A recent flurry of Merger & Acquisition (M&A) activity in the shopping centre space could be set to alter the state of play in the industry as an increasing number of bigger groups take hold.
In this post, I’m going to explore what the shopping centre M&As mean for the sector and what conditions gave rise to them.
Shifting Consumer Patterns
The increase in shopping centre M&A activity is an ongoing reaction to changes in consumer shopping patterns. As consumers have become more aware of brands and styles, they’re increasingly prepared to travel or use online channels to obtain the right brands and goods for their lifestyles.
Consumers have always led retailers, with real estate lagging behind. Traditionally, changes have been relatively slow – we have seen format innovation such as in town shopping malls, hypermarkets, retail parks, out of town regional malls as well as flagship stores, casual dining brands and the internationalisation of capital cities. Today however, technology is driving a much faster pace of change in shopping and real estate – in addition to a substantial number of traditional high street retailers – has not only struggled to react, but also to see where future demand is headed.
How Landlords React
To date, landlords could follow occupier format trends and generate profitable income models through physical development. Recent examples of these include the growth of airport retailing and designer outlet centres. Online shopping however, has effectively lowered the commercial value of ‘places’, not just through diverting sales away from shopping malls but with returned goods now accounting for up to 25% of sales (up from a level more like 10% in the 1990s).
This means the practice of offsetting returns against sales at store level has depressed the profitability of stores and their ability to pay rent. With leading retailers such as Zara, consolidating portfolios away from less profitable locations and developing digital stores, plus a growing challenge from Amazon, many landlords recognise that they need a relevant product which is future proof and retains their negotiating power with occupiers.
For the likes of Unibail Rodamco and Westfield or Intu and Hammerson, the mergers are largely defensive but give these businesses global scale and leading assets in locations which are likely to remain highly prized by occupiers. A larger number of strategic assets strengthens the negotiating power of the merged company when it comes to leasing.
Controlling some of the most desirable destinations for consumers also gives landlords the ability to negotiate beneficial marketing relationships and linked portfolio deals. The latter is a technique that is commonly used to persuade occupiers to lease stores in certain ‘less attractive’ locations.
A European-wide Trend
The rise of M&As is widespread across Europe, although the pace of consumer driven change is perhaps more obvious in the UK, where out of town fashion retailing and digital shopping have a gained a stronger foot hold. This has spawned specialist managers such as New River REIT, established in 2009 to manage convenience-led community shopping centres.
In Europe we have to look no further than Klepierre, who, since 2012, has been refocusing its portfolio on dominant shopping centres in France, Scandinavia and Italy, selling a portfolio of smaller shopping malls adjoining Carrefour hypermarkets in 2014.
Since the 2008 financial crisis, many major landlords have been replacing retail space with food and beverage (F&B). In the UK, a number of high profile F&B operators have recently fallen into financial difficulty such as Eat, Square Pie, Byron and Jamie’s Italian, suggesting that the casual dining sector has perhaps expanded beyond market capacity. Europe is behind the curve in the growth of F&B but landlords should learn from the UK that expanding food service in malls should not be the only strategy.
How does this impact on the consumer experience? Larger buying power can enable the merged company to focus on rapid improvement of strategic assets. Hammerson has already indicated that at least £2bn of assets will be disposed of to ‘strengthen its balance sheet and provide liquidity to reinvest in higher return opportunities,’ Whilst ‘experience’ is becoming a much overused but under delivered phrase, we expect to see landlords investing in creating modern, brand supportive and technology driven environments which attract consumers through a combination of great brands, great shopping choice, compelling entertainment and memorable environments which incorporate first class design which engages rather than herds visitors.
Shopping is increasingly leaning on its leisure credentials; it’s the principal activity for inbound tourists to the UK and is the fourth most popular free time activity for UK adults. With typical days out now including 3.8 different activities, landlords will seek to create destinations which are packaged, multipurpose, diverse, brand driven and which ultimately are irresistible to consumers.
Changing the ‘Shopper Centre’ Experience
In the short term, shopping malls need to raise their game as there is a danger that they will cease to be relevant to consumers. The many zombie malls in the USA are examples of what happens when the landlord takes the true customer – the consumer, not the occupier- for granted and fails to invest to follow changing demand.
There will be successful shopping malls in the future and I expect them to have much stronger focus on the leading national and international occupiers, facilitated by greater lease flexibility, greater F&B and entertainment content, more flexible unit spaces and much stronger brand association in marketing communications and mall environment. I also expect a greater association with adjacent cultural, social and retail activities in city centres, perhaps even the incorporation of specific attractions and hotels, better quality events programmes, better management of common spaces, including car parks and lifts, more international retail and high-quality manufacturer brands, greater commercialisation of space and dedicated tourist management. The successful shopping malls of the future will be more dynamic, more responsive and more immersive environments.
What this Means for Smaller Shopping Centres
We expect to see more aggressive competition with towns anchored by smaller centres owned by smaller landlords. The risk is that this may lead to a further erosion of shoppers from middle tier town centres and further consolidation of retailer portfolios.
For smaller centres, where overcapacity and a lack of demand create a ‘perfect storm’, we may see changes of use, such as more leisure or ‘edutainment’, a greater emphasis on services and even conversion of some space to residential. Landlords may also seek to attract occupiers by converting their centres either fully or partially to outlet centres as Jadwa Investment has successfully achieved at Princes Quay in Hull City Centre.
The Future of Shopping Centres
Given the track record of M&A examples in the last 20 years, this will be a core driver for real estate growth in the future. Currently, many landlords of smaller portfolios lack the resources to invest in the realistic strategies, environment changes and lease negotiations necessary to adapt their malls for the future. Staying still however, will inevitably make them unattractive to modern brands and vulnerable to the ongoing restructuring of occupier portfolios.
In the current low growth economy, success is about gaining market share. As most shopping centres have similar management strategies for growth, then the potential for cannibalisation and low growth can only increase. For brands, it is no longer about the value of a shopping location today, but whether that location will remain of value in the future. To attract leading brands, it is essential for landlords to demonstrate well-judged investment and strong management skills. With the pace of change increasing by the day, it remains an important space to watch.
About the Author:
Ken Gunn is Managing Director at FSP and looks back on 30+ years of experience in retail property. He uses his deep understanding of consumer shopping habits, retail centers and leading edge analysis to support FSP’s projects and help clients realize the true potential of their shopping centre and retail park investments. He is a widely-respected authority on designer outlets and has worked on over 100 outlet projects in 30 countries over the past decade. Read more of his work here or get in touch about shopping centre M&As and other topics via e-mail.