Rising rents put the squeeze on local retailers

Australian retailers are facing more than competitive challenges from the influx of large-scale international retailers that are opening their doors here.

Not only must local stores -- once insulated by distance and an undemanding consumer -- compete on range and price with global organisations with far better economies of scale and more integrated supply chains. But they are also being squeezed on one of their major costs: rents.

Multinational chains can pay top dollar for prime locations and have pushed central city retail rents sharply higher, after years of sluggish growth following the financial crisis.

Rents in Sydney's central business district surged by 10.7 per cent and in Melbourne by 7.8 per cent last year as stores jockeyed for a finite number of superior locations, according to a quarterly report by global real estate firm CBRE.

It was the fastest pace of annual growth in Sydney since 2008 and in Melbourne since 2007.

The sharp upward trajectory over the past few years is clear. In Melbourne, Bourke Street Mall rents range between $6,500 and $10,000 per square metre, data from Savills shows. In 2010, the same space rented out for between $4,000 and $6,000 a square metre.

Sydney, Melbourne and Brisbane have consistently featured in the top 10 most expensive cities in the world for prime retail rents in recent years, a reflection of high property prices across the market as well as rising demand.

As many domestic retailers become priced out of prime locations, CBRE expects they will be forced to move to secondary locations or else pay up. Rents in the city outside of the Bourke Street Mall top out at about $4,000 a square metre.

Overseas chains have advantages of scale and higher gross margins, which mean they can afford to pay. Their much larger footprints also generally lead to lower rent per square metre, compared with local retailers in smaller stores. And it's worth noting that they are subject to the same weekend penalty rates that other businesses whinge about.

Sydney and Melbourne have been the initial targets of H&M, Topshop, Uniqlo and the like for their maiden marquee stores. The national rise in rents was more muted at 3.7 per cent.

Myer sold off its two heritage-listed Melbourne buildings a few years ago, including one that has become the upmarket Emporium mall. Both Myer and David Jones are reviewing their store portfolios and locations, rather than automatically re-signing leases.

Brisbane and other capitals as well as top regional centres are the next targets for the multinationals, who are attracted by Australians' high level of consumption per capita and still solid retail spending compared with their sluggish home markets.

For some, such as US faux Hamptons-style furniture chain Pottery Barn in Bondi Junction, the stores also serve as branding showrooms for a fast and efficient online business that retro local stores seem incapable of building. Pottery Barn has already opened in Chadstone and reportedly has plans for a Perth store.

Sweden's H&M this week said it will accelerate its store rollout to 400 worldwide this year. The fast-fashion chain plans two stores for Brisbane and a Sydney store in Pitt Street's Glasshouse in 2015, having opened in suburban North Ryde late last year.

There are rumours that several luxury food retailers including Mario Batali's Italian food megastore Eataly, which has 11 locations in Italy and massive markets in LA and New York (5,400 square metres in downtown Manhattan) , as well as Harvey Nichols and Marks & Spencer, are also scouting for space.

Retail spending has been solid with annual growth above 5.5 per cent through last year, and may get another fillip from the next cut in interest rates, which markets are betting will happen in February or March. Lower petrol prices may also help.

Spending has recovered even as surveys of sentiment remain mired at post-budget lows; a key component of the Westpac-Melbourne Institute consumer confidence survey that asks about economic conditions in the next 12 months has crumbled 15 per cent from a year ago. Local retailers would welcome a boost to help withstand the cold wind of intensifying competition.