Wednesday, August 5

Understanding The Australian Retail Apocalypse & Where There Are Opportunities For Startups

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The retail apocalypse is here and it is only set to get worse for Australian retailers. In the past two weeks Harris Scarf, Bardot, Curious Planet and EB Games have announced a combined total of 159 store closures. In addition, a further 146 stores were put at risk of closure with Jeanswest being placed into voluntary administration earlier in the week.

Despite the bleak start to 2020 the outlook is only going to get worse for traditional bricks and mortar retailers who despite years of advanced warning from overseas retail markets have struggled to adapt to changing consumer preferences and purchase habits. 

In fact, since as early as 2010, the United States has been experiencing an accelerated decline in traditional bricks and mortar retailing. A study by Cushman and Wakefield found that mall visits declined 50 percent between 2010 and 2013, and they have kept falling every year since. By 2019 this wave had become a tsunami with research by Coresight Research tracking 9,302 store closings in the US, a 59% jump from 2018.

For Australia, despite the increased global nature of our retail mix, we continue to lag behind our major trading partners when it comes to the penetration of online retailing. This lag has provided an additional period of time for our retailers to innovate, but most have failed to heed the warning. And while a gap remains, it will close and therefore there is only a narrow window of time for existing retailers to adapt or they will face the same problems that have befallen on the likes of Harris Scarf, Bardot and Jeanswest.

It is this failure to act that presents an opportunity for startups who can provide new tools, technology and insights to retailers who no longer have the luxury of time. Retailers who fail to aggressively innovate within the next 12 to 24 months will likely find themselves under increased pressure to cut costs, floor space and consolidate to survive.. But to understand where the opportunities lay it is important to understand the retail landscape and some of the forces that are driving this change.

The Retail Landscape

Put simply, Australia has too much retail floor space. When an excess of space meets an increase in online sales, combined with changing consumer purchase habits and preferences, then this excess of space is only going to become more pronounced.

According to the Shopping Centre Council of Australia, Australia has 106 square metres of Gross Lettable Area per 100 persons, third behind the USA and Canada. By comparison countries such as New Zealand, the UK and France have less than half the amount of space, at 50, 43 and 40 square meters per 100 persons respectively.

As sales shift online and and those dollars that are spent offline move towards experiences rather than physical goods, there will be downward pressure on total retail floorspace, but some retail centers are likely to feel the effects earlier than others. To understand why we need to identify how shopping centres are categories in Australia. They broadly fall into the following definitions:

  • Regional Shopping Centres, which include at least one department store (with one if not two or three supermarkets)
  • Sub Regional Centres, which include at least one discount department store (with one, if not two supermarkets)
  • Neighbourhood or supermarket based shopping centres, which include at least one supermarket as the major anchor tenant
  • CBD centres.

For retailers who find themselves in metropolitan located neighbourhood shopping centres they are likely to be the first ones to feel the pain as foot traffic further consolidates to sub-regional or regional centres or moves online entirely.

Why is this the case? These neighbourhood centres are designed (and marketed) to use their anchoring supermarket tenant as a magnet that attracts foot traffic to the centre in the hope that those people will remain in the centre and browse the surrounding specialty stores. For decades this strategy has worked but as a larger percentage of supermarket sales goes online foot traffic will decrease, impacting the casual sales that flow to the other retailers within the centre. 

In addition, these retailers (or their online competitors) are going to see a larger percentage of sales online, putting downward pressure on in-store sales and calling into question the strategy of having a large, geographically spread retail footprint, especially in these smaller neighbourhood sized centres. 

The flow on effect from this is likely to be that national retailers look to consolidate their holdings in a smaller number of large sub-regional and regional centres. We even have evidence of this occuring outside of neighbourhood centres with the likes of Big W, Myer and David Jones all closing down smaller and underperforming stores.

This reduction in retailers looking to own or maintain stores in a neighbourhood centre will, in turn, disrupt the traditional retail mix in these centres and inflict further pain on those retailers who choose to remain. For example, in a Neighbourhood centre of 15 to 40 stores, there is likely to be between 3 and 10 fashion retailers within the mix. As the number of closures mounts the reason to visit a centre with a handful of fashion options decreases exponentially with each subsequent closure.

To survive these centres will be forced to focus their attention on what has often been their best performing categories, service-based businesses such as hairdressing salons, barbershops, dry cleaners. I.e. services that people typically don’t have performed inside the home. These service-based will continue to exist, alongside specialty fresh food retailers that draw off the main supermarket anchor (i.e. butchers and bakeries)

Overall, the impact on the centre will ultimately be a decrease in space that is able to be leased. There will be a reduction in the number of stores the centre can support and in addition, smart neighbourhood shopping centre owners will consolidate and convert some of the retail floor space into improved dining areas, play spaces of children and event space that can improve the appeal of the centre as a destination and place people are happy to frequent within the community.

Sub-Regional and Regional Shopping Centres are better prepared to respond. With more modern shopping centre developments we have already seen the shift towards creating more of a “destination” than a pure shopping experience with improved dining areas, entertainment precincts and other magnets designed to draw families into the complex. For these larger centres the impacts within the next 12 – 24 months are unlikely to come from smaller local or regional tenants, and rather will stem from broader issues such as the national closure of retail chains.

For example it would not be unheard of that a Regional Shopping Centre in Australia until recently had three or four retailers out of Harris Scarf, Bardot, Curious Planet, EB Games and Jeanswest. Now within the period of a few weeks they are looking to fill a handful of additional vacancies at a time when very few retailers are looking to expand. 

As a result there is there will be an increase in the time stores remain vacant, a decrease in rental yields and potentially an increase in the incentives provided to retailers to open a new store (i.e. assistance with fit out costs or rental offset periods). As consumers you will also notice these impacts with more pop up retailers who take the vacant space for a few weeks at a time. This is a sign that the centre is happy to take any money it can get while it battles with rising vacancies.

So for startups looking to take advantage of this period of turmoil where do potential opportunities lay. There are a couple of broad areas we can examine:

Helping Retailers Become A Destination

Retailers will no longer be able to afford to rely on the centre itself to be a destination. Their individual stores will need to become a drawcard in their own right. This is their greatest advantage over online retailers. Their physical space provides a location that can transform the customer experience from a transactional one to an emotional one.

For example in a forward thinking sports retailer could look to dedicate the majority of their space to demonstrating products, rather than merely displaying them. In this scenarios you wouldn’t walk into the store to try some football boots on or look at a new basketball you would go there to actually shoot hoops or play on a mini indoor pitch. You would experience the product, find what works for you and then complete the transaction.

Smaller retailers with less floor space will have to think harder and while automation will also impact the number of jobs it provides the opportunity to dedicate the working capital towards a more skilled workforce. Take the example of a typical 150 to 250 square metre fashion store. Instead of the store assistant being someone who merely stacks clothes and processes transactions they could instead be an actual stylist who provides real, actionable advice on what looks good for you and your body type. That’s not something that’s easily obtained online.

Helping Retailers Increase Personalisation

Despite years of promises and thousands of loyalty programs and apps, retailers are yet to crack “personalisation” at scale.

How you shop, what you want to buy, your preference on how you pay for that item all differ by individual, yet the in store experience provided to consumers in homogeneous and often lacking in any kind of personality or excitement.

Traditional brick and mortar retailers need to crack this problem if they are going to be able to build a more intimate connection with their customers and start treating them as individuals, rather than a number in their loyalty card system.

This potentially is the hardest problem to crack, as any ability to offer increased personalisation often buts up against privacy concerns and questions on how, what and when to track consumer behaviour is warranted and beneficial.

In an ideal scenario though imagine walking into a store and the shop assistant immediately knows what you are likely to be interested in. A prime example of this would be a consumer who regularly frequents a particular skincare store. Upon entering the assistant knows that they typically buy a new moisturise every 6 – 8 weeks and prefer more of a neutral fragrance. Now not only can they pre-emptive know what the customer is likely to buy, but they can also attempt to up-sell or cross-sell often products with a similar fragrance profile.

Marry The Offline With The Online Experience

Building off the back of personalisation, smart retailers already understand that customers want a consistent experience across all of a company’s channels. In many cases however they don’t know how, or have not yet optimized for marrying the offline and online experience for the customer.

Interestingly enough, in the same week that there have been mass store closures across the country Google has acquired an Irish startup called Pointy that is going after this very issue. The team at Pointy have developed a solution created a small, physical box that plugs into local retailers’ barcode scanners. It then tracks what they sell and then updates their website so that consumers how exactly how much of a particular item is in stock at an individual retail location.

Other areas where there is potential to marry the offline and online experience for consumers is understanding their delivery preferences, providing easier and more seamless returns policies and tracking past purchases to only highlight products that are in stock in your local store that also match your size or past purchase patterns.

Managing The Shift To Automation

Automation is coming and we have already seen round one take place with the move to self-serve checkouts in major retail chains across the country. Round two will see ideas and systems like the Amazon Go concept store take hold where a consumer can simply pick up an item and walk out of the store without ever having to engage with a staff member or cash register if they choose not to.

For specialty retailers this move to automation needs to be balanced with the concepts mentioned above, such as providing a more personalised shopping experience and creating a sense of a destination. Yet at the same time it is not a topic that can be ignored.

For startups however, It would also be a mistake to focus on automating only the point of sale experience. In fact automating other areas of the business such as returns, in-store deliveries, click and collect offerings, etc can free up in-store resources to help achieve some of the other above mentioned concepts.

In addition, in a thin margin environment, automation can help reduce costs and enable retailers to become leaner and more efficient. 

The retail landscape in Australia is likely to become worse before it gets better. For Australian startups however this should be viewed as an opportunity, rather than a deterrent, because for every retailer that are closing stores and consolidating there are 10 others having conversations to ensure they are not the next to go and suffer the same fate.

About The Author: Paul Towers is a 4x Entrepreneur with a Bachelor of Property Economics. Paul also previously owned a retail business earlier in his career and spent 3 years working for a large property investment firm that had multiple retail properties within their portfolio.

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About Author

Paul Towers is a passionate supporter of the Australian startup ecosystem and the Founder of Startup Soda. Originally, Startup Soda was solely a newsletter that helped curate the best content from the Australian startup community, more recently however it has turned into a media platform with the aim of improving coverage of Australian Startups, Founders and VC's.

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