Spotlighting the resilience of convenience retail in Australia
In December 2018, as part of the Australia-Israel Chamber of Commerce prop tech trade mission, I found myself in Tel Aviv, looking on in awe as a machine learning algorithm accurately scanned, weighed and calculated the contents of my grocery trolley. It even pulled me up for the extra bottle of olive oil I’d thrown in to test the robotic cashier’s theft detection capabilities.
I suppose the innovation shouldn’t have surprised me: A recent study by Cushman and Wakefield found that technology is now doubling in power and capabilities every 18-24 months. This means that a retail development with a 50-year lifespan will need to adapt to technology 30 million times more powerful than today.
Nevertheless, my curiosity was tangible. Designed by Israel-based startup, Supersmart, this self-scanning technology is the next iteration in automated supermarket checkouts and hyper-convenience for customers. And it’s not science fiction. The AI-based solution is already in use at Metro supermarkets across 27 countries, as well as seven domestically in Israel, heralding major improvements in consumer convenience and a better in-store shopping experience. Supermarkets on the other side of the equation benefit too, with better fraud and theft mitigation, productivity increases and streamlined logistics and stock management.
The Supersmart self-scanning solution is an example of how the virtual and physical worlds are morphing, manifesting more engaging and seamless physical retail ecosystems.
With that in mind, 2019 holds immense opportunity on home soil for Australian retailers and developers to continue innovating and building resilience in response to ongoing change. But faced with advances at every turn, where should we start?
Sustained health of bricks-and-mortar retail
According to a recent study by the ABS, Australia’s physical retail sector is set to grow by $130 billion to $460 billion by 2028. In-store shopping is alive and well, and the growth Charter Hall has experienced within our retail portfolio of convenience-based investments supports the industry’s resilience.
With $26.4 billion of quality long leased property across Australia’s office, retail, industrial and social infrastructure sectors, Charter Hall has more than 27 years’ experience managing and investing in high quality property on behalf of institutional, wholesale and retail investors. $6.1 billion of our funds under management sits across 165 plus retail assets, where we continue to see capital investment (local and offshore) attracted to the Australian convenience and non-discretionary retail sector.
But we cannot rest on our laurels.
Our sector is not immune to an ever-shifting Australian political, social and financial landscape. We’ve seen a marked downturn in residential property – the steepest in a decade – while big infrastructure spending from government is changing the way our population works, travels and plays.
Financial equality, wealth distribution and consumer financial health also remain an ever-present focus for retailers – particularly discretionary – as spending habits evolve. While policy uncertainty continues to be the rule, rather than the exception, ahead of the upcoming federal election.
Because of these factors, for the retail sector to maintain its positive momentum we must strive to maximise the opportunities an agile mindset presents. We must continue adapting, evolving and thriving in spite of change.
What’s driving the strength in our retail market?
At a macro level, the Australian economy is in good shape. Unemployment fell to 5% in December, as employment grew faster than the size of the labour force, whilst job vacancies are up 13.6% on last year, landing at a six-year high. As a result, we’re still spending.
Our steady population growth is often overlooked as a contributing factor to the economy’s health. Australia’s population has grown at an average of 1.6% per year over the past five years – the third fastest growing country in the world. Due to both population growth and the necessary housing growth required, we are finding that our convenience-based centres are adding a second or third supermarket to cater to changing demographics and growing population catchments. As a result, we’re seeing higher returns in areas with significantly high population growth – such as Geelong in Victoria, which has an average five year population growth of 2.6%.
This focus on growth drove our recent acquisition of Gateway Plaza in greater Geelong in June last year as part of a joint venture between our listed Charter Hall Retail REIT (ASX: CQR) and the Charter Hall Prime Retail Fund (CPRF).
In addition, not unlike Costco’s entry ten years ago, the future entrance of international retailers like Decathlon and Kaufland in Australia is helping to drive healthy competition. Their unique offerings encourage differentiation amongst major local players. ALDI is proving this point well, having recently gained 10% market share since entering with its unique value proposition.
Australian consumers are spoilt for choice, and competition to improve the shopping experience and meet differing customer needs will only increase.
Similarly, retailers and developers are responding to the need for smarter, more sustainable shopping centre developments that make a meaningful difference in communities. This social and environmental focus to improve the triple bottom line, demonstrates the social values and behaviours savvy consumers increasingly seek from brands.
We’ve been working with social enterprise Two Good over the past 12 months to deliver support to survivors of domestic violence across Australia – from providing a safe place to stay, to care packs and supporting re-entry into the workforce. A lot of the women this partnership impacts are members of the communities in which our retail centres are based, and we strongly believe that making a difference to them in tangible ways is our social responsibility.
Beyond community initiatives, building sustainable solutions to help control resources, reduce our carbon footprint and be better corporate citizens is also a priority. In recent years, green technologies like PVC rooftop solar panels have reached a stage where they are now cost efficient and operationally effective at scale, allowing us to reduce energy and innovate in truly meaningful ways.
With this and other sustainable solutions, we are now generating energy savings of more than 400MW hours per year across our portfolio. In NSW alone, our container recycling facilities are seeing more than 30 million drink containers recycled, and $3 million dollars refunded back to shoppers in only six months.
Convenience remains imperative, and non-discretionary will be key
We continue to see a huge trend towards convenience retail with accessibility, amenity and connecting communities at their core. In recent times we have conveyed to the market our concept of categorising our assets as convenience and convenience-plus instead of the traditional groupings of neighbourhood and sub-regional.
Looking at our ASX listed fund CQR, we have 39 convenience assets and now 20 convenience-plus assets. CQRs property income is evenly derived from convenience and convenience-plus assets, representing a well balanced portfolio.
When comparing our convenience centres to Urbis benchmarks for Neighbourhood centres, our specialties deliver higher productivity and supermarkets outperform the benchmark in both sales volume and productivity. When we look at convenience-plus centres, the size and tenant composition are significantly different to Urbis benchmarks for sub-regional centres.
Our convenience-plus centres are on average 43% smaller than the benchmark of sub-regional centres and they have 43% more floorspace dedicated to supermarkets as a percentage of the total area.
Additionally, they have less than half the space allocated to discretionary specialty Retail, with both the specialty and supermarket productivity higher than that of a benchmark sub-regional centre.
It’s these significant differences in asset composition and trading performance that have led us to use different terminology for our centres. We are confident that our convenience and convenience-plus centres are resilient and will deliver sustainable growth.
As part of this strategy, over the past few years we have divested more than 20 smaller, lower quality assets and acquired five bigger, better quality convenience-plus assets with long-term leases that will stand the test of a changing market over time.
As the composition of Charter Hall’s retail portfolio has continued to evolve we’ve built a team of more than 150 experts focused solely on delivering convenience.
Total property solutions for our tenant customers
Charter Hall is one of Australia’s largest managers of retail convenience centres, logistics facilities and commercial office spaces. Our relationships with Wesfarmers, Coles and Woolworths span all market sectors – from the warehouse to the shopping centre shopfront – giving us added insight into the entire retail journey and its evolving challenges and opportunities.
For example, we’re seeing that connection between back-of-house and front-of-house operations is becoming increasingly more important. Plus, a concerted push from retailers to lower their unit cost per carton indicates that pressure is still on to improve productivity and profitability.
Innovating internally to evolve at the speed of change
To stay ahead of the challenges in 2019 and beyond, we need to be maximising collaborative and innovative opportunities in the retail sector. This includes continuing our focus on talent and team and exploring the difference that new modern processes and innovative problem-solving approaches can make.
We’ve successfully employed initiatives like PACE to take advantage of having multi-sector teams across all stages of the property development and management lifecycle. Our PACE teams tackle real customer problems by co-creating solutions, rapidly prototyping, testing them with the end-user and launching into market at a much faster speed than would traditionally be viable.
What’s in store for 2019?
This year, our focus will be on maintaining weighted average lease expiries (WALE) with non-discretionary retailers to help meet investors’ focus on performance and stability, and providing meaningful variety within the retail food, catering and services specialties coupled with community initiatives to keep customers engaged.
Our active asset management model helps achieve these long-term outcomes with a commitment to managing the longevity of every retail centre and how it serves the changing community needs. Our tenant customers sit at the heart of our business, and our engagement, service levels and meaningful relationships remain critical to achieving our strategic objectives.
But we can’t stop here: An innovative and curious mindset, along with a continued focus on enabling our people to explore and have the courage to try new things has become the new business-as-usual, not just a trend.
Our industry must continue investigating and interrogating how we conduct ourselves and how we can be more openminded, more efficient, and take the course corrections and big leaps when they present themselves.
Because innovation isn’t the risk. The risk is not innovating.
About Charter Hall
Charter Hall Group (ASX:CHC) is one of Australia’s leading fully integrated property groups, with more than $26.4 billion of high quality, long leased property across the office, retail, industrial and social infrastructure sectors. The Group oversees a portfolio of 779 properties that is more than 5.4 million square metres in size. The ASX100 Group has more than 27 years’ experience managing and investing in high quality property on behalf of institutional, wholesale and retail clients.
Charter Hall’s success is driven by our focus on our tenant and investor customers. Our $3.7 billion development pipeline creates new assets for our investors, improving future returns, while creating opportunities for our tenant partners to expand and adapt their businesses. Sustainability and innovation are key elements of our approach.
Add comment