, Main Street manager. “The reason they will go to a retail store is for customer service or a one-on-one experience.”

Malls and big box retailers have long been the enemy of smaller, Main Street businesses, and now online shopping is as well, she said. However, it appears that e-commerce has also taken away business away from those bigger stores, too.

While e-commerce also takes business away from Main Street, people are also starting to embrace business districts and urban living is popular, she added.

“I think there is an opportunity for us to take advantage of that energy of leaving the mall,” Kmetz said.

The shopping districts in downtowns will not be like they were in the 1950s but can offer many social destinations that people want as part of their social environment, including art galleries, theaters and restaurants.

“Hopefully, the retailers here can take advantage,” she said.

Brian Pedersen
Reporter Brian Pedersen covers construction, development, warehousing and real estate and keeps you up to date on the changing landscape of our community. He can be reached at [email protected] or 610-807-9619, ext. 4108.

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