The new sheriff is in town. However, I’m not quite sure if the Simon-Brookfield-Authentic Brands team is the white knight savior or the undertaker. This trio is buying failing retailers and has just completed the purchase of bankrupt Brooks Brothers.
Their latest target is JC Penney. On the plus side, I think this is a brilliant and opportune strategy for Authentic Brands. These are all iconic, internationally famous brands so the potential for international licensing is immense. Good on them! Shopping center people propping up failing retailers will save thousands and thousands of jobs, help sustain vendors, support both fashion companies, and a multitude of other stakeholders. Business almost like normal.
But business is not normal. As we’ve discussed before, the COVID-19 pandemic has accelerated the failure of these retailers by at least five years. These retailers were losing well before the virus, failing to react to changing consumer demands. They were poor merchants. Do they deserve to get saved?
I believe the shopping center giants are disturbing the natural evolution of these failures. Yes, it does a lot for these shopping center developers. Who else could possibly fill those huge anchor physical plants? I don’t think an Amazon distribution center replacing a JC Penney location is a good long-term solution. So, with these deals, the space is still rented. In addition, many lease agreements use a formula of anchors and occupancy percentages. The Simon/Brookfield deals artificially prop up this number. Good short term for them, but not good for the long-term health of the apparel business.
I also think this strategy will have an enormous impact on the remaining retail community, both big boxes and specialty stores. If these shopping center-owned stores break even, it’s a win/win. If they break even, they generate positive cash flow and pay for themselves. They pay the rent to their shopping center owners. However, they will have no incentive to be merchants, to be innovative, or forward-thinking. If the sole objective is to break even and be cash flow positive, everyone else will have to compete against a company with a bar set very low. Prices will be reduced. Margins will be reduced. The entire market will take a major step down. Sadly, we could all be reduced to the lowest possible denominator.
The only hope is for innovative merchants to conceive and implement totally new concepts for brick-and-mortar stores: mixed-use spaces perhaps, creatively curated assortments, emerging brands, concepts that free merchants from having to compete with the ordinary/obsolete/price-sensitive retail norms of the past. I know you’re out there, retail innovators. Now is the time to step forward.
Fred Rosenfeld is an industry consultant; he can be reached at email@example.com.