RETAIL - Broll

SNAPSHOTQ2:2017

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STRUGGLING RETAILERSBig boxes are closing down, what now?

The Consumer Price Index, Retail Trade Sales and the Consumer Confidence Index are some of the factors which influence the retail market and can provide an indication of what consumers have been doing and may do in the near future with regards to retail spend.

Consumer Price Index (CPI)

The CPI for May 2017 was 5.4% year-on-year (y-o-y), up from 5.3% in April 2017, with month-on-month (m-o-m) prices having increased by 0.3%. Food prices increased by 6.8% on a y-o-y basis and 0.5% m-o-m. The top three largest yearly increases in food prices were 20% for sugar, sweets and desserts, 12.6% for meat and 6.5% for fish. When looking at monthly increases in food prices, the highest increase was evident for milk, eggs and cheese (1.2%), meat (1.1%) and sugar, sweets and dessert (0.9%) while fruit recorded the largest decline of -3.8%.

With inflation at 5.4%, the prime lending rate at 10.5%, household debt to disposable income at 73.2%, increasing costs of living and a negative Consumer Confidence Index of -10, South African consumers are under pressure and have been under pressure for some time now. Furthermore, the country entered a technical recession as at Q1:2017 when a quarterly decline of -0.7% in GDP was recorded following a -0.3% contraction in the last quarter of 2016.

All of the above mentioned factors have spin-off effects on the retail market and a number of store closures have been evident as of late, inclusive of both local and international retailers. Certain small retailers have closed their doors recently, but of greater concern are the large, big box retailers that have closed up shop, some have simply reduced their footprint across the country whereas others have left the country in its entirety.

Questions now arise as to what will happen to all of these large spaces which are now becoming vacant? How will landlords repurpose this space? Is there opportunity for increased income in terms of rentals received? Are there now more opportunities for local tenants to be located in prime centres? What now?

Retail Spend

Which Items Increase Your Monthly Grocery Bill?

April 2017 vs. May 2017

Milk, Eggs and Cheese

Meat

Sugar, Sweets and Desserts

Oils and Fats

Vegetables

Fish

Bread and Cereals

Fruit

1.2%

1.1%

0.9%

-0.2%

-0.5%

-0.6%

-0.8%

-3.8%

Entire Food Basket0.5%

Source: Stats SA

Big boxes are closing down, what now?

Consumer Confidence Index

Since Q2:2012 the Consumer Confidence Index has been primarily negative with the last two years having only recorded negative values. In Q3:2016 consumer confidence picked up slightly changing from -11 to -3 quarter-on-quarter. However, as at Q4:2016 consumer confidence dipped once again and recorded a value of -10. Even though the Q4:2016 index is a slight improvement from -14 recorded in Q4:2015, consumers still have a largely negative outlook in terms of the country’s economic position, personal finances and spending power. Contributing factors to this include, but are not limited to, an adverse economic climate, currency volatility and the ever increasing cost of living.

Retail Trade Sales

April 2017 retail sales at current prices amounted to R76.753 billion. In real terms (constant 2012 prices) sales increased by 1.5% y-o-y and 0.3% m-o-m. The main contributors to the 1.5% increase in April 2017 were general dealers and retailers in food, beverages and tobacco in specialised stores (food and drink), contributing 2.1% and 1% respectively. Additionally, these two categories also experienced the highest y-o-y growth in real terms, i.e. 13.6% (food and drink) and 5.1% (general dealers).

Big boxes are closing down, what now?

Contribution of Each Type of Retailer to Total Sales – April 2017 (current prices)

Consumer Confidence Index

Source: Stats SA

Source: FNB/BER

Household Goods4%

General Dealers44%Pharmaceutical

9%

Food and Drink9%

Textile and Clothing18%

R76.753Billion

Other9%

Hardware7%

-20 -15 -10

-5 0 5

10 15 20 25

Q1/99

Q1/00

Q1/01

Q1/02

Q1/03

Q1/04

Q1/05

Q1/06

Q1/07

Q1/08

Q1/09

Q1/10

Q1/11

Q1/12

Q1/13

Q1/14

Q1/15

Q1/16

While a few smaller retailers have closed down within certain centres in South Africa (SA), across the country a number of big box national and international retailers, including the likes of Stuttafords, the Edcon Group, Mango, Nine West and River Island, have in recent months indicated that they are closing down their stand-alone stores within SA, reducing the number of stores which they have across the country or reducing the size of some of their existing stores. This will result in increased vacancies within a number of centres and what landlords will do with these large vacancies remains to be seen.

StuttafordsStuttafords was founded in 1858 and was one of the very first department stores in SA. At the beginning of June 2017 it was noted that the company had reduced its number of stores within SA from nine to six and that further store closures were being discussed. However, it has since been indicated that as at 1 August 2017 all Stuttafords stores will be closing down, this comes after the retailer placed itself into voluntary business rescue late October 2016 and months after plans to rescue the retailer proved to be unsuccessful.

The Edcon GroupIn May 2017 the Edcon Group announced that it was closing down some of its stores as a result of retail cannibalisation and was also considering downsizing some of its existing stores. In a 12 month period to 25 March 2017, Edcon closed 24 of its stores, i.e. eight Edgars, four Jet, five Jet Mart and seven of its speciality division stores (CNA, Red Square and Boardmans). Additionally, it has further been indicated that when the Group’s existing leases are due for renewal consideration will be given as to whether these stores should be kept open or not.

Mango and Nine WestAt the end of March 2017 all Mango and Nine West stand-alone stores closed up shop within SA. These brands have however continued to maintain a presence in the country via Edgars as a store-in-store concept (Mango) and on a wholesale agreement (Nine West handbags). The exclusive rights to both brands were owned by the House of Busby and their exit from the market was indicated as being due to the House of Busby altering its portfolio to match domestic needs.

River IslandBy the end of September 2017 all River Island stores within SA will be closed down. The retailer had 12 stores in SA, of which four were store-in-store concepts in Edgars which falls under the Edcon Group, Edcon has been indicated as having a strategy to consolidate the international brands which it sells.

Other RetailersA few retailers ranging from 30m² - 300m² have also been closing down recently, some of which include tenants in the food, homeware, health and beauty, apparel and jewellery categories. With particular reference to jewellery stores it has been noted that these tenants are contemplating decreasing their current footprint as a result of high risk, evident by ongoing robberies, which are in turn affecting the insurance of these stores. In addition, landlords are re-assessing the inclusion of jewellery stores in their tenant-mix due to high risk.

Struggling Retailers

What Now?

With all of these spaces becoming available, pros and cons are evident, i.e.

Pros: • An improvement in a centres tenant-mix is now possible as is the relocation of current tenants; • Opportunities for the revitalisation of space and creating something new and exciting in a centre is viable; • A new lease on life within a centre can be created which can result in stabilised, long-term leasing; and• Increased rentals are possible if large spaces are subdivided as smaller tenants in general pay higher rentals in comparison

to tenants taking up big boxes.

Cons: • Uncertainty amongst shoppers and retailers is evident; • Loss of income may become evident until the vacant space is repurposed; • Reduced feet to the centre as some of the retailers that have closed down were big draw cards; and• Successfully leasing large big boxes can prove to be difficult and can take a number of months, in addition to being a costly

undertaking as many larger retailers require tenant installation allowances from the landlords.

The question now arises as to what can be done with these vacant premises?

Broll insights indicate that:• Vacant spaces are likely to be sub-divided into smaller spaces to be let to smaller tenants;• Other large nationals, international retailers as well as well-established independent retailers now have the opportunity to

be located in prime locations where they previously may not have had a presence; • More consideration could now be given to value offering tenants, especially in the apparel and homeware categories, that

were previously not considered worthy enough to be a part of a certain centre’s tenant-mix;• Large vacant spaces could be repurposed into boutique type gyms, kids play areas, entertainment areas or food courts

where these are currently lacking in existing centres; and• Temporary exhibition spaces could be created for interim additional income until a permanent solution for the repurposing

of this space is achieved.

Concluding Remarks

For more information please email Broll Research [email protected]

The influx of international retailers to SA has been evident over recent years. However, with the number of retailers closing up shop, the country’s low growth and current technical recession as well as the fact that in a number of instances international brands are too expensive for the majority of South African consumers, a slowdown in new international retailers entering the country may become evident. Furthermore, international retailers that still want to enter the SA market may now become more selective with regards to the centres they decide to open up stores in. With the proposed new centre developments (roughly 1.7 million m²) on top of the approximate 24.4million m² of existing formal retail space across the country, the question also arises as to whether there are enough retailers to fill all of these centres as well as provide product differentiation? Only time will tell, if and when these proposed centres materialise.

Whilst some shopping centres still have interest from tenants wanting space within the centre, the retail market in general is currently facing tough market conditions. Retailers are becoming more cautious with regards to expansion plans, lease negotiations have become more challenging, rental negotiations and rent reductions are becoming more evident and a number of retailers (especially marginalised retailers) are struggling to meet their monthly financial commitments. In light of this, the repurposing of vacant space will need to be done in a careful manner, the wants and needs of consumers should be taken into account and as Broll’s previous Retail Snapshots have indicated shoppertainment is now more important within shopping centres than ever before. Retailers which provide the right service, correct product pricing and forward thinking in terms of marketing are expected to grow, thus the opportunities which are now prevalent need to be grasped with both hands by landlords as well as centre management teams. Decisions taken should not be spur of the moment but well thought out plans need to be devised so as to provide the South African retail market with something new, exciting and different.

DisclaimerBroll Property Group has taken every care in the preparation of this report. The sources of information used are believed to be accurate and reliable, but no guarantee of accuracy or completeness can be given. Neither Broll Property Group, nor any CBRE company, nor any director, representative or employee of Broll Property Group, accepts liability for any direct or consequential loss arising from the use of this document or its content. The information and opinions contained in this report are subject to change without notice. No part or parts of this report may be stored in a retrieval system or reproduced or transmitted in any form or by any means, electronic, mechanical, reprographic, recording or otherwise, now known or to be devised, without prior consent from Broll Property Group.