26/03/2015 - 14:33

Online retail drives bigger centres

26/03/2015 - 14:33

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At first glance, the planned $600 million expansion of Perth’s Karrinyup Shopping Centre seems to run counter to the relentless march of internet retailing, especially as a fresh report predicts that 50 per cent of all retail sales will be made over the internet in less than 10 years.

Karrinyup Shopping Centre.

At first glance, the planned $600 million expansion of Perth’s Karrinyup Shopping Centre seems to run counter to the relentless march of internet retailing, especially as a fresh report predicts that 50 per cent of all retail sales will be made over the internet in less than 10 years.

The same report, from the influential US investment bank Morgan Stanley, predicts a consolidation of shopping centres into fewer, bigger, well-positioned centres, with total store numbers falling by 50 per cent.

For individual retailers and shopping centre owners, the forecasts of Morgan Stanley in its latest ‘Global Retail Property’ report make for sobering reading; for anyone who has followed the rise-and-rise of the internet, however, they make for predictable reading.

The bank’s report is focused on the US and UK markets, but it is easy to understand that trends which develop there quickly find their way to Australia, with Karrinyup’s expansion a logical part of the process.

“The growth in online retailing, increased urbanisation and infrastructure improvements, have resulted in retailers reducing the number of stores within a specific market, but increasing the store size to provide customers with a greater shopping experience,” Morgan Stanley said.

Karrinyup’s expansion is an example of that trend, with the owner, AMP Capital, moving now to cement the centre’s position as a winner in a market increasingly being driven by the internet.

If consolidation of shopping into fewer and bigger centres is one key aspect of how Morgan Stanley regards the future of retailing, the even more interesting feature is the acceleration of internet penetration and the approach of an ‘inflection point’, which will lead to an internet sales boom.

According to the bank’s e-commerce team, around 10 per cent of all retail sales in the US and UK are today booked over the internet, with half of those coming from retailers that have a shopfront presence.

 

By 2018, an estimated 20 per cent of retail sales are tipped to be internet based, with that year (or thereabouts) being the inflection point, a time when internet retailing mimics the dramatic surge of e-commerce trading seen in other sectors, such as music, laptop computers and smartphones.

Using historic data to track the rise of internet trading Morgan Stanley noted the following.

• In the year 2000, laptop and notebook computers held around 20 per cent of the personal computer market, with the rest held by desktop personal computers (PCs). That year was the inflection point, with a rapid rise to 2009 when the ratio of laptops to PCs was just under 60 per cent, which is roughly where it is today.

• Music sales, the second case study, comprised 20 per cent of sales booked over the internet in 2006, but took off from that inflection point to hit 80 per cent last year – a spectacular rise in just eight years.

• The rise of smartphones such as Apple’s iPhone have been even more dramatic, with a 20 per cent share of all mobile phone sales in 2010 rocketing up to 80 per cent by last year, a rise that has been double the speed of music sales.

• E-commerce penetration is tracking the same trajectory as laptops, music and smartphones with today’s 10 per cent penetration expected to hit 20 per cent around 2018, with that year being the inflection point with a rapid rise to 50 per cent of retail sales being made over the internet by 2023.

There are reasons to question the Morgan Stanley view of the retail world, with the most obvious being that the more densely populated US and UK markets are not directly comparable with Australia and its more thinly populated suburbs.

However, if you accept the argument that Australia inevitably follows the overseas experience then there are other critical points to consider in the bank’s view, especially the forecast that total shop numbers will fall as internet sales rise.

Key to that point is an analysis of the UK market, where Morgan Stanley estimates that a retailer required 200 shops to reach 50 per cent of the market in 1971 whereas by 2010 only 70 shops were required – a number that’s likely to keep falling as more trading migrates to the internet.

The bank argues that conditions are ripe for a period of retail property consolidation, given factors such as structural changes under way in retailing and readily available capital.

But retail property estate owners are cautioned against indulging in consolidation through mergers or acquisitions, because the next aspect to the business will be about portfolio optimisation – having bigger and better shopping centres, not more of them.

The expansion of Karrinyup is a project taken directly from the Morgan Stanley playbook; it will now be interesting to see what other shopping centre owners do.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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