Amazon, mall owner look at turning Sears, J.C. Penney stores into fulfilment centres

The largest mall owner in the US has been in talks with Amazon.com to take over space left by ailing department stores.

Amazon typically uses these warehouses to store everything from books and sweaters to kitchenware and electronics until delivery to local customers. Picture: AFP

The largest mall owner in the US has been in talks with Amazon.com, the company many retailers denounce as the mall industry’s biggest disrupter, to take over space left by ailing department stores.

Simon Property Group has been exploring with Amazon the possibility of turning some of the property owner’s anchor department stores into Amazon distribution hubs, according to people familiar with the matter.

Amazon typically uses these warehouses to store everything from books and sweaters to kitchenware and electronics until delivery to local customers.

The talks have focused on converting stores formerly or currently occupied by J.C. Penney and Sears, these people said. The department store chains have both filed for chapter 11 bankruptcy protection and as part of their plans have been closing dozens of stores across the country. Simon malls have 63 Penney and 11 Sears stores, according to its most recent public filing in May.

It wasn’t clear how many stores are under consideration for Amazon, and it is possible that the two sides could fail to reach an agreement, people briefed on the matter said.

The talks reflect the intersection of two trends that predate the pandemic but have been accelerated by it: the decline of malls and the boom in e-commerce.

Malls were struggling for years, as more customers stayed home to shop online. The spread of the coronavirus, which forced malls to temporarily close and limited their crowds even after reopening, has worsened the situation. Amazon, meanwhile, was able to navigate new logistical challenges during COVID-19 and recently reported its greatest quarter ever.

For Amazon, a deal with Simon would be consistent with its efforts to add more distribution hubs near residential areas to speed up the crucial last mile of delivery.

But for Simon, any deal to surrender prime space to Amazon would signal a break from a longtime business model for malls: reliance on a large department store to draw foot traffic to neighbouring shops and restaurants.

That model has broken down in recent years, as many department stores are now fighting for their lives. Lord & Taylor also filed for bankruptcy early this month, while Neiman Marcus filed in May. Nordstrom closed 16 stores in recent months.

Their big-box spaces are typically more than 100,000 square feet (9290sq m) and often span more than one level. Smaller mall tenants have counted on traffic to department stores to spill over to neighbouring retailers, and many have clauses that allow them to reduce rents or break their leases if the department store stays empty.

Having an Amazon fulfilment centre could still trigger some of these cotenancy clauses, but some landlords say even that scenario would be preferable to keeping that yawning space vacant.

Still, Simon’s other tenants might not celebrate a deal with Amazon. Many blame the giant online retailer for severely disrupting their business. Its presence as a new neighbour would likely do little to pacify them, especially if Amazon’s new distribution capabilities in well-located Simon malls help make it even more competitive by helping speed up its delivery times.

Amazon fulfilment centres wouldn’t draw much additional foot traffic to the mall, though some employees could eat and shop at the mall. That is why landlords have preferred to replace department stores with other retailers, gyms, theatres or entertainment operators. Yet many of these tenants are struggling to survive during the pandemic and aren’t in expansion mode.

Simon would likely rent the space at a considerable discount to what it could charge another retailer. Warehouse rents are typically less than $US10 a square foot, while restaurant rents can be multiples of that.

But Amazon’s growth and healthy balance sheet would make it a reliable tenant at a time when most retail business has been waylaid by the pandemic.

Simon, which owns 204 properties in the US, has had to contend with a ramp-up in retail tenant closures in recent years that has accelerated during COVID-19.

A number of US malls are already doing business with Amazon, such as renting parking lots to Amazon’s huge van fleets. But for Simon to lease a large, well-located indoor location would be the rare instance of a major mall operator offering prime retail space to Amazon.

The Wall Street Journal