What recent store closures mean for the property market

  • Opinion
  • March 8, 2016
  • Paul Keane
What recent store closures mean for the property market

I recently read that Target closed all 133 of its Canadian stores. Can you imagine closing that number of stores? The various landlords have been severely impacted, and some are pursuing legal action against the company for breaches of lease obligations.

International companies regularly assess their performance in each country and are brutal as to exposure. If the brand isn’t working, closure - rather than prolonged trading agony - is the best option. It enables the Brand to close and exit quickly.

Comparatively, in New Zealand, we’ve had the recent, much publicised closure of Dick Smith Electronics, and the Good Guys back in 2014 who exited after opening just three stores. The Warehouse Group also exited their entry in Australia some years ago after failing to make a mark.

Entry and exit is becoming a common trend for retailers, and we are becoming used to such rises and falls.

The example of Target, together with local closures, gave us food for thought in terms of announced new arrivals and the potential for other retailers to open in NZ. Those of us at RCG with long standing retail industry connections are constantly reviewing where the opportunities for new retail entry may be.

Kmart exploring new opportunities for retail growth

Kmart came here in the 1980s with a goal to open around 25 stores pretty quickly. Momentum was lost when the company realised how difficult it was to trade. The company slowed up its growth and muddled along with a handful of stores throughout the country. Last year they began the roll out of their redesigned store experience across Australia and NZ, the new stores have a modern feel with a focus on quality merchandising.

Recently Kmart has opened a new store in Hamilton and another at Bethlehem in Tauranga, a sign that the company is exploring new opportunities for retail growth in New Zealand.

In earlier days, Kmart took leases of 24 years; this proved to be a problem for the retailer when performance was difficult and they couldn’t easily exit, due to lease obligations.  With the recent expansion lesser lease terms with tags attached are being negotiated.

H&M, Zara to expand their NZ presence
The entry of H&M, Zara and others to Auckland this year will inevitably spawn opportunities for these retailers in other locations. New Zealand of course is small fry compared to openings in other countries. For example, in 2015 H&M opened 375 stores internationally, so the New Zealand entry for the group is not that challenging.

International supermarket chains continue to expand
Aldi, a supermarket chain which opened in Germany in 1914, counted 10,000 stores worldwide in 2015. It plans to expand the chain with another 130 stores in the UK over the next six years and a further 80 stores in Australia over an even shorter time frame. United States giant Costco already have five stores in Australia and are planning more. Aldi and Costco haven’t signalled any entry to New Zealand, but one never says never!

Ikea cautious not only in NZ
The Swedish based concept store Ikea is a brand that has been touted as likely to enter the New Zealand market, but once again, size versus opportunity has impacted that decision. The fact that the brand continues to expand slowly in other countries is a sign that the company is cautious in regards to growth. Zara by comparison, continues to expand with 2,000 stores across 88 countries to date.

So what does all this mean and what can we learn from the demise of Target in Canada?

First off, the lease deals that are being concluded will have a number of ‘tags’ that protect the tenant over time. If there is a need to exit, then there will be less exposure to the tenant and there will be somewhat of a risk to landlords.

This is a critical issue for Property Owners, as lease tags will have a flow on effect to syndicated properties where multiple investors have small unit holdings, and will rely on tenant longevity to ensure their investment and ROI is protected.

The reality is that if a major retailer needs to exit, then receivership is the best means of escape and there is nothing a Landlord can do to prevent that happening.

However, what new entrants will do for the NZ market will be to lift the game - particularly that of existing retailers. Major local companies like The Warehouse, Briscoes and the supermarket chains (Foodstuffs and Progressive) will all be seriously impacted by the influence of new retailers entering, or ‘threatening’ to enter the NZ market.

As an example, in recent years The Warehouse has focussed on expanding the group through the acquisition of other brands. We suspect that over the next five years this model may change to a focus on representing the image of a modern store, through an improvement to the merchandise selection, range and presentation.

Similarly, Briscoes will also concentrate on lifting its image, and we suspect that both supermarket chains will focus on lifting their image of their respective brands. All this is versus negative store growth which is becoming more difficult due to the lack of sites available for new store expansion.

Targeting locals is the best option in the long term.

For NZ property investors, the key is to take heart from securing leases with traditional NZ retailers rather than pursuing long leases with new entrants. History has demonstrated that new entrants have less chance of surviving than the traditional NZ chains who are in it for the long haul.

 Paul Keane is a registered property professional and has vast experience in New Zealand’s commercial property industries. He provides retail and property consultancy including development management to many New Zealand property owners, developers and city councils. This post originally appeared on RCG's blog.

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