Anchored in the past
Retail landlords have had a lot to think about recently: Three questions in particular are more vexing than they have been in living memory.
First, how much weaker, if at all, is the underlying demand for retail real estate going forward given the triple whammy of demand weakness for discretionary retail goods, the technology revolution, and the potential for dislocation as a result of internationalisation of the domestic market?
Second, what is the shape of that demand in terms of store sizes and configurations?
And third, what adaptive strategies should landlords be taking to protect and enhance the value of their assets?
Of course, many of the factors that will determine the answers to these questions are very much in flux. Nonetheless, some discernible outlines are emerging.
For example, it seems likely that the overall trend growth of retail space, at least in the sense of retail space as we have conceived of it until now, will need to slacken in future years to ensure stable operating metrics. (Although the idea that all new development will have to stop is from the realm of science fiction.)
It is inevitable that stores will be configured and sized differently, although the common wisdom that stores will have to be universally smaller is not at all a foregone conclusion.
And there’s another inevitability as well – the store will be a much more interesting place to be than it is now. That’s because it has to be and those that don’t provide a vastly improved shopping experience will perish.
The elimination of marginal stores and rejuvenation of the rest suggests a robust improvement in sales per square metre, particularly if we include sales made online and collected from the store. (For sales made digitally from within the store but fulfilled from somewhere else, there will be issues to sort out to ensure that landlords capture the full value of the economic activity generated by their stores.)
An increase in store productivity driven by advances in technology, visual merchandising, and customer service is not exactly something that should cause competent shopping centre operators to sink into gloom.
Yet in the current retail environment in Australia this happy frame of mind seems a long way off. There are reasons for this too.
Principal among them is that an uncomfortably high percentage of discretionary retailers, led by the non-food retailers that anchor just about every shopping centre in the land, have spent the past few years circling their wagons to deflect criticism instead of facing reality and actively making the investments they needed in store design, technology, and service to move forward.
The performance of these non-food anchor stores in an economy near full employment is nothing less than deplorable.
According to Inside Retail’s own Top 25 Retailers list published in April/May 2012, David Jones, Myer, Big W, Target and Kmart – that is to say the five major non-food shopping centre anchors – are all set to generate lower sales in FY 2012 than than they did in FY2010.
Harvey Norman, another shopping centre anchor of sorts is in the same boat, and the future looks bleak for it and its electronics kith and kin.
Some industry experts in the US have concluded that commoditised retail categories such as consumer electronics, books and music may soon have no place in stores at all.
Store fleet pruning, a healthy and natural activity for any retail chain that wants to progress, is high on the agenda for a lot of chains. Myer and David Jones seem to be exceptions that, despite bleeding market share and relevance, are still hell bent on creating more space for themselves.
According to US trade publication, Shopping Centers Today, of the 550 delegates polled at the International Council of Shopping Centers’ European conference in Berlin a couple of weeks ago, only five per cent said they thought department stores could survive in their existing format.
Yet the uncanny ability of Australia’s two department store retailers to postpone their day of reckoning is matched only by landlords’ extraordinary capacity to believe in them. This means the end-game will have to be more bloody than it otherwise would. So instead of a rational phasing out of non-flagship stores, we risk a slow and painful withering away at the big end of the mall.
There are ways of heading off this death by a thousand cuts.
For the two department stores and the three perennially underperforming big box discounters, a concerted program of sub-leasing part of their store space to capable co-anchors should come under consideration by shopping centre operators and the anchor retailers alike.
Global fast fashion retailers interested in the Australian market and requiring large footprints suggest themselves as logical candidates to soak up anchor space, just as they are now doing in the US, Japan, and elsewhere.
Retail “condominiums” composed of flagship-sized specialty fashion stores are also becoming increasingly common. Large format mass market and upscale casual dining restaurants must come into the reckoning.
There are a lot of ideas out there to limit the damage that general merchandisers are increasingly inflicting on Australian shopping centres.
This is one problem that can be solved, provided the retailers and owners are on the same page.