Malls Owning Retailers – The Beginning of a Trend?

The recent sale of Aeropostale assets to General Growth Properties and Simon Property Group has created a lot of head scratching. Some have suggested this is the start of a new trend.  We think not.  This was a unique set of circumstances involving the top mall operators in the US.  Most don’t have the resources of GGP and Simon.  Plus, with changing retail dynamics mall operators need to stay focused on transforming their properties to operate in an environment of increased on-lineshopping and fewer anchor department stores.  Buying retailers (troubled or not) consumes scarce capital and management attention that needs to focused on ensuring that malls remain a viable long-term business model.

So what’s in it for GGP and Simon?  Clearly in the short term it’s a way to keep rent payments coming in and maintain control over locations in their prime malls.  (Over half the US doors to remain open are in new owners’ locations).

But is there value in the Aeropostale franchise?  The implied premise is that the business can be shrunk to viability.  Yet drastically downsizing a business (in this case from 800 stores before bankruptcy 400 stores) to restore profitability has seldom been a recipe for long-term success – companies cannot shed costs and overhead fast enough to get on a firm footing.

While we may see transactions like this in the future, expect them to be few and far between.