Mr. Bezos goes to the mall (maybe)

The next phase of the retail mall revolution, from shopping to shipping, just got a big push forward.

The Wall Street Journal reported late Sunday night that Amazon.com Inc. (NASDAQ:AMZN) is negotiating with real estate giant Simon Property Group (NYSE: SPG) to transform some of Simon’s department store properties into fulfillment centers by assuming anchor tenant spaces once held by major but now struggling retailers. According to the Journal, the talks have focused on J.C. Penney and Sears, which have both filed for bankruptcy protection. Simon malls have 63 J.C. Penney stores and 11 Sears stores, according to its most recent public filing in May.

Until now, Amazon’s mall leasing or acquisition activity has been on a one-off basis; Marc Wulfraat, head of consultancy MWPVL International, said he could recall only three such transactions, all of which have been in Ohio. A deal of this nature with Simon would put Amazon in the retail-to-industrial conversion business in an unprecedented way.

For Amazon, the move makes tactical and strategic sense. The company needs at least 50% more fulfillment and distribution capacity in place by the holiday peak period to manage what is expected to be an unprecedented combination of seasonal activity and the impact of the novel coronavirus keeping many consumers away from brick-and-mortar stores and in front of their digital devices. Amazon CFO Brian Olsavsky said on a recent analyst call that capacity expansion is the company’s second-most important priority behind employee health and safety. Amazon has fallen behind on one-day deliveries of Prime orders due in part to a shortage of distribution center space.

Strategically, Amazon sees mall development as a way to shape consumer behavior to expect deliveries based on precision as much as, if not more than, speed, said Brittain Ladd, a top Amazon executive during the last decade and head of an e-commerce consultancy. The broader the physical network, the easier this transition can be accomplished, Ladd wrote Monday in a LinkedIn post.