The growth in online sales is not unexpected, but the question is if and when will the momentum slow and what will be the ultimate impact on store-based retailers and on retail landlords?
In mid-2017, Commonwealth Bank research predicted one in three consumer purchases would be online in 2018, with double-digit online growth of around 20 per cent in calendar years 2016 and 2017.
The final figure for 2018 is due to be published shortly, but online transactions enjoyed a significant lift in November as a result of Black Friday and Cyber Monday promotions.
Falling foot traffic
According to Commonwealth Bank research, pre-Christmas online transactions growth was up 13.4 per cent in volume and 18.5 per cent in dollar value in 2017.
In the lead-up to Christmas in 2018 online transactions growth had slowed to 4.9 per cent, but the year-on-year dollar value of sales was up 11.9 per cent.
The average value of an individual online transaction has also been increasing, according to the research, with consumers spending on average $97 per online transaction in 2018.
Bricks-and-mortar retailers that have developed online sales platforms have no doubt contributed to those growth figures, and most retailers continue to report online sales gains as a highlight of generally underwhelming store-based sales growth.
However, the online sales gains for most, if not all, retailers are not offsetting the loss of in-store foot traffic, transactions and sales growth.
The key issue regarding online retail is that it is stealing growth from bricks-and-mortar retailers, with a direct impact on market share and earnings.
Earnings are being impacted both in respect of a proportion of revenue but also as a result of the cost base of bricks-and-mortar retailers, particularly with rising rents and occupancy costs, increasing staff wages, higher inventory costs and the rising cost (and uncertainty) of debt.
Online retail is effectively negating the benefit of population growth, and any additional spending power created by tax cuts or Gen X and millennials living with mum and dad and unencumbered by mortgages.
For store-based retailers and retail landlords, the question of where and when the online retail onslaught stops or, at least, finds its level, is now a major issue with significant financial implications.
Never mind the global retailers that have entered the Australian market, as they are facing similar albeit slightly more favourable rental and occupancy costs and store-establishment funding from sources offshore.
The real damage to retailers of online retailing has seen chains like Roger David, Laura Ashley, Crabtree & Evelyn and Ed Harry collapse, while other chains cull their store networks.
That is without calculating the damage on Myer and David Jones: the department store chains are losing customers, sales and market share in the surge in online retailing.
The tale of Christmas 2018 is yet to be fully understood, but the Grinch has certainly left some glum faces at David Jones, PAS Group, Kmart, Super Retail, The Reject Shop and Kathmandu – and one suspects some even greater stress at Myer.
However, the impact of online retailing on bricks-and-mortar retailers is not about a single Christmas. It is about the agility of bricks-and-mortar retailers, and that means lean and mean business models, omnichannel engagement with customers, unique selling propositions and service levels.
Lean and mean business models include right-sizing individual stores and right-sizing store networks.
The problem of overreach
The chains’ market share strategy of a shopfront in every shopping mall or major strip centre, or even every state or regional market, carries substantial and unacceptable risk today.
Overreach and legacy store locations and lease deals have proved an anchor on many, if not most – if not all – major chains, and have been key to the demise of prominent retailers in recent years.
In the past three to five years, retailers have been seeking rent relief under existing leases as well as in new and renewed leases with retail landlords.
The pressure on rents in shopping centres and shopping strips from retailers prepared to continue trading is compounded by the financial collapses of chains that are leaving empty tenancies and shops.
Vicinity Centres, the country’s largest shopping centre landlord, has cut the value of its $15.8 billion retail portfolio for the first time since 2011 when it listed on the Australian Securities Exchange.
Other prudent shopping centre landlords should follow Vicinity’s lead, because they face the same headwinds of weak rental growth, more challenging leasing conditions, increased scrutiny on debt levels and asset backing by financiers and weaker net operating income.
Divestment of some retail centres has and will reduce the drag on financial performance for the major landlords, but it will not solve the overall problem, which is the challenge of online retailing eroding bricks-and-mortar market share, foot traffic and transaction numbers, sales and profitability.