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Study: For Department Stores it’s Downsize or Die

Department stores are staring death in the face, and those that don’t make it may be taking their troubled malls down with them.

For any hope of a sustainable future, department stores will have to cut back on hundreds of locations, according to new research by Green Street Advisors.

The real estate research firm said for department stores to reach the levels of productivity they enjoyed in 2006, they would have to close 800 locations, or all anchor space at 200 malls—both of which amount to scaling back on 20 percent of U.S. mall anchor space.

“Department stores still have a place in the future; but likely on a smaller scale,” according to Green Street Advisors. “The mall of the future likely only needs one-two department stores, with non-traditional anchors filling some of the void.”

The days of four or five department stores anchoring the mall are over, and though the traditional traffic drivers still occupy two-thirds of mall anchor slots (and their presence will still be imperative for mall quality), other consumer courters like restaurants, grocers and movie theaters will start to supplant some of those department stores.

“While these newer entrants only account for a fraction of anchor gross leasable area (GLA) compared to the department store chains, they will likely continue to absorb a disproportionate amount of department store space that could come available,” Green Street Advisors said.

When those department stores leave, some malls will suffer. Lower productivity malls will be at risk if they lose one or more anchor tenants.

“Meaningful anchor store closures would derail the favorable supply landscape, especially for low-end owners,” the real estate research firm said, adding that department store exits could spur closures of already unproductive malls, and “troubled” malls anchored by Sears, J.C. Penney and Macy’s “are at the greatest death spiral risk.”

Department store sales have been on a downward slope for the better part of 10 years, and the pace of those declines is starting to pick up. According to the study, sales at department stores are down nearly 20 percent compared to 10 years ago and much of those sales are going to specialty retailers, discounters, off-price brands and e-commerce—the consumer no longer only has eyes for department stores.

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To get back to a balance between sales and profitability, according to Green Street Advisors, store closures will have to take place at a greater pace.

Since the start of the year, closures have been seemingly rampant: Kohl’s said it would close nine stores, Men’s Warehouse parent Tailored Brands said it would close 250, J.C. Penney said seven, and on Thursday, Sears said it would close 68 Kmart stores and 10 Sears stores this summer.

But even that isn’t enough. Despite all signs pointing to problems, many department stores are still holding back on shedding retail space.

The greatest offenders? Sears and J.C. Penney—the “two problem children,” as the report dubs them.

Sales at both retailers have been painfully poor in recent years and each has its own turnaround plan in place. Those turnarounds, however, will need to include more store closures than might have already been bargained for.

“Together, they [Sears and J.C. Penney] cause the vast majority of the industry’s ‘sales productivity gap’ and continue to be the prime candidates for store closures,” Green Street Advisors said. “Downsizing would likely happen in large slugs rather than a moderate pace of closures—perhaps in a restructuring—because infrastructure and overhead expenses are more difficult to pare back at a moderate pace.”

The best place for department stores to start culling locations will be in larger markets where there’s redundancy.

As the study noted, “A scenario exists where several hundred malls are no longer relevant retail destinations in the next decade or so.”