Amazon and the online threat
The Australian property landscape is changing, particularly in the retail sector, representing new challenges and opportunities for investors. The rising influence of online retailers, especially Amazon’s plan to enhance its online retail platform in Australia, has rightly been a hot topic in the industry of late.
The phenomenon is undoubtedly a rising challenge for bricks-and-mortar retailers who will increasingly have to battle for consumer dollars. Still, there is reason to believe Amazon’s impact on Australia’s retail sector may be less than some commentators have suggested. Australia’s geography will play an important role in the story of Amazon Down Under. The high cost of last-mile delivery and tyranny of distance in Australia are likely to pose a challenge to Amazon’s expansion in the country compared to other markets.
In jurisdictions where Amazon has been highly successful, such as the U.K. and Germany, it has benefited from higher populations confined to a smaller area. While in the U.K. it might be possible to service most of the population in a few hours from a warehouse near London, Australia’s large land mass makes reaching customers outside the major cities in a cost-effective way more challenging. Australia compares more closely to Canada, where online retailers have taken longer to penetrate the market and achieved limited market share.
Meanwhile, Australian mall owners aren’t resting on their laurels. Significant capital expenditure is planned to transform malls into 'social communities', or 'social playgrounds' - destinations where people meet, socialise, shop and relax. Already, we are seeing a distinct structural change in the way centres are positioned to cater for their local markets and react to the online challenge. The proportion of rental receipts coming from the food and beverage sector at any given centre is often as high as 25%, whereas 10 years ago it might have been less than 10%.
Visitor numbers and dwell time spent in these centres will continue to rise, providing they re-mix their offers and meet their local market. However, tough strategic decisions will need to be made to create 'next generation malls' where significant capital is required to protect market share. Retail landlords looking to attract shoppers may also need to increase their emphasis on boutique fashions and local retailers. While malls will still need to offer big name stores like H&M and Zara, the value of brand may become less important when it can be replicated online. Boutiques bring something different to the party, and help to distinguish a centre from other malls as well as online competitors.
Malls that are the dominant shopping centres for the region will likely fare better than smaller peers in the face of the online threat. They are more aspirational, create a day out, attract people from further afield and provide something the online threat can’t replicate, such as cinemas, food and beverage, and other activities.
While we recognise the challenges posed by online retail, we remain supportive of the retail property sector in Australia. However, we are taking a selective approach about where we choose to invest, and focusing on either dominant, fortress-type shopping malls, convenience-style offerings or niche strategies such as premium outlets.