It’s the topic on everyone’s minds: can the existing retail model survive disruption? At present, most public commentary is focused on online retail as the culprit. What is perplexing is that this disruption is considered so potent – within the broader retail industry, disruption is not news. Evolution and change are recurrent features of our sector, with the only constant that there is no constant.
Never before has our industry has been more heavily scrutinised in the public eye. Every store or brand closure is newsworthy, every senior executive’s job movement is analysed, and responsibility for every client divestment or value write-down is laid firmly at the feet of online retail – or, more specifically, Amazon.
The major players in the retail property sector have long understood the impact of digital disruption, a challenge we have monitored since the internet first emerged around the turn of the century. In fact, after 20 years of data collection and analysis, we feel more confident today that the industry has the right strategies in place to not only preserve the relevance of built-form assets but to harness the power of the digital revolution to enhance the experience for our retailers and their customers. More on that later.
What is given much less airtime, but warrants the same level of consideration, is the growing influence of Environmental, Social and Governance (ESG) priorities within our industry, and the significance and value attributed to them by our investors and the communities in which we operate.
Through active management of our assets, we have been taking steps to reduce our exposure to these industry disruptors and continually enhance our ESG output – preparing to face challenges that may come, both domestically and within our growing US portfolio. Strategic retail investors capable of understanding and willing to meet challenges and opportunities will remain well prepared to mitigate and leverage changes for future rewards.
Economic conditions
While we expect global cyclical economic recovery and GDP growth to continue through 2018, the softening macroeconomic environment in Australia will provide some headwinds for the domestic retail sector. With the Australian GDP’s 25-year growth run slowing, inflation remaining below the RBA’s target range of 2-3% since December 2014, and unemployment relatively steady at around 5.5%, we’re seeing moderating economic performance drag on the retail sector as household spending power is reduced. We are also alert to RPI disinflation which is challenging the growth in headline retail sales.
Despite these softening conditions, the Australian retail market continues to be an attractive investment, with long-run trends resulting in significant long-term growth in income and wealth. Population growth remains relatively strong, driven by a recent resurgence in Australia’s education sector, and a lower AUD exchange rate continues to bring tourists to our shores, supporting employment and new investment in traditional tourism hot-spots.
While manufacturing continues its consistent decline as a proportion of our economy, we’ve seen a rise in service industry employment for both skilled and unskilled workers, producing a centrally located workforce that is collecting an average higher wage. Queensland’s mining and resources sector has also seen a recent turnaround in line with an uptick in commodity prices, with the Queensland Resources Council reporting a return to job creation for the industry after more than three years of shedding staff. This trend in the resources sector is being realised right across Australia with strong iron ore exports in the west, coal in the east and LNG exports from both sides boosting employment nationwide and investments into small and medium businesses.
We recognise today’s Australian consumer as more cautious, with recent low growth partly due to low inflation having a flow-on effect for retail expenditure growth. Stagnant wage growth and increasing household debt are also reducing discretionary spending power, with record low interest rates encouraging households into increasingly large loans.
Despite the slow retail trade growth as a result of this, growth in food retail and catering is encouraging, maintaining its share of total household consumption and increasing as a share of retail turnover. We believe the strength of F&B will continue, demonstrated by our ongoing focus on investment in food-focused spaces like Eastland’s Town Square restaurant precinct in Melbourne, and ‘The Kitchens’ at the Gold Coast’s Robina Town Centre.
However, continued investment in food and beverage requires a nuanced approach – strategic centre operators will be investing in emerging trends, diversified offers that include artisan and independent operators outside of the standard franchised brands, and personalising food precincts to cater to the aspirations of their local communities.
The ‘disruption’ of online retail
There is no doubt online retail is an important factor for our industry, with online retail sales in Australia currently sitting at around 6.4% of the $22.2-billion retail market. However, it should also be considered that these figures are usually based on point of sale, and do not allow for the role of in-store fulfilment as an element of the purchase process.
When taking into account the role of omnichannel retailers where a physical store is a key component in the purchase process of an online sale, such as in the case of ‘click and collect’, the figure of 6.4% reduces down to more like 3.6% of total retail sales. As a nascent distribution channel, online sales are growing much faster than traditional retail sales, although we expect that growth trajectory will flatten out as the sector approaches a stabilised market share of circa 15%.
As a formidable player in the retail market globally, it would be imprudent to assert that Amazon will not have an impact on the Australian retail landscape in the coming years. Optimistic forecasts by Urbis estimate that by 2022, Amazon Australia’s revenue could grow to around $5.8 billion. However, when considering the projected growth of the Australian economy, forecast to grow to around $435 billion in retail sales within the same period, Amazon represents a relatively small slice of the overall retail pie.
The recent move by Amazon to acquire Whole Foods US, and their launch of the first Amazon Go store which integrates technology seamlessly into a physical store to remove the need for scanning or checkouts, underscores the argument that success lies in a ‘total retail’ approach in which established ‘bricks-and-mortar’ retailers act to enhance an online offer.
What is becoming clear is that, rather than being ‘dead’, physical retail remains a valued part of the purchase process. When strategically and appropriately integrated with the technology our customers are already beginning to take for granted, ‘bricks and mortar’ will continue to be an essential component of the overall retail offer for a competitive brand.
The evolving shopping centre offer
The internet is just one example of disruption in the retail industry. As Australian cities grow, and our customers adapt and change, the role and form of major shopping centres is also changing. Alongside a growing trend of becoming less reliant on department store anchors, retail assets are evolving into mixed-use activity centres, offering a wide range of services well outside the realms of what has previously been thought of as traditional retail.
With retail usually the highest driver of traffic it is logical to co-locate other uses and maximise the efficient use of infrastructure in a sustainable way. It also provides the ability to strategically remix a centre’s offer to not only improve visitation but also to meet the challenges of potential disruption by offering a far more diverse range of products and services that are less easily impacted by online mediums.
Central to our approach to this evolution has been a recognition of the enduring value created by crafting places that transcend the traditional retail experience and cannot be authentically replicated online.
An example of this strategy in action can be seen in the launch of our newly refurbished ‘Monaro Mall’ precinct at Canberra Centre. Originally opened in 1963 as the first fully enclosed and air-conditioned shopping centre in Australia, this historic section of the centre has been given a world-class facelift which melds its mid-century designs with a refreshed and contemporary space. The dynamic offer includes:
• A beauty and wellness precinct embracing a cohesive mix of retailers and services, and a ‘beauty garden’ which offers a regularly refreshed mix of kiosk-style, shorter-term leases
• A lifestyle and homewares offer, incorporating several new-to-market retailers, as well as exclusive popups and installations from the likes of the ACT’s annual DESIGN Canberra Festival and pop-culture powerhouse ‘The Cool Hunter’
• A dedicated ‘masterclass’ space which plays host to an ongoing schedule of curated appearances from celebrated local and international influencers, providing access to a complete beauty, wellness and lifestyle experience and drawing people back to the Canberra Centre again and again.
By transitioning our assets from centres that focus on transactions to destinations that provide lifestyle, recreation, entertainment and dining experiences, together with an exceptional retail offer, we’re creating places that our community feel a genuine connection with and that provide value-add opportunities for our investors and retail partners.
ESG
We view issues such as energy security, climate change and social cohesion with the same degree of precedence many of those outside our industry place on digital disruption. After all, ‘disruption’ is really just a natural element of evolution that presents an opportunity for change. The continued transformation within QIC GRE, produced by a firm commitment to driving improvements in ESG-related initiatives, is a powerful force for good – delivering operational efficiencies and creating positive social and environmental outcomes alongside competitive financial returns.
In a retail-sector first, we recently announced a landmark agreement with the Clean Energy Finance Corporation to invest $200 million into the QIC Shopping Centre Fund for portfolio-wide improvements in energy performance, incorporating initiatives such as onsite rooftop solar PV, LED lighting, system upgrades and advanced data-monitoring systems.
Our focus on creating destinations at the heart of their communities also continues to deliver a range of community investment programs via our assets, which are delivering change that is valued by our communities and represents the causes they believe in. Examples include:
• A 200% increase in recycling in the past year at Robina Town Centre’s bustling Gold Coast urban marketplace, The Kitchens, achieved through programs such as oil, rainwater and organic waste recycling as well as a bespoke shared tableware program
• 117 lives changed for the better through crisis accommodation project, women’s refuge ‘The Sanctuary’, made possible through the provision of a fully refurbished six-bedroom home by Castle Towers Shopping Centre in Castle Hill, Sydney
• 106 students who have achieved practical, industry-relevant retail and hospitality training through subsidised placements, provided by a partnership between Grand Central Shopping Centre and TAFE Queensland South West.
We’re creating true and enduring value for our investors, communities, business partners and all our stakeholders by weaving ESG considerations into the core of our decision-making, aligning with globally recognised standards and partnering with respected organisations to deliver programs designed to achieve industry best practice.
About QIC
QIC is one of Australia’s largest institutional fund managers, which has over the past 20-plus years acquired and developed a retail portfolio of 49 real estate assets globally.
QIC’s domestic real estate portfolio comprises assets in Qld, Vic, NSW, ACT, SA and WA. Its international property holdings include regional retail malls in the United States located in California, Nevada, Florida, New York, Virginia, West Virginia and Pennsylvania. QIC GRE portfolio was valued at AUD19.4billion as at December 2017.
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