By Chris Bedingfield
Much has been written about the decline in the Australian macroeconomic retail environment, particularly for bricks and mortar businesses.
But is it really all doom and gloom for the retail sector? In our view, fear about the demise of physical retail may be overdone.
Despite the hype, the total pure online retail sales is currently just 2 per cent of total sales. Of course, with the arrival of Amazon, online will grow – and quickly. What is not often discussed is that the retail pie will also grow, fu
elled by population growth, general improvements in productivity and price.
This is where demographics become important. Australia’s population has recently surpassed 25 million people and the Australian Bureau of Statistics says the population growth rate will average 1.5 per cent over the next 10 years – making it one of the best population forecast growth rates in the developed world. This shouldn’t be underestimated.
With three simple assumptions, predicting long-term economic growth is relatively easy. And since retail sales generally track economic growth, predicting long-term retail sales should also be relatively easy.
If we assume modest productivity growth of 1 per cent, population growth of 1.5 per cent, and inflation of 2 per cent, retail sales are forecast to increase at around 4.5 per cent over the long term.
Applying this logic to current retail sales, over the next 10 years sales could grow by almost $200 billion from today’s starting point of $320 billion.
The inference is there is plenty of retail sales growth to cater for both online and bricks and mortar.
For example, if we assume ‘pure’ online penetration reaches 20 per cent of total sales (which is aggressive since it currently represents just 2 per cent), around $100 billion of total retail sales will eventually occur online. This still leaves a substantial $80 billion-plus of additional sales through non-‘pure’ online whose business model relies on physical bricks and mortar presence.
Taking this analysis one step further, we expect – as has occurred in the US and UK – that the biggest losers from online retail penetration will be second tier malls, meaning assets best positioned to capture the vast majority of this incremental $80 billion will be best-in-class malls that have more foot traffic and are able to best adapt to the changing retail environment.
That’s substantial growth, considering today the top 20 malls in Australia account for less than $20 billion in retail sales or 6.5 per cent of total sales.
Anyone forming a view on Australian retail and ignoring the demographics is doing it wrong.
Chris Bedingfield is a co-founder of Quay Global Investors, a boutique global listed real estate asset manager.
Article first published in The Sydney Morning Herald: https://www.smh.com.au/business/companies/population-growth-is-the-wind-in-australian-retail-s-sails-20180822-p4zz3y.html?csp=13b0bc865d792e975b492627e81971b7