While this idea has been building for years, COVID-19 has accelerated the inevitable intersection: mall-to-distribution center conversion. Retail bankruptcies have left large, commercial buildings located near population centers vacant at a time when e-commerce companies are desperate for square footage close to their customers. Last week, this concept hit the headlines as an emerging trend when it was reported Amazon is looking to buy vacant mall space.
For those who developed logistics robotics systems, we turned to our network of experts to explore the reality of mall-to-DC conversion. So grab one last Orange Julius as we answer the question, “Will malls become distribution centers?”
First up, here are executives who support the concept.
TJ Fanning, VP Growth, SVT Robotics: “My bet is on grocery breakpack centers. Many small retailers have a fairly large footprint still for the SKU representation due to inventory holding and daily replenishment, especially in grocery. The grocery store has rapidly grown in size, with the average store 20 years ago being under 20,000 square feet to the new stores operating in the 55,000 square foot average. This size of store is difficult to manage the optimal location, staffing and inventory as they continue to expand.
My prediction is that mall space will be converted to full case storage and distribution of less than case load to smaller grocery operations. This will allow the mall space to optimally pick online grocery orders, as well as prepare re-stocking of smaller grocery stores, on a more regular basis, thus, reducing inventory holding.”
Elram Goren, Co-Founder & CEO, Fabric: “Malls were built in high-traffic locations that are close to end customers and have the required infrastructure for stock replenishment. This is why in today’s radically transformed retail environment, mall owners/operators are an ideal candidate for leveraging portions of their now under-utilized assets as e-commerce and business-to-business micro-fulfillment centers. Flexibility and scalable unit economics of the fulfillment solution will be paramount in transforming these locations into high-throughput, profitable fulfillment hubs.”
Tom Nightingale, CEO, AFS Logistics: “It will really just come down to the basic economics of supply and demand. With the probable collapse of brick-and-mortar retailing, there will be a consolidation of the remaining off-line retailers to a smaller set of malls, leaving the remaining mall owners with little to no demand and seeking an escape hatch. When this happens, it is only natural for online retailers and others who rely on proximity to populations to snatch those properties up at a cost per square foot lower than typical industrial real estate. It’s just math.”
The Robot Report Podcast recently discussed Amazon’s plans to acquire vacant real estate at malls and what it means for warehouse automation.
Todd Steffen, VP, Supply Chain Colliers: “Malls were designed to be near the rooftops. E-commerce needs the same position in the market.”
Bill Thayer, Co-Founder, Co-CEO Fillogic: “The 400 C- and D-tier malls are great candidates to become distribution centers, assuming close proximity to population density. We’ll continue to see industrial real estate investment trusts (REITs) and other developers convert retail real estate assets into industrial facilities.
The market dynamic that is driving this convergence is the price difference between these two asset classes, which was occurring prior to COVID-19, with construction costs/lease prices for warehouse space growing exponentially over the past 5 years, and has only been exacerbated by more retail sales accelerating to online channels post-COVID.”
Anonymous senior parcel executive: “I believe the role of the mall will change from retail to experience. As such, there will be a wider range of services that the mall will provide, including product discovery and social commerce. As a result, there will be lower value real estate within the mall that will be well suited for warehousing and logistics operations. Moreover, it is important to keep in mind that we’re talking about malls beyond the high-end, multi-story buildings. The majority of retail space in the U.S. is in strip malls, which lends itself quite well to logistics for last-mile delivery.”
In short, those who believe in the mall-to-DC concept agree that:
- Malls have large amounts of available commercial space
- Malls are near large population centers
- Malls are close to major highways
- Malls are stops along bus routes connecting employee pools
- Malls have commercial infrastructure in place (power, sewer, etc)
- Malls are desperate enough to make this work
- It’s happening; Amazon has already converted 23 retail spaces to industrial use cases.
Executives who don’t see the mall-to-DC idea gaining traction
Fundamentally, these executives do not see the mall-to-DC concept gaining traction because:
- End cap building space is not entirely suited for distribution centers (zoning, load ratings, ceiling height, etc)
- Distribution centers will negatively impact any in-fill stores (think of Gap or Spencer’s Gifts), so it could mean the end to retail foot traffic to the entire mall
- Outside of the top five retailers, no company has the balance sheet to mirror inventory in more than 3-4 e-commerce distribution centers
- Department store rent would be severely discounted for warehouse tenants.
Billy Binder, Account Manager, Fortna: “Mall-to-DC conversions are most beneficial for a company that possesses its own delivery fleet, is rolling out same-day delivery, and has an unlimited appetite for inventory: Amazon.
For others, the business case and benefits of such a location strategy become muddied by the steep investment required to retrofit a building that was poorly designed for high levels of automation, quick inventory turns and dense storage.”
Roger Counihan, CRO, CognitOps: “I believe that this trend will continue for some players with major last-mile e-commerce distribution applications, primarily Amazon and major e-commerce 3PL’s where the customer service SLA and differentiated service levels can justify less efficient, multi-level layouts.
This trend could also provide an avenue to provide secondary networks for firms with a “physical internet” logistics strategy. Distributors and wholesalers in the highly competitive supply verticals will likely still look to rely on highly efficient, purpose-built distribution centers.”
Ronald Kyslinger, Former SVP/VP of Jet & Walmart: “I would find it hard to believe that converting malls into fulfillment centers would become a trend. The malls would be expensive to convert, the operations in the building would be sub-optimal from a layout/flow perspective, and the transportation logistics to/from the location would be less than strategically located.”
Chris Richter, CEO, FloorFound: “Capacity is not necessarily the largest challenge with micro-fulfillment. The larger challenges are distributed order management and demand sensing software becoming more agile and intelligent, carrier models adopting to optimize, density based pricing, and customers interest/willingness to pay for the benefit of within 1-2 hour delivery. Smart, zone skipping and consolidation software optimizing for next-day delivery on more options in an affordable way for merchants is probably a much better option in the immediate term.”
Vik Srinivasan, SVP, Meijer: “I think it’s likely that Amazon will trial this potential with a handful of these, however, I don’t see it becoming a megatrend with other players. Micro-fulfillment from existing retail nodes address the proximity opportunity without the large capital outlay and do so without creating wholly redundant inventory positions in those geographies.”
John White, Former CEO, Fortna: “While there will be examples of large companies (Amazon) that will take advantage of preferred lease rates from struggling mall operators, the overall trend of converting malls to distribution centers will not take hold based on, among other things, impact to remaining tenants, traffic, inefficiencies of the space, and inventory and supply chain costs.
Conversely, we will see increased combinations of “micro-fulfillment” and “dark store” concepts in existing retail locations (grocery, mass merchants, large store count retailers) to support e-commerce, shorter/quicker deliveries and pick-up for consumers to gain incremental benefit from existing underperforming retail space.”
Anonymous retail supply chain executive: “I disagree it will be a major trend – implying that multiple retailers would adopt this practice. However, I do see this being pervasive within Amazon and possibly 1-2 other larger retailers in key markets and attractive locations. [There are] lots of ways Amazon can use this real estate and multiple examples of them doing so at other converted mall locations. Many of these locations would make excellent Prime Now, Amazon Fresh, and same-day FCs. I would expect that Amazon would not just use this real estate for fulfillment centers, but to also use some of these to deploy their cashier-less Amazon Go technology to broader product categories such as electronics, home furnishings, etc.”
About the Author
Julian Counihan is General Partner at Schematic Ventures, an early-stage venture capital fund located in San Francisco. The fund is focused on investments in technology companies within supply chain, manufacturing, commerce infrastructure & digital industrial sectors.
Counihan started a career in technology as a software developer at Fortna where he worked on warehouse control & automation systems. After a period in technology investment banking, he began investing in industrial hardware and supply chain sectors at a venture capital fund in New York.
He graduated magna cum laude from UVA with a BsC in systems engineering, holds an MBA from MIT.