Big Changes in Store for Southern California's Malls

On Monday Federated Department Stores completed its acquisition of May Department Stores, becoming a $30 billion company that will be a dominant force in the department store sector of the retail business in the United States. As previously reported, Federated has decided to consolidate ten of May's regional department store nameplates into its Macy's brand and close 68 "duplicate" stores in 66 malls, mostly in California, Ohio, and Pennsylvania. Monday's announcement was accompanied by news that an additional 7 "duplicate" stores would be closed in California, New York, and Massachusetts, largely to satisfy anti-trust concerns voiced by those states.

Southern California is the largest market in the nation to be affected by the merger. May's Robinsons-May chain will be merged into Federated's Macy's West division, which already operates numerous stores in the region. Within a year 24 stores will close at 24 malls in the greater Los Angeles and San Diego metro areas. The owners of these malls, which include such national corporate titans as General Growth, Macerich, Simon, and Westfield, face the daunting challenge of filling the empty spaces in a way that will make their customers and their shareholders happy.

The evolution of the retailing business has forced malls to evolve as well, and the shopping center industry is at a crossroads. There has been a remarkable shift in dominance from the "middle market" department stores, which have long favored malls, to "lifestyle" retailers and "big box" stores that have found much of their success in non-mall locations. In addition, today's shoppers are preferring outdoor, "Main Street" style centers over the enclosed, climate controlled, and insular environment of conventional malls (even in Phoenix!). These factors have led to the phenomenon of "dead malls" that can be observed in cities across the nation, pointing towards a future in which only the largest and most successful malls will survive.

While none of the 24 Federated store closings in Southern California will push their host malls into "death," leaving any of these stores vacant for an extended period of time is simply not an option for mall owners. New stores must be found to ensure that these malls continue to draw customers and thrive.

A Sneak Preview?

You might be able to take a glimpse into the future of Southern California's malls by driving about 66 miles north from the Los Angeles Civic Center. Although you will have passed through several mountain ranges and arrived in a rural desert environment, you will still be in Los Angeles County and witihin the greater metropolis. You will find yourself at Antelope Valley Mall.

At Antelope Valley Mall, you'll encounter department stores belonging to the Harris Gottschalks and Dillard's chains. Neither of these regional retailers is well-represented in Southern California malls but that may change once Macy's West completes its absorbtion of Robinsons-May.

Harris Gottschalks, Antelope Valley Mall, view of exterior

Dillard's, Antelope Valley Mall, view of mall entrance

15 years ago, there were four major middle-market department store chains in Southern California: Bullock's, May Company, Robinson's, and The Broadway, all of which have been consolidated into Macy's. Southern California was also home to two smaller chains, Buffums and Ohrbach's, that have long since closed shop for good. The massive Southern California market, soon to be thoroughly dominated by Macy's, can support more competition.

Many have speculated on the future of regional department store chains in the wake of the Federated-May merger, questioning whether there is a future for them in the nation's crowded retail landscape (related article). Any expansion into Southern California by either Harris Gottschalks or Dillard's would be a risk, but the immense size of the market, along with the bounty of soon-to-be available real estate at many of the region's top malls, will likely prove too tempting for both companies to resist.

Who's Gottschalks?

Gottschalks Inc.

HQ: Fresno, CA

67 stores in 6 states

Gottschalks operates stores in the San Bernardino-Riverside area (the Inland Empire) as well as in the Antelope Valley. However, shoppers in the rest of the Los Angeles area and in San Diego probably aren't familiar with the chain.

Long a major player in the California hinterlands, Gottschalks recently stumbled a bit after its acquisition of the Seattle-based Lamonts regional chain in 2000, bringing it into several new and unfamiliar markets. Its 1998 acquisition of Harris, a San Bernardino-based Southern California chain, has proven to be a wiser move, creating a base for further expansion in the market. (Many Southern California stores are branded Harris Gottschalks)

Federated's decision to close stores at the Galleria in Tyler in Riverside and the Montclair Plaza in Montclair may allow Gottschalks to obtain an entrance into two successful Inland Empire malls in which it is not currently operating. A larger expansion, which could include a push into Los Angeles, Orange, and San Diego counties, is unlikely considering the company's relatively small size, limited financial resources, and unfamiliarity with those markets, but it is certainly possible.

Who's Dillard's?

Dillard's, Inc.

HQ: Little Rock, AK

329 stores in 29 states

In greater Los Angeles, Dillard's only operates one store in the Antelope Valley. A store was recently opened in El Centro, a community located in Imperial County that might be considered within San Diego's orbit.

Like fellow Arkansas-based company Wal-Mart Stores, Inc., Dillard's enjoyed steady growth within its retail category from the late 1960's into the late 1990's. Unlike Wal-Mart, Dillard's grew primarily through acquisitions, absorbing several other regional department store chains as it extended its reach into several major markets throughout the country. It began to stumble after its poorly-executed acquisition of regional conglomerate Mercantile Stores in 1998 but remains strong in its core markets in the West and South. The death of founder William Dillard in 2002 led to speculation that the troubled company would be sold. While Federated has often been mentioned as a possible suitor for Dillard's, such a merger is not likely now that the company is primarily concerned with digesting May.

It's no secret that Dillard's has long eyed California as a place to grow. In 1997 the company opened its first store in the state in the Central Valley community of Stockton, not far from Gottschalks' Fresno base. While this article from January 1998 indicated that Dillard's would open stores in the Northern California communities of Antioch and Santa Rosa, they never materialized. According to this article from August 1998, Dillard's went so far as to sign a "letter of intent" to open a store at the Tanforan Shopping Center in San Bruno, which would have expanded the company into the greater San Francisco market. Dillard's never opened a store in San Bruno, though I've not been able to find an article that explains why. The fact that Dillard's abandoned its reported plans to move into Antioch, San Bruno, and Santa Rosa signals that the company may have decided it wouldn't be very successful in Northern California.

Dillard's has expanded slowly in California and now has only 3 stores in the state. The Antelope Valley store opened late in 1999, and the El Centro store opened about a year ago. The company appears to be more comfortable operating stores in Southern California, and its success in Arizona, New Mexico, and Texas seems to indicate that it knows how to market itself to Latino customers, a significant demographic group in both greater Los Angeles and San Diego.

Dillard's is in a far better financial position than Gottschalks to embark on a significant expansion into Southern California and become a major player in the market, as it has more than three times as many stores nationwide. The costs involved with establishing itself in such a huge market area where few people are familiar with its name may prove prohibitive -- a repeat of the Mercantile Stores fiasco is unlikely, though, as the company is not in a position to replace well-respected regional names with its own banner. The challenge for Dillard's is clear: it would have to offer a decidely different shopping experience from Macy's West. But if any department store company can hope to compete with Macy's throughout Southern California, it's Dillard's.

Other Possibilities

If Gottschalks and Dillard's don't use the Federated-May merger as an opportunity to expand in Southern California, other chains could pick up the slack. While both Sears and JCPenney are already well-represented in the market, each chain could possibly add a few new stores as a result of the merger; however, both companies have shifted their expansion focus to "freestanding" stores away from malls. Kohl's is another possibility since it has begun to open stores in the market, but it too has favored "off-mall" locations.

More "big box" stores could also find their way into more malls as a result of the merger. Both Target and Wal-Mart have recently opened stores at Southern California malls. Target generally enjoys more "cachet" than Wal-Mart as a discounter, a reputation that is especially important in this style-concious market. Many mall owners would consider a Target store far more complimentary to their current roster of retail tenants and customer base than a Wal-Mart store. Recently Westfield was proud to announce that both Neiman-Marcus and Target would be coming to its Topanga Plaza mall, a national first; Federated will be closing stores at many fashionable "A-grade" malls where Target might be welcome but Wal-Mart would not. Former Federated stores could also be carved up into several smaller "big box" stores, a very real possibility in today's retail landscape.

Many Southern California mall owners may end up seeing the Federated-May merger as an opportunity to "reclaim" space from the department stores that once sustained them and represented the most powerful force in American retailing. These days, smaller but more appealing "large format" retailers, restaurants, and entertainment venues are considered to be the most compelling customer draws. Many former Robinsons-May and Macy's stores may be demolished and replaced with outdoor "lifestyle"-oriented environments that reflect the recent changes in the retailing business, consumer preferences, and shopping center design. The region has become home to many "dead malls," but most of them have been redeveloped into more relevant land uses. The malls that are losing stores as a result of this merger are by and large still quite successful; their owners have a compelling incentive to replace them in a manner that will maintain their attractiveness to consumers as a place to spend their leisure time and money, ensuring their continued success.

No matter what happens, we in Southern California should expect to see many changes in our local malls.

The List

On July 28, Federated announced that Robinsons-May stores at the following Southern California malls would be closed:

Los Angeles County

Del Amo Fashion Center -- Torrance -- store is 180,000 square feet, opened in 1981 -- other mall anchors: Burlington Coat Factory, JCPenney, Jo-Ann Etc., Macy's, Macy's Furniture, Marshalls, Sears, T.J. Maxx

Glendale Galleria -- Glendale -- store is 179,000 square feet, opened in 1993 -- other mall anchors: JCPenney, Macy's, Mervyn's, Nordstrom

Los Cerritos Center -- Cerritos -- store is 153,000 square feet, opened in 1971 -- other mall anchors: Macy's, Mervyn's, Nordstrom, Sears, United Artists movie theatres

Northridge Fashion Center -- Northridge (Los Angeles) -- store is 191,000 square feet, opened in 1995 -- other mall anchors: JCPenney, Macy's, Pacific movie theatres, Sears

Santa Monica Place -- Santa Monica -- store is 137,000 square feet, opened in 1981 -- other mall anchors: Macy's

Westfield Fox Hills -- Culver City -- store is 150,000 square feet, opened in 1975 -- other mall anchors: JCPenney, Macy's

Westfield Santa Anita -- Arcadia -- store is 181,000 square feet, opened in 1976 -- other mall anchors: AMC movie theatres, JCPenney, Macy's, Nordstrom

Orange County

Westfield MainPlace -- Santa Ana -- "north" store is 149,00 square feet, opened in 1991 -- other mall anchors: Macy's, Nordstrom, Robinsons-May ("south" store)

San Bernardino County

Victoria Gardens -- Rancho Cucamonga -- store is 180,000 square feet, opened in 2004 -- other mall anchors: JCPenney, Macy's

San Diego County

Westfield Plaza Camino Real -- Carlsbad -- store is 150,000 square feet, opened in 1969 -- other anchors include JCPenney, Macy's, Macy's Mens & Home, Sears

Westfield North County -- Escondido -- "north" store is 112,000 square feet, opened in 1986 -- other anchors include JCPenney, Macy's, Nordstrom, Robinsons-May ("south" store), Sears

Westfield University Town Center -- La Jolla (San Diego) -- store is 147,000 square feet, opened in 1978 -- other anchors include Macy's, Nordstrom, Sears

Ventura County

Pacific View Mall -- Ventura -- store is 205,000 square feet, opened in 1999 -- other mall anchors: JCPenney, Macy's, Sears

The Oaks -- Thousand Oaks -- store is 150,000 square feet, opened 1978 -- other mall anchors: JCPenney, Macy's, Macy's Mens & Home

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Also on July 28, Federated announced that Macy's stores at the following Southern California malls would be closed and that the existing Robinsons-May stores at these same malls would be converted into Macy's stores:

Los Angeles County

Lakewood Center -- Lakewood -- store is 208,000 square feet, opened 2000 -- other mall anchors: JCPenney, Mervyn's, Robinsons-May, Target

Westfield West Covina -- West Covina -- store is 150,000 square feet, opened 1975 -- other mall anchors: JCPenney, Robinsons-May, Sears

Orange County

The Shops at Mission Viejo -- Mission Viejo -- store is 197,000 square feet, opened 1980 -- other mall anchors: Nordstrom, Robinsons-May, Saks Fifth Avenue

San Bernardino County

Inland Center -- San Bernardino -- store is 145,000 square feet, opened in 1966 -- other mall anchors: Harris Gottschalks, Robinsons-May, Sears

Montclair Plaza -- Montclair -- store is 147,000 square feet, opened in 1968 -- other mall anchors: JCPenney, Nordstrom, Robinsons-May, Sears

Riverside County

Galleria at Tyler -- Riverside -- store is 156,000 square feet, opened in 1970 -- other mall anchors: JCPenney, Nordstrom, Robinsons-May

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On August 30, Federated announced that Macy's stores at the following Southern California malls would also be closed and that the existing Robinsons-May stores at these malls would be converted into Macy's stores:

Los Angeles County

Westfield Promendae at Woodland Hills -- Warner Center (Los Angeles) -- store is 81,000 square feet, opened in 1995 -- other mall anchors: AMC movie theatres, Macy's (at this mall, two existing Macy's stores will be consolidated, but Federated will be acquiring a Robinsons-May at the nearby Westfield Topanga Plaza)

Orange County

Fashion Island -- Newport Beach -- store is 83,000 square feet, opened in 1995 -- other mall anchors: Bloomingdale's (another division of Federated), Neiman Marcus, Robinsons-May

Westminster Mall -- Westminster -- store is 175,000 square feet, opened in 2002 -- other mall anchors: JCPenney, Robinsons-May, Sears

Ventura County

Simi Valley Town Center -- Simi Valley -- store will be 107,000 square feet, projected to open later in 2005 -- other mall anchors: Robinsons-May (this is the only Macy's store currently under construction in Southern California, and it will be divested soon after it opens)