A seismic shift in Australian retail
A seismic shift in Australian retail - June 2019.
It's a new financial year, but that of course means absolutely nothing to us as every day presents challenges in how to cope with the ever diminishing available time.
For the last couple of years we have been writing about how the landscape of retail has shifted considerably, faster than most imagined.
Today, the traditional model of bricks and mortar storefronts that served so successfully for centuries of trade are now struggling for survival against a broad attack from focused, niche online specialists. It's not really a battle of good versus evil, it's just a different offer and value proposition where the customer gets to decide.
Commentators refer to it as "disruption" and it's happening in every imaginably industry and market segment (see our article about how an online disruptor caught our attention when purchasing car tyres).
Over the last 18 months we produced a series of articles on how the core of retail - those large, shiny and bright shopping centres hosting an array of brands, franchises, food courts, movie cinemas and increasingly all manner of service experiences - were suffering declining patronage at the expense of rising popularity in online shopping.
For a long time the landlords and corporate giants that owned these expensive complexes were running carefully crafted campaigns of denial, deflection and all manner of PR spin in their attempts to re-write negative headlines and avoid potential damage inflicted from of any slumps in consumer confidence. The truth was being suppressed and smart retailers could already see what was happening.
Around 12 months ago we predicted the death of strip shopping and demise of smaller shopping centres, some located in regional areas, as the first wave of "recession" in the retail segment and it's evident now in the frenzied fire sales of these smaller complexes.
Apparently, by last count there's around $11B in shopping centre assets up for trade, or about 3 years worth of transactions - that's a frighteningly negative signal of severe market distress, part of which might be due to the current economic climate and perhaps some of it from a tighter availability of previously cheap capital.
It's becoming more difficult to believe corporate spin doctoring when they call it "re-balancing portfolios", these Centre owners are in fact determined sellers offloading poor performing assets with no visible or practical signs of future positive upside.
The smaller centres are basically assets weighed down by rising land values and softening yields. For owners it's a whole lot easier to just dispose of the asset than fix it - I guess if it was you or me in the hot seat we would probably do exactly the same.
However, there are real and dire consequences in shopping or retail areas when tenants move out and the spaces are not quickly re-leased, or left vacant for long periods. Less foot traffic hurts the remaining traders and they in turn start to worry and plan their exit strategies, snowballing like a contagion.
It's like a small scale collapse and you only have to look at Melbourne's doomed Docklands precinct, a retail anchor that's consistently failed to perform for almost two decades. Even the previously successful areas like Chapel Street and Richmond's Bridge Road have declined and faded into insignificance - retailers and merchant avoiding the zones as if it's cursed or toxic.
About the only hope for these areas are the risky entrepreneurs seeing a potential future in converting smaller, unloved shopping spaces to residential apartments by building up into the sky.
But that's not going to happen until after the slow, painful death of tenants and it's flow on negative effects to the nearby communities. Rebuilding only occurs once valuations hit rock bottom and the prospect of retail vitality deemed terminal and it's only then can developers crunch potential upside once they see the market floor and of course work out questions approval deals with borderline corrupt councils.
So how did all this change so fast ?
At some point during the period from 2014 through 2017, which ironically aligns around the same time smart phones and tablets became addictively embedded into our everyday existence, consumers began to tire of the efforts involved in physical shopping and instead shifted to the alluring convenience of researching and purchasing online.
The NAB's recent announcement in early June 2019 stating Australian retail was officially in recession stirred up a raft of analysis by commentators prospecting for newsworthy gems - comparing the growth numbers of bricks and mortar to online only serves to amplify the contrasting fortunes.
NAB's declaration of the recession in retail ironically came just days before Wesfarmers announced their $230M purchase of Catch Group (subject to ACCC approval) - a fast growing online marketplace specialist.
Wesfarmers' move to snare Catch is a canny, strategic play - with Wesfarmers unable for many years to offload their troubled Target business and now faced with a previously successful turnaround of Kmart showing all the signs of market distress from sustained cycles of caustic discounting. Wesfarmers also admitted they have stumbled through recent supply chain inefficiencies and probably decided enough is enough. This move is a seriously hard pivot by Wesfarmers to rescue the future of these beloved Australian retail brands.
Wesfarmers, for all their market winning formulas in Bunnings and Officeworks had more or less conceded defeat in retail for Target and Kmart and were being forced into a corner by admitting both businesses were now generating negative growth with no clear strategic repositioning available under the current bricks and moral models.
But kudos to Wesfarmer's executives for acting well before the rot set in - they are kick starting a radical transformation for businesses that are still generating more than half a billion $$ in profit instead of waiting until they turned into toxic loss makers and empty shells like so many other gutless executives of other brands have done in the past with decaying assets - propping up losers until they can't hide the rot or continue to fool investors.
Wesfarmers de-merger of Coles generated a huge war chest of cash, so they are absolutely on the mark to use some of those funds in contemplating the shift of their distribution for Target and Kmart from physical stores to online by leveraging Catch's new state of the art robotics in purpose built warehouses. Instead of trying for 3 years to copy Catch, they have jump-started a transformation.
It may also help them accelerate the closing and downsizing of Wesfarmers retail store footprints and it's probably fair to say that it will position Wesfarmers to compete aggressively with Amazon on a superior platform with a richer omni-channel capability, although Amazon Australia's performance in the last 12 months has been a complete failure and today poses literally zero threat.