Big mall-based stores face new threat as customers dwindle

NEW YORK -- Erica Dao used to shop at malls once a month, looking in stores and seeing what the mannequins displayed. Now, she mainly looks for inspiration on social media.

“I discover brands through Instagram,” said Dao, 33, of St. Paul, Minnesota.

Elizabeth Troy says she was the “queen of sales,” going through discounted items at J. Crew and Banana Republic stores at malls near where she lives in Richmond, Virginia. But her go-to source has become the online subscription service Stitch Fix, which lets her try on clothes at home and decide what to keep.

“I almost never go out to buy now,” says Troy, 50.

Those kind of shifts illustrate the way people are changing how they buy clothing. Shoppers aren’t just showrooming at stores and then buying the same items online if they can find better prices -- it’s a more significant separation from the mall.

That is spelling big problems for mall chains like The Limited, which has shut all 250 of its stores, and Wet Seal, which filed for bankruptcy. Department stores like Macy’s (M) and J.C. Penney (JCP)  -- anchors for the malls -- are also closing stores. Sears Holdings (SHLD) has said there’s “substantial doubt” about its future, but believes its plan to turn around its business should reduce that risk. The number of “distressed” retailers -- those with cash problems and poor credit profiles that are facing strong competition -- is at the highest rate since 2009, says Moody’s Investor Service.

“Retail is increasingly becoming boring,” said James Reinhart, CEO of the used-clothing marketplace thredUP. He says much of the merchandise at stores is homogenous, while online “each day there’s a whole new assortment.”

Department stores make regular announcements about the next way they’re going to win customers back, like offering more athletic-inspired clothes or adding tech areas. But they’re fighting a market in which people are already buying fewer clothes, spending online or at discounters when they do, and demanding more personal and convenient ways to buy.

Brands like Stitch Fix and Bonobos offer curated selections based on people’s preferences, while companies like thredUP capitalize on shoppers’ increasing willingness to buy secondhand items from mall brands like J. Crew, Anthropologie and Athleta at big discounts. Deloitte estimates that the nation’s top 25 retailers have lost $200 billion to the smaller entrants to the market over the last five years.

“These internet-rooted businesses are connecting so well with consumers,” said Marshal Cohen, chief industry analyst at market research firm NPD Group. “They’re offering personalization. They offer great value, quality service and a unique look. This is something that the apparel industry has been ignoring, but consumers are gravitating toward them. And they’re becoming a big threat.”

While U.S. clothing sales increased 3 percent overall to $218.7 billion last year, department stores and national mall-based chains saw a drop of 4 percent. Discounters enjoyed a 1 percent increase, and off-price stores like T.J. Maxx and Ross saw sales rise 5 percent.

Clothes are also a smaller part of people’s personal spending. In January 1990, Americans spent 5.2 percent of their overall expenditures on clothes and shoes. That compares with 3 percent in January 2017, according to an analysis by Michael P. Niemira, principal at The Retail Economist research firm. If demand held steady, Niemira says, there’d be an extra $255 billion spent.

Even so, retail space rose to 7.76 billion square feet in 2016 in 54 U.S. metropolitan areas - about six times per capita that of countries like Britain, the International Council of Shopping Centers said. Richard Hayne, CEO of Urban Outfitters (URBN), likens the retail industry to a housing bubble.

“We are seeing the results: doors shuttering and rents retreating,” Hayne said after the company reported disappointing fourth-quarter results. He expects the trend to continue, and says online shopping is only partially offsetting lower store sales.

“Digital communities and social media are replacing storefronts and traditional advertising as a preferred means by which brands and customers are connecting,” Hayne said, noting Urban Outfitters’ 7 million Instagram followers.

The online startups have their own ways of reaching shoppers.

Jason Hairston started his hunting clothing and gear brand KUIU by blogging, and says he generated $500,000 on the first day in business based on interest through the blog. He says by skipping the store step, his Dixon, California-based company can offer higher-quality products at the same price.

It was on social media that Dao discovered the online brand Everlane and liked its simple but modern looks. It’s also how she found shoes by Freda Salvador that she spent $300 on - three times what she usually pays.

“I am trying to find someone that appeals to me,” she said. “It’s not, ‘Oh, everybody is doing this.’ It reflects my values. It reflects my personal style.”

That connection is something shoppers may feel is missing from the brands they’re turning away from. Bill Taubman, chief operating officer at mall operator Taubman Centers (TCO), expects more store closures. But as much as shoppers gravitate toward online brands, he has doubts about their sustainability.

“Customers forget about them very quickly,” he said. “That’s why the internet guys are thinking of opening stores.”

Indeed, online brands like Bonobos, jeweler Blue Nile (NILE) and eyewear seller Warby Parker have been setting up showrooms. Even KUIU plans a 30-city tour with an 18-foot trailer that expands to a showroom as a test for traditional store locations.

The hybrid model is gaining ground, but online retailers are also figuring out whether to go with traditional stores or showrooms where shoppers try on clothes and then have their purchased delivered. “We quickly discovered in the testing days of the Guideshop concept that guys don’t need that instant gratification of walking out of the store with something right away,” said Antonio Nieves, chief financial officer at Bonobos.