Faith in the Temple of Consumerism

October 1960. Sir Robert Menzies was Australian Prime Minister. A loaf of bread cost 18 pence. Australia’s ‘Holden versus Ford’ battle was taking shaping. And Elvis Presley’s It’s Now or Never was at the top of the charts.

It was also the year the Aussie retail industry was about to change forever.

In Victoria, Chadstone shopping centre opened in old farm paddocks in October of that year. It had just 72 shops — a far cry from the more than 500 it has today. It was the biggest shopping centre in Australia at the time. And, several half-a-billion-dollar redevelopments later, it still is.

The push for a shopping centre like Chadstone came from American-Australian Ken Myer. After a trip to the US in the late 1940s, he realised that ‘malls’ in the suburbs were the future.

A similar thing was happening above the Murray River in New South Wales. Two pals, Frank Lowy and John Saunders, were in the process of setting up shopping malls around the same time. The two mates listed their company, Westfield Development Corporation, on the stock exchange in 1960.

All three men were instrumental in bringing the shopping mall concept to Australia. And in innocently killing off the city-centric and strip-shopping precincts that were popular until then.

60 years on, the retail landscape is about to change once more…

For the past three years, year-on-year retail growth has shrunk, dropping from 4% annual growth in 2015 to 1.7% today.

Australia Retail Sales Year-on-year

Source: Trading Economics
[Click to enlarge]

The declining sales growth has taken out some of the biggest names in the retail sector, including Oroton Group, Topshop, Marc’s, David Lawrence and Pumpkin Patch.

On top of speciality stores, major department stores are struggling to keep people coming through the doors. David Jones, now owned by South African conglomerate Woolworths Holdings Ltd [JSE:WHL], recently took a $712 million impairment charge, reducing its value by 33%. That’s a hefty write-down considering WHL paid $2 billion for the business.

What will happen to David Jones’ nearest rival, Myer Holdings [ASX:MYR], remains to be seen. Myer shares currently trade for 64 cents. That’s a long way from the $4.10 initial public offering price in 2009.

It’s widely expected that Myer will start to devalue the goodwill of the labels on its books. In other words, analysts are betting that the company will reduce the value of some of the brands it has in store. This clever accounting trick is often used make the books look better in the long run.

In spite of the retail sector showing a solid 2.1% growth in November sales, don’t bet on that happening again. The NAB Monthly Cashless Retail Sales Index fell based on December sales. Meaning analysts are now estimating that growth for December will barely hit 0.3%.

The whole retail industry looks as if it’s about to topple over. 

Retail industry undergoing transformation?

I prefer to think of the retail industry as one that’s undergoing a seismic shift in how it operates. Similar to what happened when shopping centres revolutionised the shopping experience in 1960.

This transformation may have just occurred in the US. Just before Christmas, European commercial property giant Unibail-Rodamco SE [AMS:UL] offered Frank Lowy a tidy $32 billion for full control of Westfield Corporation Ltd [ASX:WFD].

Now, it’s easy to assume that Lowy has seen the writing on the wall, looking to get out of the industry as the internet continues to ravage bricks and mortar retail.

But that’s probably not the case.

In 2014, Westfield separated its Northern Hemisphere assets from those in Australia. The shopping centres owned by Westfield in the US and UK were rolled into the WFD business. Meanwhile, the Australian shopping centre business got a new name: Scentre Group [ASX:SCG].

As US retail sales took a turn for the worse in 2013–14, it looked as if Lowy was protecting his Aussie assets from the rest of the world.

Except that’s not the case. Lowy was neatly repackaging the business, preparing it for a buyer. A buyer with deep pockets. One that wants a business with exposure in the US and UK markets.

That makes it a perfect fit for Unibail, as they have no commercial space in the US.

Yet what about the ‘ghost malls’ in the US? 6,985 retailers went bankrupt in the US last year. Why would any company want to buy into what seems like a dying industry?

Well, any shopping centre development has a return on investment forecast of 10–15 years. Unibail isn’t buying for today. It’s buying for the shift that’s taking place right now.

Westfield doesn’t run dead shops. They have a strong history of selecting prime locations with major growth prospects. Smart retailers will aim to have their flagship stores — the fanciest ones — in the best malls with the biggest foot traffic.

Not only that, Westfield runs ‘entertainment’ precincts. Food and beverage was the largest growth area for European retailers over the last two years, according to Bloomberg. And this is something that Westfield knows how to do.

More importantly, while large shopping centres may feel like soulless wallet-opening traps, they are crucial to a retailer’s network. Convenience is important to people.

Physical stores will ultimately act like click-and-collect points in the long run. Furthermore, shopping centres are going to increasingly become giant show rooms. A place where people can touch and feel the products…and then go home and buy online.

The point is, while Aussie retail may be stuck going nowhere, it’s only temporary. The next big shift in retail is coming fast.

Shopping centres aren’t dead. They are just repositioning themselves.

Kind regards,

Shae Russell,
For Markets & Money

Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money