Online Returns May Be More Costly to Malls Than Expected

Online returns are often a boon to mall owners, bringing in customers that might otherwise prefer to shop from their couch, but who don’t want to make a trip to the post office or wait weeks to see their money refunded to their accounts, however the glut of e-commerce purchases being returned to brick-and-mortar stores may in fact be hurting landlords in a different way.

David Simon, chief executive officer of Simon Property Group Inc., the U.S.’s largest operator of malls and shopping centers, said in an earnings call on Friday that some retailers have been underreporting their sales figures by deducting online returns. As Bloomberg reported on Tuesday, sales per square foot is an essential metric that can determine the rent a property owner collects from a retail tenant, and in turn affect the company’s status with investors.

Landlords often set a base rent for retail tenants (Simon averaged $53.54 per square foot for the first quarter of 2018) and then take a cut of sales on top of that. In rarer cases (particularly when supply of vacant storefronts outpaces demand), the percentage of sales will take the place of rent entirely.

Simon Property Group reported sales per square foot of $641, up from $615 in the first quarter of 2017, however that number may not tell the whole story, said Simon. While larger, more established retailers typically have formal reporting processes in place, local businesses and upstart companies may not, giving them the opportunity to take advantage of the loophole presented by online returns.

“This is not allowed under our leases,” Simon clarified on the call. “Although we plan to continue to provide reported retailer sales, it is important for the investment community to understand. We believe this metric is understated.” While it’s unclear how significant of an effect this practice could have on reported figures, some estimates have put the rate of returns for online purchases at 30 percent, compared to around 9 percent for in-store sales. Additionally, almost 11 percent of all online sales are returned to brick-and-mortar stores, according to a recent survey by the National Retail Federation.

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