Like me, you have probably read thought pieces and seen many assessments in recent years about the store of the future and the retail landscape of the future. Indeed, I have written one or two myself.
While not even the most pessimistic commentators predicted the complete demise of the physical store, there have certainly been many over this period who have suggested that its role will alter dramatically at the very least, and that its relevance or significance to effective retail operations will diminish dramatically. Only a few years ago, reductions of 35% – 40% in some categories, to occur over the subsequent 3-5 years, were not uncommon predictions.
In Australia at present we are seeing a re-energised shopping centre development pipeline. I have recently calculated that just the top 10 regional centres which have either recently commenced major redevelopments or are about to do so, will add in the order of 450,000 sq.m – i.e. nearly half a million – of new retail floorspace.
If one adds to that amount all of the developments which will occur at other, smaller regional and sub-regional centres, plus the numerous neighbourhood centre facilities that are still rolled-out by Woolworths and Coles in particular, as well as the handful of Masters stores, Bunnings stores and so on built each year, and let’s not forget the occasional CBD project like the recently opened Emporium in Melbourne, then it is not difficult to get up to a figure pushing 1 million sq.m of new floorspace.
Within the current environment, and certainly against the background of recent thought pieces as I have outlined above, this seems odd. Did someone get it wrong? Does it mean that much, or perhaps even most, of this new retail floorspace is ill-advised and unwarranted? Who is right and who is wrong?
It always helps to start the process of tackling such difficult questions by considering the most pertinent facts. For Australia, the way I look at it, amongst the most important facts are the following:
- The most recent retail census was undertaken by the Australian Bureau of Statistics (ABS) in 1991/92. It showed that, at that time, across Australia there was a total of 32.9 million sq.m of retail floorspace in CBDs, shopping centres, strip centres, freestanding retailing and all other types of retail development.
- The population of Australia in 1991/92 was 17.5 million, thus the provision of retail floorspace per capita was just under 1.9 sq.m. That is all retail floorspace, not just shopping centre floorspace. Shopping centre floorspace, depending on exactly how broad the definition of shopping centre is, accounts for roughly 40% – 45% of the total.
- Due to budget limitations, the ABS has not deemed it important enough to undertake another retail census since 1991/92, thus estimates of the current provision are up to the private sector, in particular research groups such as my company, the various real estate agencies and other consultancies. I keep track of new retail developments reasonably closely, and my estimate at present is that the total provision of retail floorspace in Australia is 2.2 – 2.3 sq.m per person, with a total of some 52 – 53 million sq.m serving a population which is currently 23.5 million.
- All that means that over the past 22 years, Australia’s population has increased by 6 million, at about 270,000 annually on average, while total retail floorspace has increased by about 19 – 20 million sq.m., or about 850,000 – 900,000 sq.m annually.
Of course in the 2 or 3 years immediately after the GFC there was very little new retail development, so the average growth annually in the period leading up to 2009 was significantly greater than this overall average figure. Current indications are that the level of new retail development is now moving back closer to those long term averages.
To put it in context, 850,000 – 900,000 sq.m can get you a mix of retail development along the following lines:
- 50 neighbourhood centres of 5,000 – 6,000 sq.m each, plus
- 10 sub-regional centres of about 20,000 sq.m each, plus
- 3 regional centres (or expansions to existing regional centres) of 65,000 sq.m each, plus
- A further 200,000 sq.m of everything else, e.g. a handful of Masters stores, a few Bunnings stores, the occasional CBD project and so on.
How does that add up with all the shocks we have seen over recent years, and continue to see, to the bricks and mortar retail environment, particularly the emergence of the connected consumer, the enormous growth of the digital store and online retailing, and the general difficulties experienced by a number of non-food retail categories?
I think the answer can be found in a couple of places. First is the fact that Australia is enjoying, and for some time has been enjoying, very substantial population growth. That population growth has been considerably greater in the post-GFC period than it was in the pre-GFC period. For example, in the 15 years between 1991 and 2006, population growth in Australia averaged 210,000 per annum. In the 7.5 years since 2006 it has averaged 380,000 per annum – almost twice as much.
The most recent ABS figures for the year to December 2013 show annual population growth of 396,000. If we apply the average retail floorspace per capita provision of 2.2 sq.m to that population, that gives us a total of about 870,000 sq.m – basically the average recorded over the past 20 odd years.
Population growth of 350,000 – 400,000 per annum, therefore, is a very big kicker to the total need and demand for additional retail floorspace, and is one of the fundamental reasons why the new developments underway are/will be supportable.
There are, however, others. The various influences which have impacted on the retail sector in most western economies, and less so, but still to a significant degree in Australia, have at times confused analysts. In particular, I believe there has been some confusion between retail offers which have disappeared or are on the wane (because of poor logistical or other execution, and/or because they now fall short of meeting the expectations of a much smarter, better informed and more demanding consumer), and the general need/demand for new retail floorspace. During the very long period of year on year growth leading up to 2009, perhaps some of these issues were able to be hidden or at least ignored, whereas today they simply cannot.
Thus, at the same time as we have witnessed a series of collapses of various Australian retail groups over the past few years, particularly in the specialty apparel category, we have also seen the entry into Australia of a number of very successful, high turnover apparel retailers, with more about to arrive. Both groups are retailers of apparel, but whereas one group has been very much on the wane, the other has a very substantial appetite for new retail floorspace. It does not necessarily follow that one will cancel out the other, but this example serves to highlight some of the confusion.
Interestingly, one of the key differentiators of the best performing retailers, both in Australia and elsewhere, is that even during the past few years they have at the very least maintained, and in most instances actually grown, their retail floorspace. That statement also applies to a number of specialty apparel groups in Australia, for which I have undertaken some work during the post-GFC period. Again, those retail formats which are meeting, and in a number of cases exceeding, customer expectations, are still growing their store footprints, even in these more difficult retail times.
A second factor has been the growth in some retail categories, e.g. food, even in the difficult post-GFC period. That growth has contributed enormously to retail floorspace demand, and will do so for some years yet.
Of course we have also all read over recent years, and increasingly over recent months, that online retailers are seeking bricks and mortar stores to consolidate their retail offers, so ironically, online retailers are themselves now contributing to additional demand for bricks and mortar retail floorspace, albeit on a limited level.
The question of future retail floorspace demand is not a straightforward one, and certainly the development trends over the decade and a half pre-GFC are not likely to be replicated during the next 10 years. The issue is now considerably more complex than that, particularly in some categories such as specialty apparel.
However, it is fair to say that rumours of the imminent death of the bricks and mortar store that were so prevalent a year or two ago now appear to have been considerably exaggerated. It remains to be seen how things will level out over the next few years, but all indications at this point are that the demand for good quality bricks and mortar retailers, and corresponding new retail floorspace (as increasingly evident in the best of Australia’s most recent new retail developments) will come well and truly back to the fore in Australia.
About MacroPlan: MacroPlan’s experienced and qualified economists align their understanding of macro-economic forces with micro-economic variables such as geographic and industrial characteristics, demographics, labour market shifts, resource demand and commercial realities. Contact James Turnbull, Head of Retail, today to discuss your property research requirements.