Australia's Mall Owners Gird Themselves For Battle With Amazon

By Mike Cherney 

Two years ago, Australian shopping-center operator Mirvac Group launched a new effort to help retain customers amid rising competition from online retailers: combine a trip to the mall with a scenic boat ride in iconic Sydney Harbour.

The so-called Shopper Hopper service has ferried 23,000 customers to two Mirvac malls along the coast, part of a continuing initiative to convince shoppers that a mall visit offers unique experiences that can't be found in front of a computer.

Mirvac had good reason to beef up its defenses against online retail competition. In December, the biggest and baddest online retailer of them all, Amazon.com Inc., launched its full retail website in Australia and opened its first local warehouse in the country.

Previously, Australians had to shop on Amazon's U.S. and U.K. websites for most products, which meant hefty shipping fees and long delivery times. Although other big online retailers such as eBay Inc. have been popular in Australia, up until recently the country's consumers have been mostly hooked on bricks-and-mortar stores.

Now, the launch of full service by Amazon has sparked concerns that Australian shopping centers face the same carnage that has undermined many a retail landlord in countries that got hit early by the online shopping juggernaut. Indeed, shares of Scentre Group Ltd., the largest listed retail property company in Australia, have been trading at about 4 Australian dollars (US$3) recently, down from about A$5.40 in mid-2016.

But the Shopper Hopper service and other efforts by Australian retail landlords to make trips to the mall more fun are a sign that they're not going to be a pushover for Amazon and other online retail giants. Investors and analysts say mall operators here have spent the past few years adding amenities and remixing tenants to keep shoppers interested, which should insulate them from some of the pain.

"Australian shopping center owners and retailers are watching closely what the impact of Amazon has been around the world, and they are acting to cope with that," said John Sears, Australia research director at Cushman & Wakefield.

Moreover, key structural differences between Australian and U.S. retail also make it unlikely that Australian malls will struggle as much as their U.S. counterparts, some say. Online sales in Australia last year made up 8.8% of all retail, compared with 11.8% in the U.S., according to market-research firm Euromonitor International.

At the same time, Australia doesn't suffer from the same retail space glut as does the U.S., which has more than 2.5 times the retail space per capita, according to Cushman & Wakefield. Mr. Sears and others attribute that difference to stricter planning guidelines in Australia that made it more difficult to build large malls.

The battle between bricks and clicks in Australian retailing mirrors the way it is playing out in developed countries throughout the world. Increasingly, landlords who are holding their own are those who are giving shoppers a wide range of reasons to make the trip to the mall.

Australian shopping centers also are in better shape because they have less space devoted to department stores, which have proved to be vulnerable to online shopping. APN Funds Management, which invests in Australian real-estate investment trusts, cites figures from Citigroup Global Markets that show U.S. shopping centers devoted 46% of space to department stores, compared with about 20% in Australia.

Meanwhile, entertainment, restaurant and other nonretail attractions get 19% of Australian retail space, compared with 14% in the U.S., according to Citi.

"The retail mix of tenants has changed over the years," said Grant MacKenzie, a senior portfolio manager at Freehold Investment Management, another Australian fund manager that invests in property securities. "You're getting a lot more entertainment, al fresco dining and the like."

The strategy is paying off: Occupancy rates for major Australian shopping-center owners have been "consistently high for many years," says Cushman & Wakefield's Mr. Sears.

Scentre Group, which runs some of Australia's top malls, said its vacancy rate last year was less than 0.5%. The rate hasn't changed from 2014, when Scentre split from Westfield Corp.

Amazon's expansion in Australia comes as the company is looking to beef up its global logistics network and could be positive for industrial properties. Similar to the U.S. and Europe, more warehouses will be needed for quick deliveries to urban areas.

Amazon's main Australian fulfillment center is a roughly 260,000-square-foot facility near Melbourne in an industrial park operated by private-company Pellicano Pty. Goodman Group, the largest listed industrial property company in Australia, said its occupancy rate at the end of last year was 98%, up from 96% at the end of 2014.

Amazon is still likely to present some challenges to traditional landlords. Guaranteeing same-day delivery to customers in some of Australia's more remote areas will be difficult. But Amazon could still be a threat in the big east coast cities like Sydney and Melbourne, where population density is comparable to large U.S. cities, Andrew Jones, a credit analyst at National Australia Bank, wrote in a report last year.

Second-tier shopping centers, which may not be big enough for nonretail attractions, could also be at risk. There is also a limit to how many restaurants shopping centers can support, given that at a certain point new food tenants take away sales from existing ones.

As e-commerce grows, some mall operators are tailoring their tenant mix to give people more reasons than shopping to visit. At Chadstone, a mall near Melbourne that is run by Vicinity Centres and bills itself as the largest shopping center in the country, a Legoland Discovery Centre opened last year that includes two indoor rides and a 4-D cinema. A high-quality hotel is also planned at the mall.

At Mirvac, head of retail Susan MacDonald highlighted how an Audi automobile service center has been a strong addition to one of the company's malls in Sydney. "That drives hundreds of people into that center," she said.

Write to Mike Cherney at [e-mail]

(END) Dow Jones Newswires

May 01, 2018 09:14 ET (13:14 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.