Before the COVID-19 pandemic hit, it was evident that physical retailers were progressively losing market share to their online e-commerce rivals. The downward pressure on revenues coupled with increasing labour and rental costs has slowly eroded their profit margins.
Many of them were guilty of pursuing a fast, debt-fuelled network expansion strategy during the good times. Over-enthusiastically signing up to long-term leases that were skewed heavily in the landlord’s favour, without batting an eyelid. But the rise of e-commerce has since torpedoed their business model and left them locked into loss-making stores, unable to walk away.
Over the last few years, well-known Australian brands have suffered this fate, with many ultimately collapsing into a
The divergent trajectories of retailer’s financial performance and landlord rental expectations has been apparent for a while. The Lowys could see the writing on the wall back in 2017, when they sold their Westfield shopping centre empire. For those who failed to prepare for the turning tide, COVID-19 could be their death knell. With many now only surviving on JobKeeper as they thrash out the rental bill from the last few months. The Government’s move to announce a range of measures for commercial tenancy relief, may not be enough to bridge the gap between landlords’ rental expectations and tenants’ viable occupancy costs. An gap that is now becoming increasingly evident as vacancy rates soar across once prime retail sites. You just have to look at Melbourne’s Chapel Street and Bridge Road who now have vacancies of over 20%, i.e. 1 in 5 shops are now empty.
So where does this leave the once highly contested shopping centres and prime retail strips?
Depending on how long social distancing restrictions remain in place, shopping centres could fare the worst as consumers stay away from high traffic indoor centres. Further, anchor tenants are hurting badly, with David Jones and Myer’s struggles well documented.
Retail strips on the other hand are arguably better placed. As employers embrace work-from-home (WFH), people are increasingly spending more time in their local communities. This could potentially be a booster for small business as some discretionary spending is diverted away from shopping centres and CBDs and to suburban streets. But is it realistic to expect dozens of new local food and retail shops popping up to occupy these sites in the middle of COVID-19? Probably not.
So, what about the E-Commerce businesses that are supposedly basking in the sunlight of lower fixed costs and an increasing market share. Are they the answer?
In our next blog, we will explore whether this could be a win-win, for retail landords and e-commerce businesses