Back in August 1998, Time ran a story about the growth of online shopping under the headline Kiss your mall goodbye. Since then, like a radio station that runs golden oldies, a legion of industry critics has periodically rolled out this same shopping centre apocalypse theme. The pandemic even prompted one writer, Jason Murphy, to ask in a column for news.com.au recently if it was “the beginning of the end” for Westfield. Oh hell, here we go again. Luckily, serious analysts have been bu
een busy kicking around ideas about how the pandemic might reshape the shopping centre industry, as opposed to killing it. One of those is CBRE Research, which released a thought-provoking report in October entitled Retail therapy: Shopping for resilience in retail property. The authors sketched out a pathway for shopping centres that reorients them significantly toward e-commerce and mixed uses and away from the traditional retail. The report advocates, among other things: Repurposing dead space for e-commerce distribution (in essence, converting retail to industrial space)Encouraging click-and-collect by designating specific locations in the centre for convenient customer retrieval of merchandise ordered onlineLeasing more space to retailers that operate showrooms rather than traditional retail storesAccommodating food delivery by incorporating “dark delivery kitchens”.But does a shift toward big tech risk killing the idea of a shopping centre as a marketplace and community hub? Some analysts urge landlords to be careful about falling into the loving arms of e-commerce. According to Leighton Hunziker, director of retail services at Savills Australia, converting traditional retail space, such as a discount department store (DDS) to industrial space for e-commerce distribution, “would really struggle to provide a dollar return close to that which was previously experienced by the DDS, and more importantly, will do nothing to act as an anchor to drive retail customer visitation into the centre as a true anchor tenant would.” While he embraces non-retail uses, Hunziker also believes that downward pressure on rents in attractive locations provides landlords with a unique opportunity to restore shopping centres to their roots as broad general merchandisers. This would involve the return to shopping centres of uses that have gradually been “rented out of the mall”, resulting in a broad mix that allows true “one-stop shopping”, as opposed to “the last decade of mix which has been determined by those retailers with the fattest wallets”. Australia’s shopping centre operators certainly need a Plan B to insulate themselves against forces over which they have no control. The evolutionary pathway they were on under the banner of experiential retail will now have to be seriously looked at again, particularly if consumer behaviour does not fully return to how things were before the pandemic and government social distancing mandates remain in force. In other words, the way shopping centres are transformed will depend a lot more on politics and psychology than just plain old economics. The big tech/government/public health alliance When it comes to e-commerce, shopping centre operators have known for a long time that the camel’s nose is under the tent. Technology companies, supported by robust government public health mandates, have used coronavirus as a stepladder to accelerate trends that are inimical to the value of physical retail estate. From February to August, e-commerce penetration increased from 9.4 per cent of retail sales to 11.5 per cent, according to the NAB Online Retail Sales Index. Citi Research forecasts that figure will increase to 13.3 per cent by 2022, but critically for shopping centres, penetration in non-food categories is estimated by Citi to exceed 20 per cent by then. As Australia is likely to follow the trajectory of the UK and US, the e-commerce share of retail spending will ultimately go much higher still. For large retail chains like Premier Investments, the pandemic has provided a lab to test the frontiers of e-commerce. The results were so encouraging – online sales accounted for more than 25 per cent of its total sales in the second half of FY20 – that the retailer is now more confident about closing stores, and has made provision to nix 350 of them. Ditto for Mosaic Brands, which has announced more than 250 store closures this year. Some of this is sabre-rattling to get more favourable rent treatment from landlords, but the fact of the matter is that net store counts for major soft goods retail chains are inexorably on their way down. Exacerbating this trend is the fact that most online sales are not incremental – they cannibalise physical stores and make them less profitable, so retailers will try to capture the same sales growth with fewer physical units. The result is likely to be a significant attrition of the soft goods space, particularly apparel, in shopping centres. Part of that will be in the form of reduction in department store and discount department store space, with retailers in both those categories having already flagged store closures. Should shopping centres surrender to big tech? Most industry professionals would agree that further diversification toward mixed-use elements is necessary. Now, out of a combination of fear and necessity, some key elements of that diversification may need to be reconsidered. Venues that put people in close contact with each other are currently being reconfigured and have suffered a fall in productivity: more space between tables in a restaurant, between bikes in a gym, between seats in a cinema. There are some clear advantages to the blueprint advanced by CBRE. It embraces e-commerce rather than attempting to combat it; it improves technological infrastructure; and it compensates for the empty space that will inevitably be created by the steady departure of apparel retailers, department stores and discounters. There is, however, from the perspective of the retail property owner, concerning aspects to it. For one thing, industrial space means potentially lower rent and footfall as noted by Savills’ Hunziker. Second, the cart looks like it is now driving the horse – instead of enabling e-commerce, shopping centres become more like zombie purveyors of it. The model rips at the heart of the long nurtured and cherished vision among retail property owners of their centres as community hubs. Third, the emphasis on e-commerce and the visible activities around it could materially worsen the customer experience. How do you soften the impact of gobs of dark space, couriers running everywhere and convoys around loading docks? Still, CBRE’s outline is a constructive starting point for a discussion about new shopping centre models. Reverse-conditioning fear No doubt the increase in e-commerce penetration and the improvement in e-commerce infrastructure at the disposal of retailers has permanently altered the landscape and paved the way for accelerated store closures by Australian retail chains like Premier Investments. However, there is still hope of a return to some degree of pre-pandemic state to which shopping centre owners can look forward. Even as the virus still lurks, we have already seen how people hit the beach, party and ‘forget’ to wear their masks at first opportunity. That bodes well for shopping behaviours too. As Paul Frijters, a Professor of Wellbeing Economics at London School of Economics, and formerly at Australian National University, noted recently: “The important thing to know about fear is that it ebbs away quite quickly if it stops being confirmed and egged on by authority. Weeks and months is all it takes for the majority to wonder why they were ever afraid. So as soon as the government starts to oppose the fear and actively pushes against it, then I think you’ll see the restoring economic forces appear with a vengeance.” The message is clear: if governments and their public health advisors don’t want to help shopping centres in any tangible way, they can at least help people to stop being afraid of their own shadows. Reversing the politics of fear will go a long way toward revitalising retail property. This article was originally published in the Inside Retail Australia November magazine.