This article is from the Australian Property Journal archive
SUBDUED wages growth and increasing household debt is expected to put pressure on consumer spending and create ongoing troubles for retailers, as businesses and landlords learn to live with US colossus Amazon operating in Australia.
Some operators are expected to find themselves better prepared or better placed for the unknowns of 2018 and beyond, as others actively test discounting initiatives or resort to slimming down physical operations in favour of improving online offerings in the fight to flourish.
UBS has recently revised its consumption outlook down to 2% growth in 2018 and 2019, following 2.2% over the year to September, having returned a tepid 0.1% for the quarter.
“A clear negative, particularly for retail sales, is that nominal household cash flow has slumped towards a record low of only 2% year-on-year in 2017,” it said, adding that the outlook for consumption growth depended on the outlook for household income growth, which remained uncertain.
According to BDO’s 2017 edition of Spend Trend, Australian specialty retailers were the stand-out performers this year in relation to revenue growth, with an 11.5% rise on FY16, although at the cost of gross margin. International retailers returned a revenue decline of 7%, but when adjusting for foreign exchange impacts this was closer to 4.8%.
“Our review has highlighted that Australian retailers (both specialty and large retailers) are resorting to discounting in order to maintain market share at the cost of some margin. However, international retailers have focused on managing their costs to improve margins, despite the decline in sales,” it said.
Australian specialty retailers recorded an average gross margin of 41.2%, down 2.1% in FY16 in relative terms, while gross profit margins increase by 0.7% in FY17, or 2.3% in relative terms. These figures were dominated by larger retailers including Wesfarmers, which benefited from the strong performance of Bunnings.
However, international retailers increased gross margin by 2.0% in relative terms, to 40.8%. The report highlights luxury names including Burberry, Tiffany & Co. and Louis Vuitton Moet Hennessy as key examples of those not willing to discount prices to maintain margins.
“Australian retailers discount pricing strategy is not sustainable if they want to remain competitive against global market entrants. Instead, they need to adapt to the global landscape by disrupting their own business models and find ways to become leaner and more efficient, whilst still offering customers what they want,” BDO’s national leader, retail, John Bresolin said.
“Similar to the previous year, we note international retailers are still focussing on changing their business structures to adapt to reach customers through digital channels. This is seen through Target Corporation and Macy’s who have discontinued operations in certain locations through store closures, and invested in the consumer experience where foot traffic is high.
“Macy’s investment in their Brooklyn store supports the notion that their gross margins are benefiting from encouraging more store interaction, and allowing them to access new and high-end consumers.
“For our Australian retailers, this could potentially be a lesson to continue to focus on controlling cost of sales to improve margins as opposed to discounting products.”
BDO’s report said that Australian retailers have shown some encouraging growth in their online sales, with many recording significant double digit growth when online sales are expressed as a percentage of total revenue.
“However, they still have a long way to go if they are to match their international counterparts such as Nordstrom and Foot Locker, whose online sales represent in excess of 10% of their total revenue.”
It found most Australian retailers are currently generating around 3% to 5% of their revenue online. Oroton Group had the largest revenue contribution due to online sales at 11%, and Specialty Fashion Group’s online sales contribution is currently 10.4%, but in recent weeks they respectively have called in administrators and announced the closure of 300 stores.
“We are seeing some Australian retailers changing their business models to compete with their international peers with speciality retailers closing stores in the US and developing their digital presence. This is reflected in an 18.8% growth from the prior year, in relative terms,” the report said.
Last month Macquarie Group published a report of shopping centre landlords exposed to more store closures, reflecting the trends in the United States, in the face of subdued consumer spending, flat wages growth, online retailing and Amazon.
Casey Robinson, m3property research manager, recently told an Australian Property Institute conference that while the Amazon would eventually take off in Australia, the impact on shopping centres and retail stores would be “nothing like” that seen in the US.
Citigroup analyst Bryan Raymond said Amazon was unlikely to gain a significant market share this Christmas, and could generate $200 million sales in December. He said the largest downside risk for investors exists for JB Hi-Fi and Harvey Norman, while Super Retail had more risk priced into the outlook.
Credit Suisse data suggests that 4,000 shops closed throughout in America in 2016 and 8,000 more are expected to follow in 2017. A report by Green Street Advisors earlier this year found of 1,070 malls in the US, more than 330 are classified “at risk to close”. Credit Suisse estimates around 20% to 25% of the 1,110 malls will close by 2022.
In contrast, Macquarie’s research report Dealing with a tough department suggests the Australian retail scene is not immune to what is happening in the United States. Analyst Rob Freeman predicted store closures would accelerate over the next 12 to 36 months, led by major retailers Myer and Target.
Myer’s troubles have been brewing throughout the 2017 calendar year. It confirmed 19 store closures, before last week revealing total sales and profit had tumbled 5% in the first two weeks of December, after total sales had fallen by 2.3% to the end of November, and 1.8% on a comparable store sales basis.
It had already revealed it would not be renewing leases at Colonnades, Belconnen and Hornsby, following on from recent store closures at Wollongong, Brookside and Orange, and space hand backs at Cairns and Dubbo, as well as Queensland DC.
The major department store has faced ongoing public shareholder criticism, largely in the form of Solomon Lew via his Premier Investments, which holds a stake of almost 10.8%, while its share price has taken repeated hits.
The Australian Market Expectations Survey by Urban Property Australia and Situs RERC released in at the end of October showed 41% of the 276 respondents believed that Myer and David Jones would be impacted most by Amazon’s introduction, followed by Harvey Norman and The Good Guys, then JB Hi-Fi, while a smaller number nominated discount department stores Target, Big W and Kmart.
ASX-listed Specialty Fashion Group alone will be shutting 300 of its 1,000-plus stores nationwide by 2020.
“This is coming from two principal sources – subdued consumer confidence impacting discretionary expenditure and increasing competition, both from international and online retailers,” chairman Anne McDonald said.
A recently released m3property report suggested higher yields and risk premiums are just some of the concessions investors of retail property might come to demand, given the risk Amazon and the wider online retail market poses for bricks and mortar retail, and they will need to weigh up the risk and return on a centre-by-centre basis.
Property trusts are currently in the midst of a $1.6 billion shopping centre redevelopment rush, enhancing experiential elements to safeguard their assets from the Amazon effect.
Moody’s Investor Service show retail NOI growth was flat at 2.7% through FY17, and it expects 2.5% to 3.0% growth FY18 as a number of A-REITs recycle non-core assets or redevelop to improve portfolio quality.
A-REITs with large department store and discount department store exposure will face increasing pressure in terms of leasing demand, namely Vicinity and Charter Hall REIT, which derive 11% of their rent from tenants in those categories, and Scentre Group, with 10%. They have also been active in asset repositioning in a bid to enhance portfolio quality.
Trusts with high retail exposure are expected to splurge more capital to upgrades. Moody’s said would increase competition in the Australian retail market and put pressure on traditional brick-and-mortar retailers’ market share over time.
“However, the potential earnings impact for A-REITs stemming from a contraction in DS and DDS demand will have a lower impact than that suggested by the percentage of space they occupy as they have long leases and pay a low level of rent per square metre. Finding the right tenant mix will be crucial for longer-term performance,” Moody’s said.
Scentre, Vicinity and Stockland are heading the redevelopment activity, account for about 80% of the figure at an average yield on cost of 7% to 7.2%. This will add an additional 250,000 sqm to Australia’s retail leasing portfolio.
“In fiscal 2018, A-REITs with assets in densely populated urban areas with high population growth, major transport nodes and accommodative economic fundamentals (particularly in Sydney and Melbourne) will be best positioned to face industry headwinds,” it said.
Earlier this year, Vicinity sold off the residential development air rights above The Glen shopping centre to Chinese group Golden Age, which will build around 500 apartments immediately above the shopping centre, which is also undergoing a major refurbishment program.
Individual retail categories see the ongoing shift in customer preferences, from DS and DDS and apparel to food, services and leisure.DS and DDS categories saw the most significant decline in moving annual turnover across Moody’s rated A-REITs in FY17, at around 3.2% and 2.6% respectively, while revamped food courts and “dining precincts” are becoming a staple of shopping centres.
Savills agent Clinton Baxter said the Amazon effect would prove to have less of an impact on Australia’s retail markets than some commentators and investors believe.
“Amazon will out-compete the weaker retailers of certain commodity-style goods but will not cut a swathe through our market as some seem to fear,” he said.
“Amazon has a 3.5% share of the retail market in its home country of the US and, due to the geographical and logistical challenges of Australia, is unlikely to secure that level of marketshare here.”
“There will remain ample room for agile retailers to compete and prosper.”
Teska Carson director George Takis said Amazon’s introduction would strengthen the quality of suburban shopping strip retail.
“Strip retail has faced many challenges in the past including the rise of enclosed centres – which had been touted as the death knell for strips – but strips are still there, they rose to meet the challenge, they became smarter, more innovative, changed their offerings and survived and will continue to do so,” he said.
Fitzroys director Rick Berry said strip centres have been adjusting and re-mixing to take into account online retailing over the last few years, and that Amazon’s impact would be limited as much of the change has already taken place.
Australian Property Journal
