Retail property in developed markets benefits from healthy consumer spending power but is hugely challenged by the way online retail advancements are changing consumer behaviour. As a result, the sector has underperformed over the last few years. This is forcing shopping malls to adjust the way in which they serve customers – particularly in the UK and the US, where online retail penetration is highest.

In South Africa, the retail property market faces challenges stemming from prolonged weak economic growth, constrained consumer spending power and an oversupply of malls that is struggling to be fully absorbed.

We discuss the evolution of shopping malls and unpack what it means for locally listed retail property shares and Hammerson.

Goodbye convenience, hello experience
The traditional shopping mall concept (pioneered in the US in the 1950s) revolutionised the shopping experience by providing:

• Increased transactional convenience – a concentration of the marketplace in one area; and

• Increased lifestyle experiences – customers could shop as well as socialise, dine and be entertained.

Today, the most convenient transactional shopping experience is provided by your smartphone. Online shopping offers transactional convenience, effortless product searches, easy price comparability and a host of other logistical advantages that are attractive to the busy consumer. Shopping malls struggle to compete.

With online retail challenging the concept of convenience, mall owners and tenants have had to shift their focus to the social, lifestyle and experiential potential that retail environments can offer customers – opportunities not provided by smartphones.

Malls of the future
The shopping malls of the future will need to be quite different in the following ways:

• Flexible leasing and brand curatorship:

  Long-term leases are a sore point for retailers who have suffered from declining store profitability with the rise of online sales. Many large retailer brands have been forced into financial difficulty and even bankruptcy, which has enabled them to break their lease agreements and close some stores. As shown below, store closures in the US and UK over the last two years have almost reached the record levels of the financial crisis of 2008/9. These include big brands such as Macy’s, Debenhams, JCPenny, Barneys and House of Fraser, who leave behind large empty spaces that are difficult to re-let.

  

  This has inspired flexible space usage concepts as introduced by one of the US’s largest premium mall owners, Macerich. Their “Brandbox” concept divides empty units into mini-stores using modular walls that can accommodate several brands, depending on the size of the spaces needed. Each brand rents space for a short-term period (6-12 months), meaning a quick turnaround of offerings, thereby keeping customers interested and engaged. Furthermore, Brandbox provides store fixtures, marketing and technological support (radio frequency identification tags for real-time stock tracking and point of sale machine and foot traffic tracking devices) that is sold as a packaged deal. This is ideal for online businesses who wish to grow their business by leasing physical store space for the first time, without the hindrance of a long-term lease agreement.

  ‘Flexible leases’ are increasingly becoming the norm and, as a result, the landlord-tenant relationship is evolving to one of mutual cooperation where landlords have to actively curate retail brands to ensure the most attractive, differentiated offering for their customers. The graphic below contrasts this with the ‘old’, passive long-term lease relationships.

• Mixed-use precincts:

  Increasing urbanisation, coupled with the consumer’s need for convenience and a growing interest in urban locales that provide various amenities in close proximity to each other, means that the malls of the future will not be exclusively retail focused. Integrated spaces where people can live, work, shop and play are becoming increasingly common. More retail property owners are densifying land in and around their shopping malls to include a mix of residential property, hotels, offices, educational institutions, gyms, health spas, art galleries and public parks.

  In efforts to enhance the customer experience, mall owners are also critically reassessing how existing space is used, including offering more varied and more exciting entertainment. The Mall of America in Minnesota, for example, boasts an underground aquarium, a Nickelodeon theme park and a 5D virtual reality cinema.

  Services will also become an important occupier of space. Doctors, dentists, hair salons, childcare and municipal services are required on a regular basis and their presence in malls should translate to increased footfall. A good range of restaurants is deemed equally as important, along with improved tenant mixes, whereby older, less relevant retailer brands are replaced with modern businesses, such as:

  • Zara and H&M, who are taking up larger spaces to house their new, digitally empowered flagship stores that provide customers with the full omni-channel experience (an online content strategy that is used to improve the user experience);

  • Car brands such as Tesla and Mercedes are using retail space as showrooms for their latest models; and

  • Online brands are opening physical stores to further customer engagement and grow their brands more dynamically (the halo effect), for example Amazon books, Morphe and Sofa.com.

    

• Only the best will thrive: Retailers are using smartphones to better engage with customers – the omni-channel experience. This allows customers to seamlessly interact with the physical and digital world of the store. For example, H&M’s photo powered garment search engine, which uses a photograph to search for matching items in-store. It allows the customer to purchase the item via their smartphone or directs them to the nearest store.

  Retailers transitioning to this model are more selective in where they choose to have physical store presence, opting for locations where footfall is highest – usually shopping malls that have successfully transformed into experience-led, mixed-use destinations.

  Mall owners are also offering free wifi, which keeps customers lingering for longer and allows owners to track customer movements and obtain valuable data insights into shopping behaviour. This is enhanced through innovative mobile phone applications such as those which ‘ping’ when a customer passes a store hosting a sale.

  In the UK and US, only 10% of existing shopping malls meet the criteria of being considered prime destinations with a reasonable chance of thriving in the future. This will result in a high degree of mall redundancy, a source of heightened risk for investors.

Hammerson – bringing people and brands together
Hammerson is a high-quality, retail-focused property company with 40% of assets located in the UK, where retail conditions are exceptionally tough. UK retailers are not only battling with the disruptions posed by online retail but also with excessively high occupancy costs (wages, rent and business taxes). Fortunately, most of Hammerson’s UK assets consist of some of the country’s prime shopping malls that are well positioned to thrive in this omni-channel future.

For years, Hammerson has been defensively investing in their malls by reinventing spaces through the inclusion of new experiential offerings, while aggressively improving their tenant mix. They are well into the process of transforming their malls into integrated mixed-use precincts.

Outside of the UK, 60% of Hammerson’s assets are located across continental Europe and Ireland where online retail has had less of an impact. Here, Hammerson has flagship malls and owns stakes in highly desirable premium outlet centres located outside numerous major European cities.

Premium outlets are tourist-focused shopping destinations where one can purchase off-season branded fashion at discounted prices – an experience that is difficult to replicate in the digital space. These high-growth assets produce some of the top trading densities in the world.

South Africa is slow on the uptake
In South Africa, the impact of online retail has been limited, largely due to expensive data, underdeveloped infrastructure, poor fulfilment capabilities and a widely dispersed population. As such, shopping on foot will likely remain relevant for some time. However, in categories such as household appliances and electronics, the impact of online retail has already been significant, as reflected in the persistently weak sales performance delivered by Massmart’s Game stores over the last three years. In addition, as with the overseas experience, old fashioned department store formats are under pressure (Edcon Group has struggled and Stutterfords has failed).

Although South Africa is behind the curve (with only 1% of retail sales currently made online), the local online retail revolution has begun. We have already seen major changes and remain vigilant regarding other possible disruptions.

A mixed bag
The race is on for mall owners in South Africa to ensure that their assets are relevant as they compete to attract a shrinking pool of retailers. The current situation in South Africa of a proliferation of malls relative to the potential target market size is not a good starting point to tackle the transition to a more online and omni-channel retail world.