The Pain is Coming For Retail Property Trusts
The Pain is Coming For Retail Property Trusts
The graph below shows a few listed retailers and their rent to revenue ratios over the past six years:
As you can see, the percentage of sales being handed over to landlords has been going up. Significantly. Most of them have passed some of that on to their customers in the form of higher prices. You can see that in their gross margins:
That’s why the internet is eating retailers’ lunch. There is a lot of whinging about GST and the high Aussie dollar, but the biggest problem is that they are paying too much rent and, as a consequence, charging prices that are too high.
The current retail woes will be passed on to the likes of Westfield and Stockland eventually.
One final interesting graph. Here’s the same rent to sales ratio for JB Hi-Fi and Woolworths:
No prizes for guessing which companies bring the foot traffic.
Custom Search 2
Comments
Interesting, though not sure that the figures for JB and Woolworths are a reflection of their 'anchor' status, or simply the fact that these businesses have much higher turnover than fashion retailers, and correspondingly lower gross margins and operating costs to revenues.
Bricks and mortar retailers offer a valuable service - the opportunity to handle the merchandise and e-tailers are copping a free ride - offering nothing other but cheap price and some quick despatch.
Manufacturers must learn to pay for shelf space and subsidise the bricks and mortar retailers who actually display the goods.
If rents are so high why are the distribution yields from WRT and the like so damn average - even at the current 'depressed' share prices?
Something doesn't add up. Maybe the anchor tenants need to pay a tad more. Lets face it would you go to Westfield Woolies because it's there? I sure wouldn't! I go to Westfield to do all the other shopping I can't do at my local supermarket.
Perhaps that is why Westfield is diworsifying into charging for car park spaces as started at Chermside in Qld and appears to be spreading to some other sites around Brisbane judging by some talk back radio my partner heard. It seems it is time to squeeze the customer directly rather than do it through the rents - or is that as well as? It is an interesting development as suburban shopping has become well established and there is no where else to go to access big physical retail stores like Kmart, JB Hi Fi & Big W which makes it feasible to apply new charges such as parking fees. It will be interesting to see if online shopping continues to grow in the face of these pressures or if it plateaus because there is a limited proportion of the population willing to shop online.
There is another factor at work as well. Ebay runs a seller rating system that most of the online stores seem to take very seriously and work hard to ensure customer satisfaction. This is clearly lacking in face to face stores and is making an increasing difference in the quality of the experience. There may be other factors moving us to online shopping as well. Anyone else got other views either way?
Hmm! As a ex large box retailer ( stand alone) I have to say that I am concerned about the future of these shopping centres and their ability to grow rents long term. Rent is a killer and you need to be an excellent retailer to prosper in good times, so it scares me to think just how many retailers are hanging in there hoping for a change of "luck". Can the Westfield's grow revenues with car park fees? I am not so sure. Unless they value add to the experience offer more than just shopping e.g. amusement centres and themed entertainment I can see folks going elsewhere. Just look at the queues of cars waiting outside airport perimeters now days rather than park up and greet at the arrivals hall.
I have a growing suspicion that the next generation won't be so concerned with touch and see retailing, we could soon see a landslide shift to online shopping that surprises all. The real concern for developers is how to continue to drive and grow centre foot traffic not drive it away. I think the answer will be in the overall experience and I am not so sure that will include extracting entry fees from visitors without offering value in return.
It's JB Hi-Fi's incremental change in rent as a percentage of sales that would worry me. This business has a low cost advantage borne from its historic low rent positions. As it enters shopping centres on sweat heart deals (still can't be as low as side of highways) I wonder who gets hooked on who (shopping centres or JB). If the backbone of JB's competitive advantage continues to diminish I am worried about JB's future (and thats ignoring other threats).
Putting Justin's thoughts another way (and already on your radar SJ), if JB Hi-Fi doesn't bring in the sales growth, it'll get squeezed at both ends - revenue and rents. EBIT margin will thus get crunched. I think this development is probably already underway and, like Justin, I'm concerned about this company.
Yes, and looking at JB's recent falls in same store sales growth, it dfoesn't look pretty - even compared with HVN.
Post new comment