Will Amazon’s ‘mini-DCs’ help save American malls?

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Will Amazon’s ‘mini-DCs’ help save American malls?

By Al Urbanski - 08/13/2020

Many in the retail industry were surprised this week by reports that Amazon has been talking with Simon about putting distribution centers into some of the mall chain’s shuttered Sears and Penney’s stores. But close followers of Amazon’s plans to preserve one- and two-day delivery were not.

”The pandemic has helped immensely in getting online sales to accelerate, but striving to retain that next-day delivery, that’s the challenge. For Amazon to keep its sales rolling, they have to expand and get more distribution centers,” said Patrick Penfield, a professor of supply chain practice at Syracuse University’s Whitman School of Management.

He is not talking about gargantuan DCs like the one that Amazon is building in Clay, N.Y., just outside of Syracuse, a 3.4 million-sq.-ft. warehouse that will be Amazon’s largest and the second largest such facility in the world. It’s more of what Penfield calls “mini-DCs” of 100,000 sq. ft. or so that can be stationed in hundreds of communities to solve the mega-e-com’s last mile problems. Shuttered department stores fit the bill perfectly.

Patrick Penfield

“Department stores closing in malls is an opportunity for Amazon, and Amazon is an opportunity for mall owners. The pandemic has a lot of them in bad financial shape,” Penfield said.

Just this week, PREIT, the large owner of super-regional malls based in Philadelphia, reported a 36% decrease in second-quarter net operating income and an occupancy rate of 92.4% that had CEO Joseph Coradino widening his search for new types of tenants.

"We are pursuing agreements with healthcare providers, food markets, and fulfillment and logistics operators,” Coradino said.

Amazon has long been building a FedEx-style transportation system. It started up a small air force in 2015 that’s gotten bigger since FedEx dumped Amazon as a customer in 2019. Amazon figures to have 70 planes by next year.

More purple Amazon delivery vans will be appearing on streets, as well. An ad campaign currently in the market is recruiting entrepreneurs to go to amazon.com/opportunity and apply to start their own Amazon delivery businesses for personal investments of just $10,000.

Industrial space is the hottest segment in commercial real estate these days, but mall and shopping center owners have steered clear of merging warehouse space within a consumer environment. Dedicated parking would have to be committed to a DC, which would not produce any shopper traffic. In-line tenants would re-negotiate their co-tenancy agreements to lower their rents.

But that reckoning, too, could be changing in the post-COVID-19 world.

Department stores closing in malls is an opportunity for Amazon, and Amazon is an opportunity for mall owners.

Easton Town Center designer Yaromir Steiner, whose Steiner + Associates operates the 4-million-sq.-ft. retail mecca in Columbus, read the news about Amazon talking with Simon and thought perhaps he should give them a call.

“It would be incredible if Amazon could develop a ten to twenty thousand-square-foot retail component. That would give them a brand presence and create some traffic for the mall, while using the rest of the space as a fulfillment center,” Steiner said.

Chances are that more mall owners will be calling on Amazon because Amazon is going to be calling on them. When online grocery purchases rocketed up in April and May, a survey of consumers conducted by the research firm Escalent found that 77% of them were happiest with Walmart. Next came local supermarkets, and then came Amazon.

Amazon isn’t used to being in third place.

“Ninety percent of Americans live within 10 miles of a Walmart store,” Penfield pointed out. “They have the ability to placate the needs of online shoppers right then and there. The only way for Amazon to catch up is to establish all those mini-DCs—and empty department stores are their prime opportunity to get them.”