Best of 2018: The Real Reason Your Local Mall is Failing

It’s the holiday season. Today when I pick my kids up from school, the younger daughter and I are going shopping for Mom. Stella knows what she wants to get her mom—has known for a while—but the place we would have gone for it is no more. Herberger’s has closed after a rather long and feeble wind-down of weirdly non-discounted prices. That had a lot of (cheapskate) locals waiting for the real deals to emerge so they could scrounge the carcass for overlooked goodies.

The local paper reported that Herberger’s was coming back and people went nuts. Turns out, it’s returned as a “modern retailer,” which means it has a website. Hard to argue with that strategy, but it does leave us with this half-empty building. And buying jewelry for Mom just isn’t the same online. The kid is old-fashioned.

As we ponder a world in which the country’s largest city feels the need to subsidize the country’s largest retailer—to the tune of billions of dollars—it’s hard to know what comes next for retail. I made the argument here that we need to be prepared to walk away from this stuff as it fails, to re-embrace our core downtowns as economic ecosystems, not just quaint shopping areas for tourists. Is Stella getting her old-fashioned nature from me? Are our cities destined to be coffee shops, gas stations, and online everything else?

Time will tell. What I do know is that we don’t control our own destiny, and that was our choice. We are free at any time to choose otherwise. Will we?

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In high school, when I took my girlfriend (now my wife) to the Christmas Ball, I bought my clothes at the nicer of the two clothiers in town: Herberger's. The other — JC Penny — is where I bought most of my regular school clothes. That was life in a small town in the early 1990's. Still is.

At least until the last year. It was thirteen months ago that we found out that the JC Penney was going to close. It had moved from its old location in the East Brainerd Mall (where it had moved from its original location in downtown Brainerd) to the Highway 371 bypass strip — the "classic case" of transportation investment success, according to one of our most respected policy advocates — but even that wasn't enough to save it.

Last week we found out we were going to lose our other big store. With the forced liquidation of Bon-Ton, parent company of Herberger's, the last major retailer in my hometown is gone. Here's how the local paper described it:

Just this week, the lakes area learned it is losing its second major department store with Herberger's leaving and J.C. Penney already gone. It represents the last large department store in Brainerd and highlights a real and major shift in the American consumer. Something that wouldn't have been considered not that long ago when passing the Herberger's cosmetics counter or browsing through row after row of merchandise.

Forced Liquidation

I haven't studied the books at Bon-Ton because I have no intention of owning anything in the American retail space at the moment, but I did take a few minutes to look over some of their recent financials. It's ugly. 

They have nearly a billion dollars in debt, the interest of which overwhelms the profit they are generating off their operations. This is true even at today's ridiculously low interest rates. In a normal interest rate environment, this debt hog would have been slain quite a while ago. As it sits, enough was done to help it limp along, despite having every indication that it would never be able to claw its way out of this. A debt rollover at the end of last year was probably a chance for creditors to buy time to unload the debt onto some pension fund or foreign sucker, er... investor. 

At the end of 2016, the company had $35 million in equity securing $1.5 billion in liabilities, a leverage ratio of 1:43. Ha! And that got worse by the end of last year, when total liabilities exceeded equity and the company was forced into bankruptcy. Despite the fact that the company would operate profitably if the debt were wiped out, the creditors are going to secure what they can and sell off the parts that have some value. Getting out of the lease they have with my little town mall will be a simple formality.

Efficient, but Fragile

I remember when Herberger's opened. In fact, I remember when the mall itself opened. It was a big deal. Sure, there was whining about the destruction of the downtown but, come on, those places really weren't that competitive in today's market. Herberger's and national retailers like them were able to operate much more efficiently and, as the story goes, pass those savings on to consumers. The message to the community was simple: better selection, better prices and everything would be shiny and new. We embraced it.

As a thought experiment, I asked a local Facebook page dedicated to sharing Brainerd history to help me put together a list of the clothiers that operated in the downtown before the opening of Herberger's, a.k.a. those inefficient businesses that "the market" killed off through "competition" (albeit competition with a ton of government subsidy, but hey, who's counting). Here's an abbreviated list of the responses:

Opal Ann's, John Bye's Clothiers, Cunningham's, Georgia's Dress Shop, Brekken's Men's Store, Carlson's, Rosalin Style Shop, JC Penny, O'Brien's, Murphy's, Montgomery Ward, Sear's, Ehler's, Fieldman's Army Navy Store, Mezner's Children's Shop, Paul's Shoes, Sampson's Shoes, Sylvester's, Dottie's Hats, Woolworth's, Winkleman's Furs, Karin's Shop and the Frances Shop.

My grandmother worked at that last one. I remember going to visit her with my mom, a trip where I was bribed with a promised visit to the pet and hobby store across the street. That's quite an ecosystem of clothiers and it makes me kinda sick to my stomach to think about them all gone. 

In the pursuit of the shiny and new, the efficient and the low-priced, we turned our backs on decades of small business wealth creation. We walked away from all of these stores — all these families and their local bank deposits, local newspaper ads, local insurance brokers, local accountants, softball team sponsorships, Fourth of July floats, Crazy Day sales and after school jobs — and, as the old saying goes, put all our eggs into one basket.

I'm sure Herberger's had a greater shoe selection, cheaper clothes and a shinier location with a mall Santa at Christmas. They also had a fragile business model, one that was far too responsive to investors far beyond our little city limits. All the profits from the sales here went to provide the basis for greater and greater leverage (along with bonuses, dividends and the like—almost none of which stayed in Brainerd). We're still willing to give them our money — to spirit our wealth out of here as quickly as possible — but they are too bloated to take it anymore. So now we have an empty store.

What was the Payoff?

So we gutted our downtown, devaluing our core neighborhoods in the process. But we must have gotten something worthwhile in the process, right?

This is the most tragic part of the story.  Today, the mall that once represented sophistication and progress is failing, just like similar malls in similar towns all around the country. The K-Mart anchor is gone and, while they've been able to replace it with a pair of lesser retailers, the shops in between the ends underwhelm. Herberger's had taken over nearly a third of the mall, and now they're gone too. 

And that downtown with all those historic clothiers now long departed? It's also a shell of its old self. While some life is starting to creep back in now, to my eyes, it's been through a lifetime of decline. Brainerd's downtown has fallen far from its high water mark.

Yet look at the wealth. Even in its current (kinda sad) state, the nine blocks of the core downtown still produce 287% more property tax than the entire mall property. And that's before the Herberger's goes away, before there is a big hole in a building with no obvious way to fill it.

Imagine the wealth we would have if we hadn't destroyed our downtown — if we hadn't walked away from the wealth our ancestors had built and disinvested from our core, if we hadn't been seduced by the shiny and new...

We ran sewer, water, storm sewer, commercial roads and sidewalks out to and around that failing mall location. Where is the money going to come from to fix and maintain all of that stuff now? We invested tens of millions in an approach that made us poorer. And now we don't even have a place to buy clothes, except the big box store strip — Walmart, Target, or maybe we could buy some coveralls at Mills Fleet Farm. Of course, all of these stores are in the neighboring city. It's a tragedy I struggle to fully comprehend.

This is how you bleed a small town white.

What Comes Next?

It's pretty easy to predict what comes next. The rah-rah crowd — the ones who generally make their money or gain the little power there is to be wielded in such a place off these kind of "growth" transactions — will push to fill the space. Failure is not an option, regardless of the amount (or length) of subsidy required. There'll be talk of jobs and growth and restoring our economy. There'll be job training (a.k.a. debt acquisition potential for teacher salaries) for the dislocated and anything else needed to help those of us who are gainfully employed not have to fret too much about our neighbors.

We'll embrace anyone big enough to fill that space, and in doing so, we'll continue to discount not only our history but the hard math of who is actually paying the freight in this community.

In this map showing tax value per acre, the historic downtown and surrounding neighborhoods are the most financially productive land in the entire region. (Source: Urban3)

What we should do is recognize the fragile condition that we're in; our dependence on forces beyond our control not only threatens our ability to shop for clothes. It threatens everything. We rely on national retailers and their high debt / low equity business models for almost everything we buy. This should create a sense of urgency for us and an obsession with becoming more resilient.

And we should also recognize where our wealth really comes from. It comes from our downtown and our core neighborhoods (those within walking distance of the downtown). It certainly doesn't come from people driving through those places. It doesn't come from people commuting in. It doesn't come from tourists or developers or the potential of land development out on the edge. Our wealth — the wealth built slowly over generations — is slowly seeping away in our downtown and its surrounding neighborhoods.

Put these things together — the need to build resilience and the historic wealth that still remains in our core — and the strategy becomes too obvious to ignore: We need to piece our economic ecosystem back together. We shouldn't spend a penny on the mall — we should be willing to let it fall apart and collapse if the market can't support it. But we should support those investments in the core that are already paying our bills.

And here's the really sweet thing: the downtown doesn't need millions of dollars of investment. There are some trying to force that down the city's throat, but we don't need it. It's already the most successful area in the region. We just need to start reconnecting things.

There are thousands of people — thousands of customers — living a short walk from downtown. There are hundreds at the courthouse each day. Hundreds at the high school as well. All these places are two to six blocks away from where we need them — a short and very easy walk — yet walking these paths is so dangerous and nasty that few people do it. 

Fixing this should be our obsession. And let me clarify: starting to fix this on the cheap — with paint, some construction cones and a modest landscaping budget — should be our obsession. If the closing of Herberger's does anything to us, it should turn us into obsessive fanatics about making our downtown as amazing a place as it once was.

If we do that, we'll find we spend less money, grow wealthier, become more resilient and gain greater control of our destiny. All that will happen, and the city will become a better place to live. That's the essence of a Strong Towns approach.

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