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The shift away from traditional bricks and mortar retail has been a well-documented phenomenon in recent years. There have been a number of drivers, namely the over-expansion of malls, rising rents, and changes in consumer purchasing habits. The most notable (or notorious) has been the shift online and the rise of e-commerce, or the “Amazon Effect”.
Accelerated Online Shift – The New Consumer
The move to online has been a necessity for consumers whilst entire countries have been in lockdown. The trend was already afoot prior to the global pandemic, but for some consumer cohorts that have been slower to adapt, for example, baby-boomers who traditionally value physical stores more than millennial consumers, the forced online push could see accelerated post-pandemic e-commerce adoption.
For many retailers with both an online and physical store presence the accelerated post COVID-19 shift to online could see increased competition and with restricted scope to reduce labour costs and overheads in existing physical locations, the result is margin compression and reduced profitability. Particularly once, we factor in the impact of widespread job losses and hit to consumer sentiment, via the health and economic crisis that will drag on discretionary spending and aggregate demand long after the lockdowns are lifted. Job insecurity, lost savings and personal safety concerns dampen consumption as consumers choose to save more and spend less, preventing a one-quarter and done impact. In China, the first country to see lockdowns lifted, consumers remain cautious and local governments have resorted to distributing vouchers to shoppers in a bid to get consumer spending again.
Therefore, the labour market recovery will also be crucial to aggregate demand rebound dynamics. Jobs around the world have been lost with frightening speed, we only have to look to US jobless claims to see that in full swing. According to the International Labour Organisation 2.7bn workers worldwide are now affected by lockdown measures, representing around 81 % of the world’s workforce. Employment recoveries are never V-shaped, although it is true that this recession has been “self-inflicted” and therefore the labour market may rebound more quickly than in prior recessions. But, the downturn in itself generates negative externalities and second order implications that cascade making it less likely the labour market can snap back. A clear risk to the assumption that economic activity will bounce back by 2H20.
Coronavirus Australia: Accent Group to close 28 stores nationwide
In Australia, Accent Group — the owner of Sketchers, Platypus, Hype DC and the Athlete’s Foot — said that after shutting down shops for a period of four weeks, they are now re-evaluating off the back of a significant acceleration in digital sales. Accent Group's chief executive says there has been a "seismic and most likely enduring" shift towards online shopping during the COVID-19 lockdowns and the company is trying to capitalise on the trend in the longer term. Initially closing 28 stores nationwide, but this could be increased to 50-100 stores pending negotiations with landlords. Viewed through a micro-economy lense, another indicator that the post virus picture is not one of mean reversion. There will be jobs that are never re-instated, primarily as businesses increase their focus on digitisation.
Aside from the shift away from traditional bricks and mortar stores, it has also been well documented that the millennial cohort have a tendency to prioritize experiences over products. A study by Harris Group found that 72% of millennials would rather spend on experiences than on material items. In addition, another long-term trend set to reshape retail will be the increased focus on sustainability and the circular economy. According to the environmental journal, 75% of millennials are willing to pay extra for sustainable products, being more climate-conscious than their prior generational cohorts, and keen to demonstrate this through their purchasing habits.
Collectively, the result is an acceleration of store closures and retail bankruptcies. Many closures likely coming from those “delaying the inevitable” with the trend accelerated by COVID-19. In addition, for those that survive, a retail re-imagination, adapting physical stores to new consumer preferences will be critical. For example, experiential in-store offerings, premium brands, and aligning with expectations around sustainability etc.
Real estate owners across almost every asset sector are considering the effects of the coronavirus outbreak and the industry changes that may arise in the wake of the global pandemic.
As we discussed even prior to the outbreak of COVID-19 consumers purchasing preferences were changing and moving towards e-commerce. For many retailers with physical stores, the business model has long been challenged. This shift will be accelerated post-pandemic, as reluctant consumer cohorts have faced no alternative, thus increasing online penetration and sales. For retail real estate asset owners, a surge of retailers demanding rent reductions, or shutting shop permanently, would deal a blow to an industry that was struggling prior to the pandemic. Even retailers and tenants who remain in a strong position despite the impact of COVID-19 lockdowns are looking to share the pain of lost sales and seeking rent relief from property owners.
Bigger picture, according to US real estate intelligence firm Green Street Advisors, over 50% of department stores in US malls are predicted to close by 2021. This generates a knock on effect as co-tenancy clauses allow struggling retailers to back out of lease agreements or negotiate reduced rents as foot traffic is reduced. In an environment where oversupply has long been an issue, department stores are in decline and online sales are growing fast, thus resetting rents lower, real estate owners and operators cash flows will be impacted significantly. The magnitude will depend on tenant mix (essential/non-essential), how quickly distancing measures are eased, the risk of a second infection wave and how quickly aggregate demand bounces back.
Retail REITs – in the price?
Listed retail and mall REITs shares are reflecting the stressed liquidity positions and already pricing in rent losses and tenant strains as well as the longer-term structural challenges, in fact retail REITs have been hit as hard as airline stocks in the COVID-19 sell off.