Department stores, in the main, are having a tough time of it and have been for a few years now. In the US, the situation is worse than here with closures commonplace. Andrew Quillfeldt looks at the situation in Australia and concludes with some opportunities for shopping centre owners.

Department stores (including discount department stores have faced structural headwinds at a global level for some time, especially in the United States where department store closures have been significant in the past few years.

In Australia, department store closures have been much more resilient to-date, with only limited impact from store closures and space handbacks. Myer announced a further three store closures in September 2017, while the other groups have been less actively shrinking their store numbers. Nevertheless, we are becoming increasingly cautious around the outlook for department stores in Australia and the potential impact it may have on landlords if there were to be consolidation in this segment.

In the US, department stores now account for just 3.4% of total retail sales (as at December 2017), compared with 5.9% in Australia.

Total department store sales in Australia have been relatively stable since 2009, compared with a persistent decline in the US since 1997.

Retail sales growth for department stores in Australia has remained subdued despite revised business strategies and management restructures. Kmart has been the exception, having grown sales and market share substantially in the past few years and continuing to expand its store network.

Department stores are generally trying to work out how to reverse the structural decline of the sector via a number of strategies:
• Improve the product range and merchandise to make it more appealing to customers and millennials in particular;
• Improve the in-store environment by investing in store refurbishments; • Improve the customer service experience; and
• Grow online distribution channels. The optimal scenario for owners is if these revised business strategies begin to gain traction and improve sales and profitability.

The realistic scenario is that store network rationalisation and space handbacks will continue to occur in the least profitable locations as leases expire.

The downside risk scenario is if there is consolidation in the sector or if one of the five department store chains (Myer, David Jones, Kmart, Target or Big W) were to close or go into voluntary administration.

Kmart is likely to continue to expand its store network via store conversions and new store commitments. David Jones has precommitted to three new stores, but expansion is likely to be fairly limited beyond those commitments. Myer and Target are likely to continue to rationalise their store networks, with potential for some contraction from Big W as well, as leases expire.

Long lease terms clearly provide some buffer for landlords in the case of controlled rationalisation, but in the event of further deterioration in trading conditions and if one department store chain were to close, there would be some vacancy risk for landlords.

The opportunity for landlords will be to develop backfill solutions that increase the overall MAT and foot traffic by redeveloping sections of a shopping centre to include new major tenants, mini-major tenants and specialty stores.

Recent successful examples include Top Ryde City and Westfield Hurstville. Kaufland and Decathalon have begun expanding in Australia and while standalone stores have been pursued to-date, consolidation of department stores presents an opportunity for these and similar tenants to secure large tenancies within major shopping centres.