Power balance shifts as shopping habits change

Sue Mitchell
Sue Mitchell Senior reporter
A shift in the balance of power between landlords and retailers – which is already being exploited by Naomi Milgrom’s Sussan Group and Solomon Lew’s Premier Investments – has been driven by changes in consumer shopping habits during the coronavirus pandemic.Consumers worried about their health and safety during the COVID-19 crisis favoured smaller shopping centres and neighbourhood strip centres, shopped more online, and changed the days and times they shopped, according to a KPMG white paper.

Thanks to COVID-19, the normal rules no longer apply to our shopping routine, or the relationship between retail tenants and landlords.  Louise Kennerley

While foot traffic fell across the board, traffic at large shopping centres and in CBD areas fell harder than it did at small- and medium-sized shopping centres and large stand-alone stores, such as Harvey Norman and Bunnings, according to the report, which incorporated retail mapping data from GapMaps.

Foot traffic in CBD stores plunged 87 per cent in the three months to April 27, and traffic in large shopping centres fell 66 per cent, compared with a 32 per cent decline in traffic at small centres and a 45 per cent fall at medium-sized centres.

With more people working from home, almost half weekly shopping trips are now occurring on Sunday and Monday (which used to be the quietest shopping day of the week), up from 25 per cent pre-COVID.

Consumers have also changed the time they shop, with more shopping soon after opening or at lunchtime, instead of picking up supplies on the way home from work after 6pm.

It’s unclear whether shoppers will return to their previous habits after the pandemic, but KPMG partners Jane Cohen and James Stewart say even if a small percentage of shoppers continue it would have a major impact on a sector where fixed costs are high and margins and returns have been under pressure for years.

“There will be people who jump straight back to the way they were, but even if just a small percentage move it makes such a difference on these fixed-cost businesses, both the landlords and the retailers,” Ms Cohen said.

The balance of power has shifted in favour of retailers and smaller landlords, although there will have to be “give and take” on both sides, according to the report, Beyond COVID-19: The Shifting Foundations in Retail Property.

“Even if COVID-19 is quickly resolved, retailers and landlords will need to ‘lean in’ to create a new and more sustainable retail business model, which in turn will require adaptations to the property model,” the report said.

“Leaning in means facing into the paradox where the optimal outcome will not be achieved if both sides act purely in their own self-interest – a classic ‘prisoner’s dilemma’.”

Some retailers are already taking advantage of the power shift.

Ms Milgrom’s Sussan Group is refusing to reopen some of its 500 Sussan, Sportsgirl and Suzanne Grae stores unless rents are reduced; City Chic closed 13 per cent of its 106 stores after failing to secure rent reductions from landlords; and Mr Lew’s Premier Investments has vowed it will no longer pay fixed rent to landlords but would instead pay rent in arrears as a percentage of gross sales.

Mr Stewart, the joint leader of KPMG Australia’s national restructuring practice, said COVID-19 had concentrated five years of disruption into three months.

“If COVID hadn’t happened, you’d see a progressive balancing of tenant/ landlord relationships over a longer period of time,” he said.

“But COVID created this global Petri dish and threw everyone into an online environment whether they liked it or not over a three-month period.

“That construct has effectively forced this ‘prisoner’s dilemma’ to become real and it has really created a burning platform for both sides to come together.”

Ms Cohen said the nature of the relationship had to change.

“I don’t necessarily think retailers will be able to get more out of the landlords, but both will be able to create more value if they shift to a more collaborative approach,” she said.

The KPMG report coincided with new forecasts from Deloitte Access Economics, which expects real retail sales to fall 4 per cent in the June quarter and 1.4 per cent over calendar 2020 – the worst year on record – after a surge in growth over the March quarter due to panic hoarding.

“Australian retailers are facing the fight of their life in 2020,” Deloitte said.

“Consumer confidence slumped for a period, job losses have soared, and spending behaviour has been tipped on its head.

“Although retail will begin a recovery in the second half of the year, this
will be constrained by lower levels of employment, confidence and wealth.”

The outlook for the retail sector will be discussed at The Australian Financial Review virtual summit – Retail: Through the Crisis – on Thursday, June 25.

The Summit will provide up-to-the-minute insights and constructive debate from the sector’s most influential leaders and stakeholders. It aims to help shape the policy agenda for a strong recovery – and lead the debate on how the industry can stay ahead in an evolving post-COVID-19 world.