Mall Owners Accuse Retailers Of Under-Reporting Sales To Keep Rents Lower

The American shopping mall - that centerpiece of the 1980's big-box retail model - has fallen on hard times in recent years as the growing dominance of e-commerce has finally started to take a toll on brick-and-mortar retailers - a subject that we've frequently discussed.

Shifting consumption patterns (i.e. the dawn of e-commerce), years of underinvestment by mall owners, and a seemingly unceasing stream of retailer bankruptcies are the factors that have been responsible for most of the damage to Mall REITS, particularly products tied to lower quality malls.

Emptying storefronts and malls have only exacerbated a glut of American retail space. The country now has roughly 24 square feet of retail space per capita, more than twice that of Australia and 5 times that of the UK.

And as if all that weren't enough, mall-management companies are swiftly discovering that e-commerce is impacting their businesses in ways that they did not anticipate. For example, the increase of customers returning items to the nearest big box retailer location (instead of returning an item purchased online through the mail) has allowed for a quirk in how retailers report sales that is making it even more difficult for these mall owners to placate their Wall Street overlords.

Malls

As Simon Property Group Inc. CEO David Simon explained to Bloomberg, this trend has led a "significant number" of tenants to underreport their sales figures as many of these stores have begun deducting the returned items from their total sales.

Often, this total sales figure is used by mall owners to calculate rent increases - so stores have every incentive to maintain the status quo. Unsurprisingly, mall owners are agitating for change and accusing stores of effectively underreporting their sales. This hurts malls twice: Once when they collect the rent, and again when Wall Street views the mall as less financially healthy than it truly is.

The issue Simon is flagging arises from rents that are based on how much a retailer sells in its physical store. It’s common for a tenant to pay a base amount and then give the landlord a cut of sales that exceed a set threshold. Occasionally a retailer has no base rent and is obligated to pay only a percentage of sales rung up at the property.

"We are getting dinged by internet returns," Simon said on a conference call with analysts Friday. "Every retailer is different, and there is not a standard response yet. It needs to be addressed in future leases." He declined to quantify the problem but said it was "material," telling the analysts that "we have audit rights, and in our normal procedure we saw some anomalies about sales."

The tension adds to a growing list of troubles for retail property owners as the rise of internet shopping erodes brick-and-mortar revenues. Landlords are dropping big sums to reconfigure their shopping centers with attractions customers can’t enjoy online, such as restaurants and gyms.

[...]

"As the big chain tenants close, they’re replaced more often with newer, more entrepreneurial independent owner-operators, who can be more casual in terms of responsibly reporting," Flickinger said.

The problem will only get worse as online sales grow. Items purchased online are four times as likely to be returned than an item purchased in-store. And online sales are projected to grow to 24% of all retail sales by 2027, according to RBC Capital Markets data obtained by Bloomberg.

Chart

Devising a standardized solution to this problem is proving difficult, because returns affect retailers in different ways depending largely on how the customer behaves (do they take the money and leave? Do they trade it in for a different item? Or a similar item of a different size?).

It’s hard to parse how the various parties to an internet sale and subsequent return are affected, said Daniel Hurwitz, CEO of retail real-estate consultant Raider Hill Advisors and the lead director of GGP Inc., the second-largest U.S. mall owner. For example, if a consumer trades in an item for one of a different size or color, the inventory at that location is reduced even though no money has changed hands at the cash register, Hurwitz said.

"The mall business has become obsessed with sales per square foot as an absolute measure of success," Hurwitz said. "The reporting of sales has become less pure because there are so many moving parts with online returns. As an industry, it would be prudent to come up with a way to deal with this."

Fortunately for mall owners, returns aren't always a bad thing, as the owner of a business that charges customers to handle in-store returns pointed out to Bloomberg, if consumers are coming to the mall to return an item, that foot traffic should improve sales at a mall's ancillary businesses.

Managing returns is a critical issue for both landlords and retailers, and e-commerce has only made it more complicated. Anybody who has bought a pair of shoes or a sweater online can attest that shoppers are far more likely to take back apparel they bought on the internet than picked out in person at a store. The rate of returns for online purchases is estimated to be as much as four times the rate for physical-store sales, according to David Sobie, CEO of Happy Returns Inc., which operates in malls and other shopping venues, taking online returns from consumers for retailers that don’t have a lot of physical stores.

Bad for both store and landlord, right? Not necessarily. When it comes time to seek a refund, people prefer to get it in person instead of printing up a label, making a trip to the post office and waiting weeks for the cash to show up in their bank accounts, Sobie said. That typically works in the landlord’s favor, since anything that triggers a trip to the mall can drive additional purchases.

"Returns from internet purchases as a source of foot traffic are valuable," Sobie said. "Of course you’re going to browse, and maybe get something to eat."

Of course, a shift in perspective is hardly what desperate mall owners are looking for...after all, the Wall Street analysts responsible for rating those mall REITS will probably tune out the minute they hear a CEO say "you're looking at it all wrong."

Comments

fleur de lis FireBrander Thu, 05/03/2018 - 20:53 Permalink

The "vacancy scam" was addressed here earlier, it comes as no surprise that it has evolved into another scam.

Thank you Plus Size Model and Almost Solvent

1)

Plus Size Model  techpriest Sun, 04/08/2018 - 13:53 Permalink

http://abc7chicago.com/business/lawmakers-seek-to-end-tax-loophole-that…

 

2)

Almost Solvent  fleur de lis Sun, 04/08/2018 - 10:12 Permalink

This is a quick video confirming the benefits to leaving space empty in NYC.

https://www.youtube.com/watch?v=B7zXmGZa6IU

 

3)

Plus Size Model  techpriest Sun, 04/08/2018 - 10:29 Permalink

Hey, ex real estate broker here. Real estate accounting is absolutely horrid and I'm constantly amazed that so few understand it. In my shithole, landlords receive tax breaks for manufactured hardships on top of the BS I explain below.

https://chicago.curbed.com/2016/10/6/13188872/storefront-retail-vacancy…

Even funnier, the guy that sponsored the legislation in the link above is a partner in one of the largest ad valorem tax mitigation firms in Chicago. Yup, you guessed it.

If you really want to go deep down the rabbit hole, look into U.S. Codes 1245, 1250, 1031 and 1033. It's complicated and obfuscated, but what these these codes do is grant license to book building depreciation as a return on capital. Everyone knows that buildings don't fall apart and turn into a worthless pile of dust in a few decades, but the IRS seems to think they do. To sum it up, rich people pay no tax and you get the bill.

This link is just one simple explanation of how the whole process works.

https://www.american-apartment-owners-association.org/property-manageme…

 

 

In reply to by FireBrander

Endgame Napoleon FireBrander Thu, 05/03/2018 - 21:36 Permalink

That probably did bring them a lot of customers, but also a lot of browsers with no intent to buy. I bet there are also insurance expenses when they allow playground equipment in a mall.

As a childless person, I cannot say that the amount of mall crowding caused by those playground things ever deterred me from shopping in a mall.

But one of the last times I went to a mall, I was tired after a long day at a low-wage job, with an over 1-hour commute home to look forward to in bumper-to-bumper traffic.

This was about 5 years ago. It was hard to find a parking place, and it was absolutely packed with humanity, mostly teenagers. There was some sort of event in progress. 

I hate trying things on, so I often just grab something in a store. Sometimes, it is way off in terms of fit, so I take it back, which takes less time than trying it on. But like many people, I have cut way back on such purchases. 

In reply to by FireBrander

Endgame Napoleon are we there yet Thu, 05/03/2018 - 21:49 Permalink

They should turn those ghost malls into very small, one-room, affordable apartments, like the ones adjacent to universities. They should leave some of the more profitable restaurants and stores in there, which would probably increase their sales due to the convenience factor.

They should especially do that with the ghost malls in nicer, safer areas of cities, where the rent is too d****d high for many single, childless people who grew up in middle-class neighborhoods, but who cannot afford rent when living on earned-only income, with no spousal income and no pay-per-birth monthly welfare / refundable child tax credits up to $6,421 boosting up their earned income.

Half of all men between the ages of 18 and 34 live with their parents, not counting the non-womb-productive, single women and the people older than 34. That is a bigly market. No Toys R Us or The Limited stores required to fill the market need. 

In reply to by are we there yet

ReasonForLife ???ö? Thu, 05/03/2018 - 20:12 Permalink

The malls are run by careless, greedy communistic morons who have no honor and abuse their tenants by charging absurd rents to begin with, terminating the lease agreements early when someone else is willing to pay more, moving the merchant to different spots in the mall at will, causing a break in customer recognition and retention rates, etc.  The retailers should get together and sue the shit out of these shit holes for usury, corporate sabotage, failure to perform, and overall malicious intent.
 

Boycott the malls if you value your time, nerves and money.   Save up and buy something nice Made in Italy online (farfetch.com for example) for your clothes, it will last you much longer and you'll be much happier for it.

In reply to by ???ö?

Umh Thu, 05/03/2018 - 19:55 Permalink

My wife much prefers shopping online at places where she can return the items to a brick and mortar outlet. It is a lot less hassle than shipping the items back. FWIW.

LadyAtZero Thu, 05/03/2018 - 19:59 Permalink

People don't have a lot of spending money so they are buying less STUFF.   Simon Properties -- and Wall Street -- needs to start admitting this fact.

Yen Cross Thu, 05/03/2018 - 20:02 Permalink

     Those of us that have seen interest rates above the "ZERO bound", call this ailment. 

    Eg; ZIRP-adj; snowflake-n. syndrome v-pn.

  

YourAverageJoe Thu, 05/03/2018 - 20:05 Permalink

When Simon Properties manages a mall it turns to total shit.

A fine example is theGalleria in Houston. The parking garages and their facades are filthy, torn insulation hanging from piping everywhere and too many cheezy kiosks inside. Entrance doors are worn out. The place screams deferred maintenance.

Once inside you quickly realize that 80% of the people there are not there to spend money.

cbxer55 YourAverageJoe Thu, 05/03/2018 - 20:59 Permalink

Most especially since the Constitutional Carry bill passed the state senate today and is going to the governor's desk to be signed. And Mary Fallin is well known to be pro gun, so expect soon for Oklahoma to become the 14th state that allows carrying of firearms without a permit. Awesomeness right there. 

In reply to by YourAverageJoe

stefan-coast Thu, 05/03/2018 - 20:19 Permalink

Nordstroms left our city mall and now I read that the mall is in foreclosure...bad economy?  online purchases? or bad management of mall...take your pick I guess, I sure dont know. What if they turned malls into MAKING something, instead of SELLING something?   hmmm

Green2Delta Thu, 05/03/2018 - 20:31 Permalink

Two nights ago I went to a college baseball game played at our local Triple A field. I've always used the mall parking garage, cut through the convention center and popped out at the intersection the field sits on. I've never paid more than $8 to park there regardless of how long I stayed. I was shocked when the lady said "$14" after scanning my parking ticket. I then looked down at the sign and sure enough it is now $14 if you go over 4 hours. Once I drove away it began to make sense. Tenants are leaving that mall in droves. So in order to turn nothing into something they've upped parking since there are least 4 garages attached to that mall.

23 years ago that mall was brand new. Structurally it still looks new. They'll blame Amazon and all the usual suspects, but they'll never dare say the truth. For years it has been plagued by violent blacks. So the people with money, usually white, stopped going there. People still like to shop. People still like to check things out in person before they buy, but not if it's going to cost them their life.

Unsupervised black youth have easy access to this mall via the socialist bus system. So they come from all sides of town and do what they always do. This has played out at every mall around the city. The only other one in the county has also entered its death spiral. All because blacks run off the paying customers.

cbxer55 Green2Delta Thu, 05/03/2018 - 20:42 Permalink

That is what did in Crossroads mall in Oklahoma City. While it's still open, if you're white, you don't dare step foot in the place if you value your life. 

Then there's Heritage Park Mall, which is a mile from where I live. Totally empty. Grass and weeds growing in the parking lot. 

To boot, the two are only maybe 10 miles apart. 

In reply to by Green2Delta

itstippy Thu, 05/03/2018 - 20:32 Permalink

How does this explain the empty parking lots, mall concourses, and stores?  A cluster of youths hanging out at the food court isn't going to keep the lights on.  I don't think Taco Bell and Steak 'M accept merchandise returns. 

Forty years ago Shopping Malls were attractive because they put all the stores together in one place, so there was less walking for lazy American shoppers.   Today even walking through a mall carrying shopping bags is way too much effort.  Consumers want to park the car, go into a store 20 feet away, buy some crap, waddle back to the car, drive through a fast food joint for burgers, swing past the donut shop for a quick dozen glaze donuts, and drive home.

Americans circle the parking lot at the Fitness Center trying to find a parking spot close to the door so they don't have to walk as far.  

cbxer55 itstippy Thu, 05/03/2018 - 20:48 Permalink

Can't make that shit up, can ya? 

I live in apartments. The trash compacter/dumpster is about 200 feet away, mailboxes about 400, pool/spa about 600. I walk to these, the other idiots get in their car, start it up, and drive to them. Fuckin stupid. Lazy fucks! Then they come back from their super short excursion of wasting gas, and are mad someone else took their parking spot close to their unit. I just LOL at them. 

In reply to by itstippy

holdbuysell Thu, 05/03/2018 - 20:33 Permalink

If Simon were focusing on the bigger picture here, he'd realize that these financial games are being played because times are not well and everyone's looking for a way to optimize with an ever-shrinking pie, even at his high-end malls.

ZeroPoint Thu, 05/03/2018 - 20:40 Permalink

The target demographic Simon properties has been after is 12 - 16 year old girls. Apparently, this demographic always has money to piss away on clothes, shoes, and make up and are easily influenced to buy fashion brands. That’s why most malls have no shoppes which are even worth you visiting.

JelloBeyonce Thu, 05/03/2018 - 20:51 Permalink

My bullshit detector is going crazy here.....

Now here's the part you're not being told:

Simon Property Group Inc. is a publicly held company.
Their largest shareholders include:
Vanguard
Capital World
State Street
BlackRock
Fidelity
And many other of the largest money-managemt firms, thus effective corporate controllers, whom mostly operate collaboratively with one another, creating virtual monopolies amongst the largest "competing" companies in most every industry.
(info retrieved from http://investors.morningstar.com/ownership/shareholders-major.html?t=SPG)

The largest mall occupying retailers (with returnable items) include:
Nordstrom
Apple
Macy's
Lululemon Athletica Inc
Tiffany & Co
(info retrieved from https://www.marketwatch.com/story/the-6-stores-youre-most-likely-to-find-in-an-mvp-mall-2016-03-18)

 

Now guess who the largest shareholders are of each of these retail entities?
Vanguard
State Street
BlackRock
Fidelity
And many other of the largest money-managemt firms, thus effective corporate controllers, whom mostly operate collaboratively with one another, creating virtual monopolies amongst the largest "competing" companies in most every industry.
(info taken from Morningstar.com and Yahoo Finance)
 

Thus any rental profit lost on the Simon Property Group Inc. side is just recovered on the retail side by these largest retailers, and vice-versa, and just goes back to these same money-management firms, via their stock holdings.

Don't believe the B.S.

This is part of the great corporate scam being perpetuated on the American public by the corporatocracy.

When you own the largest "competing" firms, in most every industry, you simply shift the loss of one industry or company to the profit of another.
Yet you can do it in a way where only the "elite" of those money-management firms win, with the masses of smaller shareholders eventually losing (the scam can't last forever, and has certain companies are driven to bankruptcy, their smaller shareholders lose out, whereas the elite still win....since they also own the "competitors").
 

 

Everything you think you know, everything you do, buy, etc. is mostly wholly controlled by these feudal Lords.