Keeping Score is a column that will appear periodically by Digital Commerce 360 editor at large Don Davis, who has been covering ecommerce since 2007.
“That’s it,” my wife declared as she slammed the newspaper down on the kitchen counter. “I’m not shopping at Old Orchard anymore!”
She was responding to the news that the village of Skokie, home to the Old Orchard shopping mall, had agreed to raise the sales tax at the mall 1% — to 11.25% for retail purchases and an appetite-suppressing 13.25% for restaurant bills.
The money the higher tax raises will go directly to the mall owner. Proponents say it will produce $84 million over 23 years that the mall owner, Unibail-Rodamco-Westfield, will use to make improvements designed to bring consumers back to the mall. Unibail-Rodamco-Westfield is a Paris-based company formed in 2018 after French commercial real estate firm Unibail Rodamco bought Westfield Malls, one of the largest U.S. shopping mall operators.
Unibail-Rodamco-Westfield announced plans to close several regional malls in the U.S., largely because of the sharp reduction in sales due to the pandemic. Online shopping already was cutting into mall sales, and COVID-19 surely didn’t help. Mall pedestrian traffic declined 91% in the first year of COVID before starting to rebound in 2021, according to INRIX, which monitors vehicular and human traffic. And retail advisory firm Coresight Research projected in 2020 that 25% of U.S. shopping malls would close in three to five years.
But is raising prices the way to make malls more attractive? Surely not, but what is? That’s the question.
Comparing online to in-store sales tax
A consultant’s report provided to the Skokie Village Board of Trustees argued that Old Orchard’s best customers are not that price sensitive.
“Affluent households and higher-skilled workers, the primary source of sales at Old Orchard, place a relatively high value on their time,” the report argued.
They clearly haven’t met my wife, who has shopped at Old Orchard for decades. She immediately got strategic. She observed that the only store she really likes at Old Orchard is L.L. Bean, and that she can order online from the apparel retailer and, if necessary, return items to the store at the mall.
“That way I won’t have to pay the sales tax at Old Orchard,” she concluded, triumphantly.
That approach would save her a fair bit of change. Orders from LLBean.com for delivery to our home in Chicago carry a sales tax of 6.25%. That’s the rate the State of Illinois dictates for online or phone orders from out-of-state retailers like L.L. Bean, No. 62 in the 2021 Digital Commerce 360 Top 1000, that have a physical presence in the state.
That’s a difference of 5% from the 11.25% now charged at Old Orchard. That is more than enough to change the behavior of a price-conscious shopper like my significant other.
The extra 1% Old Orchard is adding comes on top of an already combined local and state rate of 10.25% at the suburban mall. Across the U.S., the average state and local tax is 7.24%, according to a Digital Commerce 360 analysis of data from the Tax Foundation. (The average state sales tax alone is 5.66% for the 45 states and the District of Columbia that have sales taxes.)
Department stores leave shopping malls
But not all shoppers are solely motivated by price. An example is my colleague Lauren Freedman, who ran her own ecommerce consulting firm, The E-tailing Group, for decades before joining Digital Commerce 360 as senior consumer insights analyst.
Lauren is a world-class shopper. And shoppers like her want shopping malls to shop at, so she’s willing to pay a little more to help a retail hub like Old Orchard survive.
“I want Old Orchard to survive,” she says. “As neighbors and city dwellers, we have to ask ourselves, ‘Do I care if this store or mall exists?’ If you want this to be part of your world, you’ve got to support it, or it won’t exist.”
Fair enough. And it’s true enough that Old Orchard is facing some of the same problems as other malls. While it still features well-known department stores like Nordstrom and Macy’s, it lost Lord & Taylor in 2018 and Barnes & Noble more recently. Part of the money raised with the additional tax is earmarked to improve the former Lord & Taylor space to make it attractive to a new tenant.
Attracting appealing new retail tenants is a tall order, given that the bankruptcies of department stores like J.C. Penney, Neiman Marcus and Stage Stores have left gaping holes in many malls. In fact, Green Street Advisors has predicted that half of mall-based department stores would close, leaving lots of anchor spaces empty.
Retail store survival strategies
The decline of department stores and the many bankruptcies of specialty retailers during the coronavirus pandemic have left lots of retail space empty at shopping malls. Malls have responded by reducing the square footage allotted to retail stores from 73.6% in 2014 to 65.0% by late 2021, according to Innovating Commerce Serving Communities (ICSC), the trade association formerly known as International Council of Shopping Centers that took a new name last year.
Instead of stores, malls increasingly feature restaurants, movie theaters, professional offices, gyms and nail salons.
ICSC’s decision to take “shopping centers” out of its well-known name is itself a sign of consumer shopping shifting away from malls. Where are they shopping instead? Online, obviously, is a big part of the answer, as ecommerce accounted for 19.1% of retail sales in 2021, up from 8.0% in 2012, according to a Digital Commerce 360 analysis that excludes products like gasoline and restaurant meals rarely purchased online.
But is there still a place for brick-and-mortar retail? I know shoppers like Lauren Freedman and my wife like to go to stores. Even I do when I’m shopping for something I’m excited about buying. But the loss of nearly 20% of sales to websites, combined with the ease of comparing prices online that’s squeezing profit margins for all retailers, puts store-based retailers in a bind.
Still, some are finding a way to prosper. One of the best examples is Best Buy Co. Inc., No. 5 in the Top 1000. A decade ago, many thought the consumer electronics retailer would fall victim to “showrooming” — consumers checking out products in a store, then, often using their mobile phones, comparing the price on Amazon and other retail websites. Many thought consumers would ultimately buy on the web to get lower prices.
To its credit, Best Buy’s executives took the problem on directly. They decided to match online prices, including Amazon’s. Then they put a bigger focus on selling higher-margin secondary items, like cables and headphones, along with providing in-home services to help shoppers set up the flat-screen TVs and surround-sound music systems they bought at the store.
Target, too, has more than held its own by freshening up stores, adding private-label products that generally carry higher profit margins and investing in omnichannel services. That makes it convenient to shop at Target, no matter whether you start your quest online or in the store.
Brick-and-mortar retail has to innovate to survive, and I suppose you could argue that’s what Old Orchard is doing by raising prices 1% to fund mall improvements. It will be interesting to see if it works. I suppose it depends on whether there are more price-first shoppers like my wife or consumers like Lauren who just want to be able to keep going to the mall.
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