Is it the business or the business models that are changing!
WTF happening in business and more specifically retail is a common question that is discussed over BBQ these days. I took the liberty to dig deeper and found that for some it may be Kodak moment but for others it is the dawn of golden era.
First some plain and boring numbers to set the scene.
As per Australian Bureau of Statistics for retail trade In trend terms, Australian turnover rose 2.7% in May 2019 compared with May 2018. The industries rose in trend terms in May 2019: Food retailing (0.2%), Cafes, restaurants and takeaway food services (0.3%), Other retailing (0.2%), and Department stores (0.3%). Clothing, footwear and personal accessory retailing (0.0%) was relatively unchanged. Household goods retailing (-0.1%) fell in trend terms in May 2019.
Sounds like happy days eh? Well almost! Where are the others?
As per ICSC Australian shopping have approximately 25.2 million square metres of GLA, of which about 46 per cent is attributed to total retail space in Australia. This results to around 0.94 m2 per person compared to 2.19 in the USA.
The big players…!
Based on SCN (Shopping Centre News), the five largest shopping centres in the year to December 2018 by moving annual turnover were:
Chadstone (Melbourne) $2.135 billion (215,056 sq m GLA)
Westfield Sydney (Sydney) $1.252 billion (166,340 sq m GLA)
Westfield Bondi Junction (Sydney) $1.145 billion (131,190 sq m GLA)
Westfield Fountain Gate (Melbourne) $1.053 billion (177,291 sq m GLA)
Westfield Chermside (Queensland) $1.025 billion (176,931 sq m GLA)
Show me the money….
As per CBRE National retail rents experienced slight softening in Q2. Whilst department stores begin to hand back space, both luxury and fast fashion retailers continue to perform well.
Why are we worried?
It has been all over the news about the big names that have fallen - Roger David, Marcs, Pumpkin Patch, Metalicus, Laura Ashley, Ed Harry, Top Shop, Toys'R'Us, Doughnut Time, Blockbuster Video, David Lawrence, Herringbone and Rhodes & Beckett.
…And the cause is
The headlines are blaming low wages growth starting to bite consumer spending, “but a big wave of foreign raiders is also taking its toll”.
But what is really going on…..!
The business models are rapidly changing we no longer need to visit an outlet for everything we need. Australia Post volume for parcels is going through a boom time. Happy days . We no longer need a shop with the well decorated front end to sell stuff when we can carry infinite inventory and sell online. Complex web of fulfilment centers, partnership structures and drop shipping does the trick. The move to online warrants that the online presence is a must have. You will need nicer picture’s taken for your offering as the customers look at pictures for touch and feel. The cost of logistics and fulfilment and proximity of warehouses play an important role not necessarily the proximity to customers. Only the services that require human touch and need to be in the proximity of the consumers require space. Food consumption continues to grow while the prices may not be rising that said, Australians do not mind experimenting which is leading to further growth.
Are we eating more food probably not however we are cooking less and food delivery is growing by around 18%. Instantly increasing the catchment area a food outlet can serve, increase its market penetration and thus increase revenues. During its IPO filing Uber revealed that revenue from Uber Eats grew 149%. Is Uber Eats making food retails more profitable that can be subjective.
That brings us to the need to have a fancy restaurant in a posh location. We can now have ghost kitchens tucked away in the middle of nowhere that post glossy picture of food and can deliver in the vicinity. It will still need the same licenses that are needed to run a food business but the capital investment required to acquire and maintain such an asset is relatively low. How will this impact retail, heavily perhaps empty stores and due to agglomeration impact empty streets are likely to emerge where rents reach unsustainable levels.
The Retail assets are monopoly in key areas are bound to lose there relevance due to these rapidly changing business models
What we see in as Increase in food outlets as is driven by consumption and low entry. Australia has people from a large array of background and ethnicities and tastes which results in almost every type of food imaginable available for consumption. Our interest in experimentation keeps them going.
If you are a retailer and are struggling with the business model need to get foot traffic in, champion the cause and show red carpet experience to your customers then you may need to revisit the entire customer experience journey. It can be about food and everything around it. In life we value of experience is more than the commodity, unless your purpose is to survive.
As the rents are not falling despite the change in the market we may need greater Rental transparency and governance mechanism to restore balance between vacancy rates and rental.
Standard supply chain models of offshoring to India, China, Bangladesh, Vietnam needs to be revisited in tune for automation rising ( see Vivek Wadhwa - he does lot of work in the area) on price arbitrage. It has become a known trend for people to get clothes made in Vietnam while travelling on a holiday. In the long run it build’s skills to build the product efficiently. Skills are lost permanently. But this impacts the banks who invest by providing loans
Minimum viable product is becoming bigger ( larger retail centre) or the commodity shop next door or an online seller. Small shopping centres do not offer the foot traffic to add to the volume and the rents are high enough to make it less profitable for investment as sunk cost of establishing a chain business remain the same.
What should be do about it?
A lot of things but you can start three areas to focus on
Your business model
Your customer journey. Not just to complete the transaction but what happens much before and much after
Where are you in the success journey and where would you like to be.
Need to find an answer
If you need help in crystallising your model and the customer journey through it and discuss it further please feel free to reach out to book a meeting to discuss this further. sbabbar@sameerbabbar.com