The Death of the Shopping Mall or Is It? Online Sales Tax is here.

For years I have heard that shopping malls are a thing of the past. In the 90s the trend to redevelop downtowns were hurting the malls. My own college town only had one store left in the mall when the downtown was successfully redeveloped. Now malls are failing, it seems, due to the on-line shopping trend. Headlines in papers, magazines, and on the television say malls are dead, malls are over, and shopping malls are dying, but are they? Will they make a comeback? And how does the recent Supreme Court ruling regarding online sales tax impact the future of malls?

The simplest explanation for the demise of brick-and-mortar shops is that Amazon is eating retail. Between 2010 and last year (2016), Amazon’s sales in North America quintupled from $16 billion to $80 billion. Sears’ revenue last year was about $22 billion, so you could say Amazon has grown by three Sears in six years. Even more remarkable, according to several reports, half of all U.S. households are now Amazon Prime subscribers. (Thompson, 2017)

Many analysts attribute those declines to shoppers’ changing preferences and the rise of online shopping. Studies show that Americans are increasingly choosing to spend money on technology and experiences like vacations over apparel. When they shop for clothing, an increasing number of them are going to discount stores like TJ Maxx or ordering from Amazon. (Peterson, 2017)

To find out how people shop I polled my friends on social media on their shopping habits. All of my friends did some sort of on-line shopping. The most common reason was for convenience. Some responded that they shopped on-line for better deals. There were a few drawbacks; the most common is waiting for your item which is usually a couple of days. I found that one-third of my friends never shop at a mall. The reason was the sea of parking, long lines, and the dislike of crowds. Some of my friends stopped going to the mall and/or brick or mortar stores because they couldn’t find the items they were looking for and lack of selection/sizes. Of the respondents, two-thirds of my friends responded that they do go to the mall but also shop on-line. Those that go to the mall gave reasons such as they like to try and clothing before purchasing, people watching, and entertainment and food experiences.

For the past year a mall near me has undergone a 20 million dollar renovation, expanding their food and entertainment experiences. Other nearby malls has gone through similar renovations, even adding offices, housing and hotels to stay competitive and create more social experiences. Another nearby mall incorporated a furniture store as an anchor, instead of the typical clothing store, adding an additional purpose of going to the mall. Other malls have added natural light to the extent of ceilings opening to the sky just to provide a new experience to draw in shoppers. Some malls are repurposing themselves, adding unusual or the not so typical use found in a mall to bring attract new customers.

In a 1989 book The Good Place, the author suggests that people spend the majority of their lives in three places, the home, the workplace, and the social space. The popularity of Euclidian zoning and separating the uses makes it difficult for suburban youth to socialize and so the malls because the social space for the youth. (Waters, 2018) With the changing culture, many youths socialize through social media and don’t gather in places as generations have in the past. Retail and Mall developers are becoming creative to draw people into the stores, enticing free shipping if you pick up at the stores. Some stores are even creating waiting spaces with comfortable couches and chairs for customers to relax while waiting for their items to be retrieved.

There still is a place for malls elsewhere; after all, people have always needed gathering places, from the Lascaux caves, in France, with their Paleolithic paintings, to the modern-day souks of Marrakech. “Humans have an innate sense of wanting to come together,” he said. “I bet the souk will be there long after Amazon.” (Merrick, 2014)

There have been other reasons cited for the decline in malls. One reason analysts and developers give is an overbuilding of malls in the United States, especially in comparison to other countries.

In 1970 there were only 300 enclosed malls in the U.S., and now there are 1,211 of them. In fact, despite the recent turbulence in the retail industry, the number of malls open has actually edged higher every year. If the analysts at Credit Suisse are right, that trend line about to turn — sharply — in the other direction. The reasons are nothing new. People are shopping online more than ever, and that trend is expected to keep growing. Foot traffic at malls has been on the decline for years. The report estimates that as malls close, online sales will grow from 17% of retail sales today to 35% by 2030. There are also, quite simply, too many stores after years of new mall construction caused retail bubble. (Isidore, 2017)

The number of malls in the U.S. grew more than twice as fast as the population between 1970 and 2015, according to Cowen and Company’s research analysts. By one measure of consumerist plentitude—shopping center “gross leasable area”—the U.S. has 40 percent more shopping space per capita than Canada, five times more the U.K., and 10 times more than Germany. So it’s no surprise that the Great Recession provided such a devastating blow: Mall visits declined 50 percent between 2010 and 2013, according to the real-estate research firm Cushman and Wakefield, and they’ve kept falling every year since. (Thompson, 2017)

It has been three years since a major new shopping mall opened in the US, leading even some mall operators to speculate that the last one has already been built. Of the roughly 1,200 spread across the country, less than half are expected to be in operation five years from now. As usual, the internet gets the blame. The shift to online shopping has taken its toll on traditional mall anchors, such as Macy’s, JC Penney and Sears. But there are other issues. America has too much retail space and too many crappy malls. “It’s much less about technology than it is about overbuilding,” says Bruce Batkin, chief executive of Terra Capital Partners, a commercial real estate lender. (Rushe, 2017)

Supreme Court Ruling
Recently, the United States Supreme Court ruled that States can collect sales tax on internet purchases. On-line stores with physical brick and mortar locations will not be impacted because they are already collecting taxes. However, the internet-only competitors and upstarts will be impacted because they have not been collecting taxes, which can make the same item less expensive on-line. Smaller companies will be the most impacted as they will have to navigate all the different tax laws. The smallest of companies will be the least impacted due to the Court ruling that requires retailers with more than $100,000 in annual sales to collect the tax.

Chief Justice John Roberts stated in his dissent, “The burden will fall disproportionately on small businesses. The court’s decision today will surely have the effect of dampening opportunities for commerce in a broad range of new markets.” (Wolf, 2018)

Industry representatives immediately hailed the decision. Matthew Shay, head of the National Retail Federation, said the Supreme Court ruling “clears the way for a fair and level playing field where all retailers compete under the same sales-tax rules.” Deborah White, general counsel for the Retail Industry Leaders Association, said her group “couldn’t be more pleased with the outcome.”

Now, the retail survivors have one fewer excuse to blame for their woes. “They have, in some ways, been hiding behind excuses like a tax differential,” said Edward Yruma, an analyst for KeyBanc Capital Markets. Their complaints have resonated less in recent years as shoppers’ migration online has been more rooted in convenience than price, he said. “What’s driving the success of online players is this is how the consumer wants to shop today,” Yruma said. “It’s that simple.” (Townsend, 2018)

Larger companies like Amazon, may not feel the impact of the ruling much because Amazon collects sales tax online on its merchandise already. It will impact their third-party items which will now have to pay taxes.

Most of the top 20 online sellers already collect sale tax online in nearly all states, either because they have added local showrooms or warehouses, or because of state laws. The top 100 retail sellers remit about 90 percent of the taxes owed. But many smaller online retailers are women, minorities, veterans and people with disabilities who have taken advantage of the protections granted by the Supreme Court and Congress over the years. The typical retailer on eBay sells between $10,000 and $500,000 annually, with customers in more than 300 tax jurisdictions. Etsy’s sellers are even smaller: Nearly eight in 10 are sole proprietors, nearly nine in 10 are women, and nearly all are based in homes. Average annual sales: $1,710.

With this ruling, traditional retailers can embrace the change by finding new and innovative ways to lure customers back in-store. Consider retailers like Zara that are relying on emerging technologies such as big data, AI, AR/VR and data analytics to strengthen the in-store experience and attract customers.

To appeal to consumers, physical retailers can push promotional campaigns that speak to the benefits of coming into the physical store. For example, to provide an incentive for coming in-store, retailers can waive shipping fees for customers who choose to buy online and pick up in-store — they might purchase additional items during their visit. Once there, businesses can use technology to provide a tailored instore experience. After all, enhancing the in-store experience is especially pertinent now that there is no real monetary benefit to ordering online. (Tollefson, 2018)

The Supreme Court ruling adds an interesting twist on how malls may survive the retail decline now that the playing field has become more level. Will shoppers return to bricks and mortar stores now that price shouldn’t be a factor due to online sales tax, or will convenience win out? Only time will tell.