What I have learned in the last few days will send shivers down the spines of those who have invested in large shopping centres. However I must emphasise that I do not believe we are on the edge of a catastrophic retail event, but rather a warning sign that we have allowed the economy to move closer to a significant downturn than most analysts believe.
We have just seen a string of large, listed retailers report tougher times, and have watched their share prices get mauled. But in the last few days I went further into the retail scene and found high drama in parts of the non-food sector -- especially in Melbourne.
Big, well-run and successful shopping malls normally have a queue of people wanting to rent any space that suddenly becomes available. But for many centres, especially in Melbourne, those queues have evaporated. The managers of the centres are now desperate to find tenants because they know that if there are too many empty shops the stench of death can quickly envelop a shopping centre.
And so in some big centres you can rent a shop for the minimum of a week and a pay a low weekly rent, as long as you can move into the centre quickly. At the end each week you can stay or go -- no penalties. Those paying top prices in neighbouring shops in the same centre are aghast, but they have tight agreements.
These short-term, low-priced tenancies can be used for a variety of retail strategies. Neighbouring tenants tell me it appears that one of the most popular uses of the spaces is to buy distressed retail stock at low prices and flog the goods at discount levels which still offer a big margin over the distressed purchase prices.
All the staff are casual -- many appear to be university students -- and shift allowances usually prevent Sunday opening. If the store does not generate enough sales to make a profit after a week it is offered back to the shopping centres and a new one is taken somewhere else. Where the store makes a dollar the shopping centre tries to negotiate better rent but is told to jump in the lake -- this is a renters’ market, and the centre often has other vacancies to fill in a hurry.
I emphasise again that I do not believe this is widespread enough to see a sudden and major fall in shopping centre returns, but rather it is a warning of how fickle the retail scene is in a number of big shopping malls, let alone strip shopping centres.
My small retail friends say there was sluggishness in sales in the weeks leading up to the federal budget. However, in the afternoon prior to the budget being introduced, the horror predictions in the media caused sales to virtually stop, and there has been limited relief since then.
This is in line with the ANZ Roy Morgan consumer confidence index, which after the budget plunged to its lowest level since the global financial crisis. In the last three weeks it has edged higher but it is still 11 per cent below April levels. If that improvement continues then the current problems will be contained and shopping centres will find tenants that pay full rent.
Unfortunately we still have three tsunamis to come: the motor industry retrenchments, the end of the mining investment boom and the retail retrenchments which will come as retail shopping swings further to online trading as shift allowances rise on July 1 (A tsunami warning for business and executives, February 11). None of these tsunamis has yet hit the economy with their full force -- they are due in 2015 and 2016.
Lower interest rates will not assist these problems, either. Lower rates tend to lower the spending of people with savings. However, as these tsunamis emerge there will be pressure in the Reserve Bank to lower interest rates. Callam Pickering has issued an alert that interest rates may need to be reduced (How the RBA got it wrong on rates, June 16).