On the Mall, A 2013 Few Can Celebrate

2013 was an inflection point for U.S. mall retailing.  The economy warily emerged from its Great Recession doldrums, share prices reclaimed record highs, and online retail ascended to become mall retail’s equal partner (in influence if not in transactions).

Nevertheless, the year was wretched for most of the mall’s “legacy” retailers.  From Gymboree to Abercrombie to The Limited to Chico’s, longstanding, once incredibly successful (even dominant), vertically integrated fashion retailers struggled.  Add these retailers to the performances from much of the rest of the sector — AEO, ANN, ARO, BEBE, DLIA, EXPR, GES, GPS, NWY, PLCE, PSUN, JCP, SHLD and others taken private (Charlotte Russe, Claire’s, Eddie Bauer, Hot Topic, J.Jill, Talbot’s, Wet Seal, etc.) — and you get a very “challenged” investment portfolio.  (For context, the S&P index returned 30% in 2013, more when including dividends.)

There are many reasons for this across-the-board stagnation, including the creative destruction inherent in fashion, which values the new/fresh over the old/stale.  Mall-based specialty store retailing is nearing fifty years old.  Newer concepts (e.g., KORS) inevitably take share from older legacy brands (e.g., COH).

In 2013, there were five exceptions:  Macy’s, Nordstrom, L Brands, Urban Outfitters, and J.Crew.  These companies grew up in the same mall-driven environment as the others, but somehow managed to achieve and sustain record valuations in 2013.*  (Notes:  I inferred J.Crew’s valuation from its public reporting.  Gap Inc., while showing signs of revival, is still well below its 1999 peak.)

How do these retailers thrive in this environment while others fade?

Let’s start with Macy’s.  There was a 30-some-year stretch where specialty retailing (both on and off the mall) ate the better department stores for lunch.  Macy’s is now using its key weapons – scale and information technology – to bite back.  It has finally mastered how to use its national scope, mass reach and product breadth to full advantage.  First, it’s share of voice is unparalleled:  Macy’s this year blanketed TV, newspapers, mailboxes, inboxes, web ads and social medial like no other retailer.  Second, its broad offer, true omnichannel execution and omnipresence (over 800 stores!) makes shopping more convenient than with most competitors. Finally, it’s leveraging big data to target market segments more deftly – store assortments are better optimized and marketing messages are targeted and customized.

In many of the same ways as Macy’s, Nordstrom is also leveraging scale and technology to increasingly dominate its sector, but as a smaller chain with an adept floor staff, they’ve executed their omnichannel strategies more quickly and quite effectively.  As is the Nordstrom way, they’ve further empowered their sales force with mobile technology, which has markedly improved the quality and speed of what was already unmatched customer service.  Importantly, Nordstrom’s merchandising recently seems more vibrant and tailored better locally, embracing several well-funded, popular contemporary brands (one of the few real growth sectors in apparel) such as Billy Reid, Bonobos, Free People, and Vince, which they pulse to create surprise and newness.

Now, let’s contrast Macy’s and Nordstrom strategies to what’s happening to most of the specialty store sector.  In large part, the troubled specialty retailers are reducing hours and inventory in stores, delaying capital improvements, and shifting resources online, where they are at a competitive disadvantage to the pure plays and other aggregators.  Omnichannel seems to be their go-to “Hail Mary” strategy, but they simply don’t have the reach or the resources to execute as comprehensively or as well as Macy’s or Nordstrom.

We might have grouped L Brands with the other lagging specialty store operators had Les Wexner not years ago jettisoned his apparel brands.  (Credit his vision once again.)  L Brands’ profit strategy is to completely dominate the mall business in two categories (lingerie and fragrance), execute with incredible discipline and focus, defeat all competitors, and reap the resultant high margins.  Oh, and let’s not forget the company’s other secret:  Victoria’s Secret Catalog, a 30-year legacy operation that formed the foundation of L Brand’s industry-envy, benchmark-worthy direct business.

Urban Outfitters, Inc. targeted hipsters well before there was word for them, and maintained lifestyle brands, not overly dependent on apparel, well before lifestyle brands became de rigueur.  Urban Outfitters and Anthropologie have kept to their lanes and true to their brands, being very intentional with real estate and measured with growth, and creating further separation from everyone else with their large stores and consistently artful and impactful visual merchandising.  Moreover, the company years ago created a successful wholesale brand (a first in our industry!?), Free People, which today stands to be its next growth platform.

At J.Crew, Mickey Drexler has once again transformed a basic sportswear business into a fashionista-friendly, complete lifestyle brand.  I do question the longevity of J.Crew’s appeal, however.  Fashion will inevitably shift, J.Crew will seem less “must have,” and margins will fall.  I further worry that the company’s imaging has focused too much lately on Mickey and Jenna instead of its product (though, come to think of it, the cult of persona has worked wonders for Michael Kors and Tory Burch).  Regardless, strong direct businesses coupled with a strategy of infusing third-party brands into their offers will no doubt extend J.Crew’s concepts’ natural lifecycle.


As the U.S. economy kicks into higher gear this year, I expect Macy’s and Nordstrom will continue to extend their omnichannel tentacles and take share.  Both L Brands and J.Crew will rely more heavily on their brands’ significant international growth potential, strong direct businesses, and growth of their more nascent business units. Urban Outfitters, still without direct competition and aided by Free People, will continue its deliberate march forward.  After a half-century of evolution, these are the Darwinian winners of mall retailing thus far.  They’ve risen out of the competitive muck and stand erect while the remainder wrestle in the dirt for share, where there will continue to be the constant churn of mall stars, burnouts and re-inventions.

A toast to another exciting year in specialty fashion retail!