The retail scene will not see in this decade a return to the halcyon days of pre-GFC shopping, according to industry analyst and economic forecaster, BIS Shrapnel.
According to the company’s latest report on the retail property sector, Retail Property Market Forecasts and Strategies 2012 to 2022, BIS Shrapnel forecasts that growth over the next five years will average just 2.9 percent a year, compared to the golden age of retailing which saw annual turnover growth of almost five percent on average in real terms.
Report author Maria Lee, senior project manager at BIS Shrapnel, says “while we expect turnover growth to strengthen through 2012/13 and 2013/14 in line with a strengthening Australian economy, growth will remain fairly subdued in the medium to long term.
“Shopping centres will see markedly lower rates of turnover growth thanks largely to the growth of online shopping and the dilutionary effect of additional retail floorspace,” says Lee.
The rise of online retailing
The report shows that online retailing is now a force to be reckoned with.
“Our online retailing survey showed a dramatic rise this year in the online offerings of the top 20 domestic retailers,” says Lee. “Over 50 percent of the top 20 now have a comprehensive online offer.
“Although that’s a great improvement, it’s still not impressive by international standards. The department and discount department stores are still trailing — although they are working on major improvements.”
Online retailing has a two-pronged impact. There’s the obvious effect of taking market share from traditional retailing. But Lee explains that there’s another effect that could be equally important.
“Consumers are using price comparison websites or apps on their mobile phones when in-store, and then demanding a price-match in order for them to buy there and then,” she says. “This can have an impact on retailer profit margins.”
Australians are increasingly shopping on overseas websites and this expenditure isn’t counted within retail turnover. They are also shopping in-store on overseas trips.
Both of these factors are likely to continue to be a drain on retail turnover growth as long as the Australian dollar stays high, suggests the report.
Retailers and shopping centre owners need to work harder than ever to sustain growth
Meanwhile, construction of new retail floorspace continues to outpace both population growth and real retail turnover growth. This has been a long term trend in Australia, broken only during the late 1990s/early 2000s period of unusually strong turnover growth.
“It’s surprising that this is happening now, when floorspace growth is relatively muted due to the challenges facing development in the post-GFC environment,” says Lee. “It means that, in real terms, turnover per square metre is falling.”
Even though turnover growth is weak, shopping centre incomes are supported by the fact that the majority of tenants pay fixed annual rental escalations of around four percent.
“The problem is that if rent is going up by four percent a year but turnover is growing by less than that, occupancy costs rise,” says Lee. “Specialty shop occupancy costs are at an all-time high. They are unsustainably high for some tenants.”
Those costs are leading occupants to either not renew at the end of the lease or demand a cut in rent to stay. If they leave, the incoming tenant is achieving a more attractive offer, in a combination of lower rent and/or leasing incentives.
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