Israel's Mall Owners Face Plunging Profits if They Don’t Spruce Up

And unless shoppers start opening their wallets or malls cut rents, some retailers may be fighting for survival in 2016, a poll by TheMarker shows.

Shoppers packing the Azrieli Center mall in Tel Aviv.
Ofer Vaknin

Israel’s shopping malls seem like prosperous places, packed with shoppers and diners. But between a fresh wave of terror attacks, unseasonably warm weather and a clutch of new shopping centers opening their doors, business is bad — not for mall managers but for their hundreds of tenants.

Shoppers have been holding back spending as the number of malls grows, and in many cities there’s a dangerous glut of retail space. It’s no surprise that many of Israel’s best-known chains are suffering sales drops, at least measured by sales per square meter of floor space. Unless shoppers start opening their wallets or mall managers cut rents, some retailers may be fighting for survival in 2016.

For now, at least, the major mall managers are holding rents unchanged even during the recent difficult months. Instead, they’ve tried to build up business for their retailers by increasing the number of mall-wide sales and other promotions.

But the worse the stores’ plight, the clearer it is to the mall owners that if they don’t upgrade they’ll lose renters. The Fox Group, a large chain that sells clothes and household items, reported a third-quarter operating loss last week. The company said it would close dozens of money-losing stores, and other chains seem likely to follow suit.

Such conclusions were clear in a recent survey ranking Israel’s malls, conducted for a fifth year by TheMarker and consulting firm Czamanski Ben Shahar.

Prescient mall owners who upgraded their malls jumped in the rankings. Mall owners who still view the chains as cash cows and see little need to invest  have fallen in the table or dropped out of the premier league altogether.

Customers are getting sick of malls offering more of the same, so new malls have come online with interesting concepts like Big Fashion Ashdod. As a result, eight of the top 10 malls have traded places.

The two big mall groups, the Ofers and Azrielis, own seven of the top 10 this year; four for the Ofers, three of which have fallen in the rankings with one unchanged. Two of the Azrielis’ three have risen and the other stayed in place.

But the Ofers and Azrielis own malls that didn’t even make it into the rankings. Next year, mall owners will have to upgrade or pay the price of lowering rents and losing stores.

In the rankings, 30% came from an online survey of 1,500 households, and 35% based on metrics at the malls like commercial space, average rents and sales per square meter.

Also, at strip malls and enclosed malls dozens of managers from the retail chains were interviewed. They were asked which malls made them the most money and where they aimed to open new stores. And managers of malls and shopping centers were asked which created the most value for their customers.

Safe shopping in Jerusalem

The survey’s surprise was the Malha Mall in Jerusalem, owned by the Azrieli Group, which won back its No. 1 ranking this year. The knifing and car-ramming attacks in the capital have kept shoppers off the streets and away from markets, so this has actually made business better for the malls, especially Jerusalem’s first mall, the Malha Mall.

In 2014, Malha was second in the rankings after a first-place finish in 2012 and 2013. One major reason for its popularity is that it’s enclosed and well-guarded; many shoppers left the open Mamilla Mall and the streets for Malha. And as a mall for locals, Malha has no real competition. Mamilla is much more for tourists.

Customers who took part in the survey rated Malha highest in customer satisfaction, while others said they’d go there if distance weren’t a problem. Malha’s customer-satisfaction rating has improved from fifth place in 2013. Malha also led in the survey of retail executives, who were asked which malls make them the most money. But mall executives only rated Malha third.

In three months, Azrieli is launching a major renovation of Malha at a cost of 50 million shekels ($12.9 million) to 60 million shekels. It also plans to expand the mall to 52,000 square meters from 40,000 square meters.

“This is a strong mall that has no competition in the city. It’s not nice to say, but events like the latest terror wave affect the mall for the better because it’s seen as a safe space compared to places like Mamilla, which is really empty these days,” says Arnon Toren, CEO of the Azrieli Malls.

“At the beginning of the terror wave there was actually a drop in the number of Arab customers who came, but that has begun to balance out. In practice, we only experienced a sales drop during the first week of the terror attacks.”

Ayalon Mall’s meteoric rise

Azrieli’s Ayalon Mall in Ramat Gan was the biggest winner in 2015, rising to second place from 10th the year before. This stems from its makeover and a new second story with name brands such as H&M, Forever 21, Bershka and Desigual. Stores have reported a 25% to 30% rise in sales since the second story was opened.

This shows that malls that invest in renovations can make a comeback. Tamir Ben Shahar, the CEO of Czamanski & Ben Shahar, says the Azrielis waited too many years to carry out renovations. For example, their Negev Mall in Be’er Sheva lost its spot in the rankings because they waited too long to upgrade.

The “Big Mall” in Petah Tikva — also known as the Avnet Mall — and the Azrieli Mall in Tel Aviv kept their third and fourth spots respectively, with the Golden Mall in Rishon Letzion rising to fifth.

The Ramat Aviv Mall in north Tel Aviv was probably the most interesting case; it tumbled to sixth place in 2015 from first place in 2014.

“I know a number of Israeli chains that lose money every month in the Ramat Aviv Mall,” Ben Shahar says, adding that revenues there are good but rents are very high. They can be 15% to 25% of turnover for small Israeli chains.

Sales rose 9% at the mall from 2010 to 2014, but rents rose 8% and they were already high. In 2014, rents were 494 shekels per square meter on average at the Ramat Aviv Mall. They were only 326 shekels at the Azrieli Mall in Tel Aviv, 278 shekels at Malha in Jerusalem and 186 shekels at Avnet in Petah Tikva.

But the retail chains still see Ramat Aviv as a status symbol, despite its lower profitability. The drop at Ramat Aviv partly stemmed from the rise of the Dizengoff Center in Tel Aviv and the Ayalon Mall in Ramat Gan.

Best strip mall: Big Be’er Sheva

The country’s No. 1 strip mall is Big Be’er Sheva, which had ranked second in that category for four years. This year it overtook the Bilu Center near Rehovot.

The rise of Big Be’er Sheva was mirrored by a drop in the city’s regular malls, but Be’er Sheva is adding two large shopping complexes next year. Third place went to the Gimel center in Kfar Sava, after a new movie complex opened. Fourth was Big Eilat, another strip mall whose rise came at the expense of the city’s other malls.

Another big loser is the Eilat’s Mul Hayam (Facing the Sea) Mall, which fell to eight place after a long presence in fifth. It’s facing increasing competition in the southern resort city, after years during which it enjoyed a near monopoly.

The situation in Eilat is similar to that for the Ayalon Mall. Ben Shahar says the owners are squeezing every last drop, charging very high rents and not making necessary renovations.

He recommends they do something before they fall out of the top 10. The mall’s managers, for their part, say they have the highest sales per square meter and changes are on the way, including new stores and renovations.

Wait till next year

This year has been marked by the rapid rise of three relatively new malls. Grand Be’er Sheva rose to 12th place from 21st and Big Fashion Ashdod came in 14th place even though it just opened. And Big Fashion Nazareth reached 15th place as customers began to think of it more as a full mall than a strip mall.

Usually it takes at least two years for new malls to take off, and even then they rarely come anywhere near the top for many years. But Israelis are looking for more excitement. These three new malls offer customers something new whether in experience, size or design.

“There’s a very high probability that these three centers will enter the top 10 next year,” Ben Shahar says, adding that they’re benefiting from refreshing concepts, size and excellent management.

Israel’s biggest mall, the Grand Canyon in Be’er Sheva, is also moving up quickly. Customers prefer it to local rivals and it’s becoming a regional center that gets high marks for customer satisfaction.