With the relentless rise of online, is this the end of retail as we know it?
The right moves
Retailing worldwide is suffering convulsions as the industry struggles to cope with the disruption caused by internet shopping, weak sales and low confidence among consumers and investors. But will the patient recover and thrive or are we watching the inevitable death of traditional retailing? And what are the implications for property developers and investors in Ireland?
Retailing went through the 'perfect storm' of a global economic collapse, combined with the advent of online shopping. But, as economies have improved, retail sales, certainly on the High Street, have failed to respond and it is clear that the shift to online has destroyed the old models. Retail sales in two of our most influential markets, the US and the UK, are falling and confidence is low. An oversupply of retail space is becoming apparent, brands like Macy's and Sears are closing stores and the traditional development models of malls and department stores are under attack.
And just when retailers thought it couldn't get any worse, Amazon, whose move into electronics and book retailing bankrupted the leading players, has paid $13.7bn for the bricks and mortar supermarket chain Whole Foods, and where Amazon go, disruption follows. The response of the investment markets was swift, with leading US grocery stocks tanking. In the UK, five of the 10 most-shorted stocks are retailers, namely Marks & Spencer, Debenhams, Morrisons, Pets at Home and Ocado. The stock markets are betting against the High Street.
And the outlook for the traditional retail market here is weak, at best. The property market was troubled by the failure of the recovering economy to be reflected in rental growth. By comparison, prime office rents are now well in excess of the 2007 peak. Even industrial values, always the slowest to fall and recover in the cycle, are now back at three quarters of the last high. But retail rents, for example on Grafton Street, have struggled back to about half of their last peak, and have plateaued.
The latest Grant Thornton Retail Excellence Ireland Productivity Review for Q2 2017 confirms that trading remains very volatile. Like-for-like sales (excluding online, but including click-and-collect) declined in sectors including ladies fashion, menswear, footwear and jewellery, compared with last year. Lorraine Higgins, head of public affairs and communications at Retail Excellence Ireland, told me that those figures follow three successive quarters of declining sales. These are worrying results for the High Street, at a time when population and incomes are increasing.
Ms Higgins agrees that much of this is down to the shift online and referred to recent government figures showing that Irish consumers are now spending €850,000 online every hour, but that 70pc of that (€595,000 per hour) is being spent with overseas retailers, at a huge loss to Irish retailers and the exchequer.
Retail Excellence Ireland (REI) believe that Brexit is having a big effect on Irish retailing as weaker sterling and lower VAT rates are making buying online from the UK more attractive. REI is calling for a 3pc reduction in VAT in the budget, to help level the playing field for Irish retailers.
Oddly enough, all of this disruption is having little effect on prime retail investment values here, which is really a reflection of the weight of money chasing commercial real estate. Prime High Street yields have hardened in to 3.5pc and are 4-5pc for prime shopping centres like Dundrum and Blanchardstown. That said, I think that run is over, nor do I see much rental growth. On Grafton Street, a decent shop has been available for nine months and generally, questions are being asked as to who exactly are the retailers that are going to pay these top rents? The common answer now is the food and beverage sector, which is thriving, but that is being overplayed.
Long-term, I suspect that the market will over-correct before eventually finding a balance between online and High Street. The Amazon/Whole Foods deal is itself proof that the future is a blend of both. In a fast-changing market, developers and investors have to be certain that their tenant has the right offer and business model. A long lease to a fading dinosaur is worth less than a shorter one to a dynamic tenant driving footfall.
Planning policy, redevelopment and customer experience will play a part too. And the one thing that a market in chaos always presents is...opportunity.