Circle of Competence Issue #89

QUOTE OF THE WEEK

"The time to buy is when there's blood in the streets." - Baron Rothschild

FOOD FOR THOUGHT

The future of the American Mall (CBS h/t Jordan P.)

This CBS story illustrates how the ownership group behind the Mall of America (Triple Five Group) is converting another New Jersey mall into a massive entertainment destination consisting of roughly 50% retail and 50% entertainment. A favorite quote of mine is the contrarian proverb above and there is no doubt that the 'Amazon effect' is exacting it's toll on shopping mall retailers. There seems to be no area more bloodied than brick and mortar retail over the past 5 years. While many current mall owners have languished as the retail industry has been reshaped through ecommerce, this has created opportunities for new and more creative investors to re-purpose the space for a higher return on capital. A few of the adaptive reuse cases that I have studied include the following:

1. Storage facilities (warehousing, traditional storage, and fulfillment)

2. Education campuses (magnet schools, technical schools, etc.)

3. Multifamily (apartment) redevelopment

4. Government centers (city hall)

5. Entertainment center (such as theme park or performing arts center)

6. Coworking spaces

7. Medical centers

It seems to me that investing in a failing mall requires a healthy dose of creativity to re-purpose the asset as well as an above average tolerance for risk. If the mall in the video above is going to be successful, there are a few implicit assumptions that must prove to be correct:

1. Consumers value in-person experiences more than shopping in person.

2. Retail will be driven off of the experiences offered at a destination rather than being the destination itself.

3. Luxury retail still works in a brick and mortar setting.

I generally agree with 1, am unsure about 2, and am increasingly skeptical of 3. Assumption #1 may carry the investment to success, but I do wonder whether people will care to shop in brick and mortar shops hardly at all as the Amazonification of retail experiences becomes more solidified and trustworthy (edge cases like groceries and clothes are nearly solved).

A couple thoughts to wrap up:

1. What other purposes will exist for the millions of square feet of mall space that will eventually be useless as retail?

2. What other industries are experiencing a blood-in-the-streets moment?

LINKS

Investing

Starbucks' business model deep dive (Ryan Reeves)

The complete guide to oil drilling (Oilprice.com)

A future embedded in the present (Absolute Return Partners Letter)

How everyone IPO'd in the 21st century - status update (Eugene Wei)

Africa's public markets - issues for investors (Ashmore)

Overview of investing in China (Conover Investment Advisory)

Technology

Venture pulse Q3 2019 (KPMG Enterprise)

Utility scale solar power plants - a guide for developers and investors (ifc.org)

The social subsidy of angel investing (Alex Danco)

Amazon's retail strategy just recycles old ideas (a16z)