The mallpocalpse is here - will mall operators respond?

The demise of the mall has been predicted for years in western countries (it's even been referred to as the 'mallpocalpyse' - see here and here, for example). And despite that, in New Zealand we have seen lots of mall development (for example, see here). However, retail has been decimated by the COVID-19 lockdown, and as the New Zealand Herald reported this week:

...online retail sales are up 350 per cent under Alert Level 3, but overall sales are down by about 80 per cent on average.

As New Zealand comes out of lockdown, and some semblance of normality starts to resume, you might think that retail will bounce back fairly quickly. However, there is good reason to worry, especially for large malls. And that has to do with network externalities.

As I discuss in my ECONS101 paper, malls are an example of a platform market (or a two-sided market). The mall exists as a space where buyers and sellers can meet to exchange goods. The mall doesn't actually sell anything, other than access to this space, for which they charge retailers an annual rent (in theory, the malls could also charge consumers an entry fee, but in practice none do).

The reason that malls attract retailers, and the reason that malls attract consumers, is network externalities. A network externality exists when the value of the good (or service) depends on the number of users. To a retailer, the value of locating in a mall depends on the number of consumers who visit the mall. The more visitors, the more customers will see their products or services on display, and the more sales revenue they will generate. To a consumer, the value of going to the mall depends on the number (and quality) of retailers and other service providers located in the mall. The more retailers and service providers, the greater the value of going to the mall. Both sides of the market produce an externality that affects how much the other side of the market values the mall. The consumers visiting the mall (and spending their money) creates value for the retailers, and the retailers create value for the consumers. Everybody wins.

Now, consider our post-COVID-19 recovery. If consumers are reluctant to interact with other people for fear of infection risk, the mall is one of the last places they are going to want to go. If you're anxious about visiting the supermarket, then the mall is really going to freak you out. Even those who are not overly cautious might opt for online purchases, which have been forced on us in recent times, but which many people have become habituated to (if they weren't already).

Fewer consumers visiting malls means that the value to retailers of locating in the malls reduces. If the malls don't reduce rents in response, then some retailers may opt to close down (if they haven't already). That simply exacerbates the number of closed retailers, by building on the numbers that did not survive the lockdown.

Fewer retailers in the malls reduces the value of going to the malls to consumers, so on top of any anxiety, fewer consumers will see the value in going to the mall. Can you see that all this is creating a death spiral for malls?

The only way that this can be avoided (or at the least, delayed), is by keeping the mall retailers open for long enough that mall visitor numbers recover, and the network externalities start moving in the right direction again. Mall owners have a vested interest in this outcome, of course. Will they realise that one of the few things that they can do is to lower rents to their retailers, to keep them operating through the lean times? Watch this space.