By Ilaina Jonas
NEW YORK Nov 30 When it comes to the internet, David Simon's kids can look but not buy.
"They are not allowed to shop on the Internet or I won't pay for their room or board," Chief Executive and Chairman of Simon Property Group Inc, the largest U.S. owner of malls and outlet centers joked at a the National Association of Real Estate Investment Trusts investor forum in June.
Although his kids and their generation still go to the mall, Simon worries what the habits of his grandchildren will be.
If online sales continue to grow and take away a bigger and bigger slice of the U.S. consumer spending pie, the future doesn't look good for some malls. Yet in a weird twist, it looks brighter for others.
Last week's starting gun for holiday shopping speaks volumes.
For the first time, online sales could account for more than 10 percent of holiday sales this year, according to Scot Wingo, chief executive of ChannelAdvisor, which helps merchants sell more on websites, including Amazon.com and eBay.com.
Online sales on Cyber Monday jumped 30.3 percent, according to International Business Machines Corp, which analyzes transactions for 500 U.S. retailers. Even more threatening are the sales from pure online retailers.
For the five-day period from Thanksgiving through Cyber Monday, client sales on eBay.com rose 38.3 percent compared with the same days in 2011, according to ChannelAdvisor, which helps merchants sell online. Sales at Amazon.com jumped 37.7 percent.
Meanwhile, foot traffic malls, shopping centers and power centers -- the home of big box stores -- rose 8.2 percent this year from Thursday though Sunday and sales increased 2.7 percent. Though store sale still account for the lion's share of shopping dollars, online sales are sky rocketing.
However, much of the online sales have come from brick-and-mortar stores, such as Macy's, the Gap, Costco and Target. They have embraced the Internet as yet another channel for sales, which benefits the stores. A large chunk of online sale returns occur at the store, giving shoppers a chance to avoid shipping costs, store owners a chance to make another sale, and the mall additional foot traffic. The same is true for consumers who order online and pick up their merchandise at the store.
"We would be very reluctant today to do business with a retailer that did not have a multi-channel strategy that would involve the internet," Daniel Hurwitz, chief executive of big box mall owner DDR Corp. "The issue with retail is merchandise. And the best merchant wins, and great real estate cannot bail out a bad merchant."
Online shopping presents its biggest threat to power centers, where stores like Best Buy and stationery merchants selling commodity goods are located. These retailers have started matching online prices but the strategy's success remains to be seen.
Many mall companies, such as Simon and Westfield Group also have embraced technology with mobile apps and QR codes that send messages and information to shoppers directing them to sales, events and offerings at the mall.
Still the new competition will widen the divide between stronger and weaker malls, and likely will accelerate the demise of weaker malls as they become less attractive retailers, shoppers and investors.
"If you're a fourth mall in a market, it's just not a compelling investment," Diane Wade, senior analyst of dedicated REIT manager CBRE Clarion Securities.
Meanwhile, stronger retailers will continue to flock to the better properties allowing owners to raise rents.
"If you're an owner of a lower quality asset that's not competitive with the other properties in the market, well that's an issue for you. But it benefits the guys with the stronger properties," Green Street Advisors analyst Andrew Johns said.
This accelerated trend will likely benefit the publicly owned real estate investment trusts who own about 70 percent of the best performing U.S. malls.
Despite incorporating technology, malls and their retailers cannot ignore the pure internet retailers, such as Amazon and eBay. To compete, they will continue focus on what online can't offer: an actual living experience, such as dining entertainment and a place to gather.
"You can't take your family to the Christmas lighting at Amazon, but you can do that at a mall," Johns said. "You can't go to Amazon to visit Santa but you go to a mall to do that."
Additionally, tenants at stronger properties will likely start using their stores as a form of advertising and as a marketing component, instead of being solely concerned with how profitable the store is.
"If I have a store in the best mall in town and I get tons of foot traffic though it, that's really valuable," Johns said. "Those people, they might not buy today, but maybe they'll go online or maybe they'll go back to their hometown because they're visiting, and buy at my other store."