Analyst Highlights The 'Scary Mall Owner Monopoly'

Retail expert Brian Sozzi weighed in on potential fallout for the retail sector from a "Mallzilla" combination of already dominant Simon Property Group (NYSE: SPG), with number three U.S. mall owner Macerich Co. (NYSE: MAC).

Retail Power Shift

In a March 23 TheStreet.com commentary, Sozzi noted, "Power is ultimately being shifted into the hands of the strong in retail…"

He mentioned that he has been bullish on Simon, and "is now warming up to Staples, Inc. (NASDAQ: SPLS) …after years of criticizing the company for inept strategies and fledgling performance."

Sozzi cited Staples' acquisition of Office Depot as a positive development.

Changing Landscape

Sozzi envisioned how the mall landscape might change if Simon were to successfully reel in rival Macerich:

Trouble: JC Penney Company Inc (NYSE: JCP) and Sears Holdings Corp (NASDAQ: SHLD): Despite recent store closings, both retailers are still "fundamentally weak." They each have a high debt load, and sizeable interest payments.

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"If Simon Property lands Macerich, it's going to raise rents on these retailers… Simon knows these anchor tenants are struggling, and need their best locations to service their obligations."

Trouble: Aeropostale Inc (NYSE: ARO) and Abercrombie & Fitch Co. (NYSE: ANF): Sozzi described them as being the "Sears and JC Penney cases from within the specialty apparel business… because of a massive generational shift in what young people are buying."

"Higher rents by Simon Property could destroy Aeropostale, while Abercrombie hangs in for longer, given its international exposure via flagship stores."

Winners: "Closed stores go to fast fashion retailers H&M, Forever 21 and Zara, creating a three-headed monopoly in the teen apparel business." Sozzi also suggested that these spaces could be transformed into health care clinics.

More Trouble: Small businesses could be hurt; he foresees the demise of mom and pop kiosks inside the malls. Also, familiar fast food franchisees in mall locations could see higher rents, such as McDonalds, Yum! Brands, IHOP and Buffalo Wild Wings.

Bottom Line

Sozzi suspects that "a combined Simon Property and Macerich would embark on a five-year spending spree to upgrade the latter's locations to meet the high-quality standards of the acquiring entity."