E-commerce is both a positive and a negative for mall REITs
General Growth (GGP) CEO Sandeep Mathrani spent a lot of time on the first quarter conference call discussing the impact of e-commerce on his company (and mall REITs in general, like Simon Property Group (SPH), Kimco Realty (KIM), and Realty Income Fund (O)). It bears repeating. It’s conventional wisdom these days that e-commerce giants like Amazon.com (AMZN) means the end of the shopping mall (and brick-and-mortar retailers in general). But Mathrani laid out some important facts that dispute this view of the world.
People tend to forget that Internet retailers weren’t the first threat to brick-and-mortar retailers. Before the Internet, people bought goods out of catalogs. The Sears Catalog is almost a piece of American History, and it revolutionized the way we shopped over a century ago. Fun fact: in the early 1970s, the five biggest retailers in the U.S. were the five U.S. divisions of Sears (SHLD). Now, they’re simply another troubled retailer like J.C. Penney (JCP).
In 1995, catalog and direct mail sales accounted for about 10% of total sales in the U.S. In 2013, e-commerce came in at just under 9% of sales. So, in a lot of ways, it’s incorrect to assume that e-commerce sales are cannibalizing in-store sales—they’re really just catalog sales being routed through a new channel.
Mathrani put out another interesting tidbit—that half of e-commerce sales were ship-to-store last year. Customers like the ship-to-store option because it gives them a physical place to return the merchandise to, and yet, has the convenience of online shopping. Retailers are becoming more sophisticated in inventory management and are integrating in-store and online systems. Finally, retailers are figuring out that the ship-to-store model also helps drive impulse sales. Instead of viewing e-commerce as a threat, smart retailers are viewing it as simply another avenue to drive sales.
Finally, Mathrani made a critical point—that e-commerce is becoming a way to vet new concepts. Some brands that used to be 100% online are now building brick-and-mortar operations. One brand specifically mentioned was Boston Proper, which is owned by Chicos (CHS). Given that the brand has worked out well online, the company has been building stores.
The takeaway from this analysis is that holders of mall REIT stocks should expect earnings (and so, dividends) to continue to increase going forward, as the economy improves.