Developers are optimistic, but retailers stay cautious BD 16 Feb 2001 - comment

Posted On Friday, 16 February 2001 03:01 Published by
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Developers are optimistic, but retailers stay cautious

Developers are optimistic, but retailers stay cautious

NEW shopping centres have been springing up almost as often as retailers have been issuing profit warnings.

Something does not add up.

Billions of rands have been spent on building or extending centres like Canal Walk in Cape Town, Menlyn Park in Pretoria, The Zone in Rosebank, Johannesburg and the Gateway in Durban. Numerous other developments are taking place on a smaller scale. Casinos have even jumped in with retail developments on their sites.

Yet there are some shopping centres that are looking decidedly empty, either because the new developments have eaten into their customer base or because they have not got off the ground.

In addition, many retailers, especially those which sell clothing, are struggling, and overcapacity is a major problem in the industry.

Foschini, Mr Price, the Wooltru group and Edgars are some retailers which have issued profit warnings and the retail index has lost a third in the past 12 months, against a 15% increase in the all-share.

Signs of an industry clean-up were evident yesterday, with Wooltru announcing the first phase of the sale or unbundling of its R4bn to R5bn retail assets with the sale of CNA. This year will see further unbundlings and consolidation in the industry.

There is an implied divergence of thought on the future of retail. Developers are clearly optimistic and retail analysts more cautious about prospects for an industry plagued by a plethora of problems.

Admittedly, developers made their decisions years ago, based on projections which may not have proved accurate. They may now be saddled with space that is not easy to fill, but they remain, possibly out of necessity, optimistic about the sector's prospects and the outlook for consumer spending.

But SA's retailers are suffering. Most expanded rapidly into a market that has tightened considerably. Pressure on consumer spending and the invasion of cellphones, the lottery and gambling into retail spend have taken their toll.

A number of retailers are the subject of VAT investigations by the SA Revenue Service. The rapid rise of the Mr Price chain caused ripples in the retail market. It operated on a much cheaper infrastructure, and was able to compete aggressively on price.

Other retailers jumped in and brought prices down, but at the expense of profit margins. They also opened new store concepts based on Mr Price off larger infrastructures, and this may prove costly.

But the Mr Price strategy of rapid store expansion and price-cutting was not necessarily correct. Today the retail sector sits with over-capacity, overstocking, high infrastructure costs and legacies where rapid expansion has resulted in the performances of profitable stores being offset by those of numerous unprofitable outlying stores. Yet retailers are under pressure to continue to take space in the new developments, or risk getting left behind.

The question is whether there are signs that retailers can emerge from the quagmire. Some indicate that the answer lies in fine-tuning merchandising, differentiating brands and getting out of unprofitable locations.

But one has to ask if these actions are just tweaking, or whether they are wide-ranging enough to counteract systemic changes in the industry.

One thing the retailers will do is to continue to get out of unprofitable stores as leases end. This would hopefully enable them to return to their focus and worry about improving efficiencies.

Standard Equities analyst Evan Walker says SA's retail densities are out of kilter with those in the rest of the world, and this has come home to roost.

While statistics on retail space and availability are not easy to come by, he understands the Gateway will be the last big property development planned for the next few years, although there could be one planned in the Westgate area.

Walker says the retailers were caught unawares by the downturn in the retail cycle, of which property has been one element. It will be a tough 2001, but by 2002 retailers will have begun to have pulled out of the unprofitable retail space and have leaner operations.

He says many retailers are still struggling to decide which customer niche they operate in, as many have been changing strategy and merchandise mix to capture the market they think will be growing the fastest.

While rapid expansion of stores has increased retailers' turnover, this was only positive for profits when operating expenses were comparatively low.

But the sector has been hit by cheap imports, a decline in the textile sector and pressure on prices. The pressure on volumes has hit bottom lines, especially of companies which have chased the 'pile 'em high, sell 'em cheap' strategy.

Companies which have been cautious in expansion and maintained their pricing may have been looked down upon over the past few years, but they are now expected to outperform their peers.

Truworths limited the increase in stores and passed on price increases to customers, while companies like Edgars, Foschini and Mr Price expanded rapidly and have been bringing down prices.

If retail property development does slow, retailers may stand a better chance of consolidating and getting their house in order.

Walker says smaller, ownermanaged stores are struggling in the big centres whose rentals are high and which are not providing enough foot traffic. As the property owners often have to entice the bigger retailers with low rentals and other incentives, the fact that people are not fighting for retail space may put some pressure on developers to hold back for a time.

But while some developers admit there is an oversupply in some areas, they also indicate that new shopping centres are very busy.

Richway Retail properties CEO Peter Blanckenberg says while there is oversupply of retail space in some areas, 'where that has happened the stronger centres will be OK, but there will be some casualties among the weaker ones'.

He says that Menlyn has been 'pumping' and that retailers have been 'flabbergasted by the success' of Canal Walk.

This may be so, but new developments like The Zone look a little empty, and it is understood the Gateway has not experienced a rush of tenants to fill its space.

Perhaps SA needs some consolidation in the retail property and the retail trade industries, not just in the rural areas but in the major centres, where consumers appear to have shopped 'til they dropped.


Publisher: Business Day
Source: Business Day

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