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A shopping city: Kiwi Property on the success of Sylvia Park

The launch of H&M and Zara at Kiwi Property’s Sylvia Park shopping centre were two of the most-anticipated retail events of 2016. We asked Kiwi Property chief executive Chris Gudgeon about what these mega-stores mean for retail - and what’s coming next.

By Sarah Dunn | January 31, 2017 | Property

Over the past year or two, retail commentators have speculated frequently about whether we’re soon to see the end of the physical store. As traditional retailers like Macy’s struggle against Amazon in the US, closer to home, Kiwi retailers such as Wild Pair and Dick Smith have given in to the digital incursions of foreign competitors.

Now that we’re staring down the barrel of 2017, however, it’s clear that the approaching change is more of an adjustment than a sweeping revision. A new wave of high-profile store launches has placed physical shopping squarely in the spotlight once more – Topshop in Auckland was first up in March 2015, followed by David Jones in July 2016, H&M on October 1, then five days later, its arch-nemesis Zara. Topshop followed up with a second outlet in Wellington at the start of November.

Each of the above launches attracted hundreds of shoppers who queued excitedly to be among the first to cross the new store’s threshold. Eager consumers began waiting for Topshop Auckland’s doors to open from 6pm the night before it opened, and the line they formed spanned two city blocks.

Months later, an aggressive publicity strategy saw H&M rewarded with a crowd of more than 1,000 waiting shoppers at its launch event, which came complete with a stage, a red carpet, a giant shopping bag sculpture and hundreds of high-profile VIPs.

One of the biggest movers behind this bricks and mortar renaissance has been the owner of Sylvia Park, the shopping centre which houses both H&M and Zara – Kiwi Property. The listed property investment company owns nine shopping centres around New Zealand, with a total value of $1.79 billion. They collectively earn $1.36 billion each year in annual retail sales.

Valued at $704 million in March 2016, Sylvia Park is the jewel in Kiwi Property’s crown. The 80,000 sqm centre is its most valuable single asset, accounting for $455 million of Kiwi Property’s total retail sales per annum. The centre is now 10 years old – its grand opening in 2006 sparked a stampede of customers that was described by then chief executive Angus McNaughton as resembling the running of the bulls in Pamplona. It now sees an annual 12.6 million visitors.

Current chief executive Chris Gudgeon says that in the first couple of weekends after H&M and Zara opened, Sylvia Park was handling 100,000 shoppers each weekend. This represents an increase on the average of around 20 percent. Consumer interest in the new fast fashion chains has been strong, making Kiwi Property’s $19.2 million investment into constructing retail stores for H&M and Zara well worthwhile.

The excitement behind the scenes at Sylvia Park during the launch week matched that of the customers, says Gudgeon. He describes the openings of H&M and Zara as a great milestone for Kiwi Property.

“As we said to our shareholders, H&M and Zara are an important first step in fulfilling our vision for Sylvia Park, which is about creating a world class retail offer. And they're an important catalyst for our planned next stages of expansion and development at Sylvia Park.”

These next stages involve up to 20,000 sqm of new retail space in a second-level fashion galleria above where Zara currently sits. It will feature a ‘café court’, new international retailers and potentially one or more department stores. Construction could begin as early as 2017, with completion targeted at between 2019 and 2021. The total project is likely to cost around $180 million.

While there was initial concern about the effect of the international fast fashion giants on the local retail market reported in the media, Gudgeon says Sylvia Park’s tenants have welcomed the increased foot traffic they’ve attracted.

“They're happy, they have good trading conditions, and a lot of them were obviously anticipating the arrival of H&M and Zara,” he says.

Chris Gudgeon, Kiwi Property chief executive.

Retail NZ general manager for public affairs Greg Harford says on balance, the arrival of the internationals is good news.

“The market here is very competitive, and while the arrival of these firms will add to the competitive dynamics, experience suggests that overall it will encourage shoppers to get out to the shops,” he says. “Over time, we expect the arrival of these international firms will have a positive impact on surrounding shopping areas.”

His point was echoed by H&M country manager for Australia and New Zealand, Hans Andersson, in an interview for The Register held the day before the store’s official opening. He says he considers heightened competition a win-win for everyone, describing the new environment as “beautiful” for customers.

“I think competition is fantastic because it keeps you on your toes, you try harder,” he says. “We have to try harder, our competitors have to try harder.”

Andersson pointed out that whether Kiwi retailers like it or not, they already face inescapable global competition through ecommerce.

Harford also touched on this, noting that unlike foreign websites which sell and fulfil to New Zealanders from offshore, physical stores located in New Zealand have to pay GST and duty to the Government, and must comply with Kiwi labour and consumer laws. In a regulatory sense, Harford says, physical stores are a level playing field.

Gudgeon says eight of Sylvia Park’s fashion retailers have responded to the arrival of H&M and Zara by investing in new fit-outs for their own stores. He points out that many of Sylvia Park’s retailers also trade in Australia, where internationals have been present for slightly longer: “Good retailers are really positive about the arrival of the internationals and are used to trading alongside them in Australia.”

An October report from global real estate firm CBRE described H&M and Zara as the first of a “rapidly accelerating wave” of international retailers seeking to establish themselves in New Zealand. According to CBRE’s research, more than 50 of these are certain or likely to enter the Kiwi market within the next few years, while a further 80 face entering with a lower degree of certainty.

Gudgeon says Kiwi Property’s retail leasing team are aware of these numbers, saying there’s a long list of retailers wanting to open at Sylvia Park. Besides the two fast fashion giants, Sylvia Park has recently opened the first Kiwi branch of Australian homewares company Adairs, and the biggest flagship Cotton On Kids store in the world.

Asked which additional international retailers Kiwi Property was targeting for Sylvia Park, Gudgeon replied: “Everybody.”

“Like all shoppers, we’re after something that’s new, has a point of difference, is exciting, and innovative and stylish and value,” he says. “All those things. We’re obviously not hard-out after the luxury brands because we’re there for everyday New Zealanders as opposed to cruise ship clients at the bottom of Queen St. We look at what we think will resonate with you and I as everyday Kiwis.”

There are some big names on the list, but Gudgeon describes them as “obvious” – too obvious to state explicitly. Ikea has long topped the average New Zealand consumer’s wishlist, and Gudgeon agrees it’d be “fantastic” to have the furniture retailer at Sylvia Park, although it would be difficult to accommodate due to the enormous footprint its stores require. He also agrees Aldi would go over well with Kiwis, but ultimately refuses to be drawn on the next big arrival.

However, Gudgeon is a realist when it comes to New Zealand’s place in the world. Statistics New Zealand puts the country’s current population at around 4.7 million – according to the latest report on world urban areas from Demographia, more than 12.1 percent of the world lives in cities with a higher head count than the whole of our widely-distributed population. With just over 1.4 million inhabitants in Auckland, even our biggest city is outclassed by 354 larger metropolises worldwide.

Gudgeon points out that H&M and Zara have, respectively, placed 62 and 91 markets ahead of New Zealand – New Zealand’s global contemporaries in the eyes of Zara are Aruba, Nicaragua and Paraguay, which it also entered during 2016. H&M positioned New Zealand alongside Puerto Rico and Cyprus. New Zealand is still ahead of Colombia, Kazakhstan, Iceland and Georgia, however, into which H&M plans to expand during 2017.

“There are a lot of international brands here already, and a lot of retailers that we’re used to seeing are in fact international and they’re on both sides of the Tasman to start with. [To] the big global names, New Zealand is a small country.”

Gudgeon believes that H&M and Zara’s presence in Australia should put them in a good position to judge what works in New Zealand. He says both companies do consider New Zealand to be a different market, adjusting for how Kiwi consumers think rather than lumping them together with Australian shoppers.

The two internationals may offer New Zealanders better price points than they do Australians, Gudgeon says: “I think they do understand us as a very value-conscious shopping community.”

The big names play their part in attracting shoppers, but they’re only part of the picture. Ecommerce has been part of the global retail landscape for more than 20 years and the trend continues to grow, luring customers away from physical stores.

BNZ’s Marketview Online Retail Sales reports show an ongoing increase in New Zealanders’ online spending – the latest available report, September 2016, indicates that Kiwis spent 15 percent more online over that month compared to the previous September.  

Gudgeon says Kiwi Property has been combating the effects of ecommerce since 2008, when it seemed as if the impact of the Global Financial Crisis on retail consumption coincided with online shopping “really starting to make its presence felt”.

“Like many shopping centre investors and managers, we have evolved our mix to be less dependent on categories that are vulnerable to online, and are looking to grow our presence in categories that are more experiential.”

Kiwi Property has invested more than $39 million into creating a stylish new dining development called The Brickworks for another of its Auckland shopping centres, LynnMall. It opened in November 2015 offering a mixture of upmarket chains, independent eateries, and also houses a new Reading Cinema.

Kiwi Property development manager Jo McDonald commented at the time that shopping at bricks and mortar stores has a certain ambience that ecommerce can’t compete with.

“Everyone’s sitting there having a coffee in the sun,” she says. “You can’t get that on the internet.”

Gudgeon describes The Brickworks as a classic example of customers seeking dining and entertainment experiences. By providing those experiences, he says, Kiwi Property has lifted the performance of LynnMall as a whole.

Part of LynnMall’s appeal is its integration with the community. West Auckland is growing fast and is increasingly connected to the central city, which LynnMall is poised to take advantage of via the nearby New Lynn Transportation Centre.

Even more attention has been paid to Sylvia Park’s city linkages – as well as nearly 4,000 on-site car parks, it has its own purpose-built train station.

“If you look at our language around Sylvia Park now, we refer to it as a town centre,” Gudgeon says. “In actual fact if you look at how Auckland Council looks at Sylvia Park, Sylvia Park’s a Metropolitan Centre. So with that, we’ve looked to expand our offerings in food and entertainment, services, personal and commercial services, and it’s worked. It really has.”

Under Auckland Council’s 30-year Auckland Unitary Plan for managing future growth, Metropolitan Centres are regional centres around which commercial activities will be clustered. Other Metropolitan Centres include Takapuna and Newmarket. The idea is that this clustering will reduce infrastructure costs and encourage alternative transport.

Gudgeon says Kiwi Property is embracing the council’s plans to intensify around key transport nodes. Its ambitions go beyond retail growth, too. Kiwi Property’s plans for Sylvia Park include the development of a nine-level office building offering 11,200 sqm of office space. Completion of the $80 million project is targeted for 2018.

“Obviously we’ve got a lot of airspace which we’re never going to use for retail, and we can offer office accommodation with a real point of difference,” Gudgeon says. “You’ve got your own railway station on the site, bus interchange, great motorway access, plus you’ve got all the amenities of the shopping centre. Whether it’s daycare or gym or community constable or commercial services, it’s all there.”

Another interesting variation on the shopping centre norm is planned at Hamilton’s The Base. Kiwi Property acquired a 50 percent stake of The Base from Tainui Group Holdings Limited, an investing vehicle for the Waikato-Tainui tribe, in April. Kiwi Property’s investment includes management of The Base and 120-year ground leases, but the underlying land will remain in tribal ownership.

The tribe plans to build a Whanau Ora centre for family health on part of the site which it’s retained. It’s also made sure unique cultural elements such as bilingual signage are kept up.

Gudgeon says it’s an exciting project: “We are so happy to be in that joint venture with Tainui. We see ourselves as very compatible partners, they’re very happy to have us on site as managers because, you know, it’s our core business.”

The Base is New Zealand’s largest single-site retail centre, covering more than 85,000 sqm. The site includes just under seven hectares of land which is yet to be developed, giving it plenty of potential for expansion.

While alarming headlines are heralding the death of shopping centres in the US - Green Street Advisors LLC told Bloomberg in June that several hundred malls could shut down over the next decade – Gudgeon is confident New Zealand centres are in no such trouble.

He points out that judging by floorspace per capita of enclosed malls, the US has around five times more mall space than New Zealand does, and Australia has approximately double.

“So on that stat, New Zealand is not over-provided. It’s when you get oversupply that you can confront issues, and I think possibly that’s been the case in the US. They’ve been oversupplied.”

Gudgeon looks forward to seeing Kiwi Property and its shopping centres continue to flourish. Kiwi Property’s retail portfolio is maintaining a 99.1 percent occupancy rate, and a 3.8 percent like-for-like net rentail income growth rate. He says running a shopping centre has many parallels with retail.

“Success is defined by sales, what consumers want, what shoppers want, so it keeps us on our toes just like it does with retailers.”

This story originally appeared in NZ Retail magazine issue 747 December 2016 / January 2017

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