It is a temptingly simple story that haunts retail: online shopping makes the brick and mortar store redundant. Why leave the house when you have the convenience of browsing and buying from the couch?
However, evidence shows that in fact, people do like leaving the house. Data suggests there is much more to the decline of retail than online shopping.
Firstly, are physical retail spaces really losing appeal? Of the 1,500 commercial transactions captured by CoreLogic so far this year, retail transactions accounted for approximately 27% of sales. Over the last 5 years, the share of retail transactions in the non-residential space has grown against a steady over-all volume of sales.
This suggests that retail sales are still desirable over say, industrial spaces, which could reflect a gradual shift to the service economy.
However, it is less clear whether retail spaces are acquired with the intent of conversion to residential, or to lease as a retail space. Health of potential retail yields depends on location.
In the ACT, retail conditions for brick and mortar turnover increased over 6% in 2016, according to the Australian Bureau of Statistics (ABS). Reporting by the National Australia Bank suggests that the ACT also had the highest per-capita online retail expenditure in this period. Growth in online shopping, and shopfront turnover, are not mutually exclusive.
As indicated by the decline of growth in Western Australia and Queensland, shopfront turnover is likely more impacted by economic conditions.
International visitors have also propped up retail growth in areas like the Sydney CBD. New South Wales had the strongest average turnover of retail growth in the last 5 years, averaging 5% per annum. MasterCard Retail Location Insights data shows that the highest level of transactions in Australia occurs in the Sydney CBD, along Pitt Street.
Perhaps more interesting is the type of retail purchases being made. Graph 2 shows a growth index of transaction types at physical stores across Australia.
The index shows that department stores in Australia are struggling, with the index increasing from 1 to just 1.02 in 7 years. Despite the sluggish growth in department store spending, household consumption remained strong, and was the primary driver of economic growth in the December quarter.
Meanwhile, growth in online sales has outperformed brick and mortar retail sales. This large growth is partly due to the relative newness of online shopping platforms. Experimental estimates from the ABS suggest that as of February 2017, retail trade made up just 3.6% of total retail turnover in Australia, down from a recent recorded peak of 4.1% in November 2016.
The decline in growth of online sales, along with the decline in the growth of department stores begs the question:
What if people are not only buying less in physical stores, but buying less overall?
Consumption patterns highlight the shift toward a more thoughtful, existential spender; one who looks for meaning in life through purchasing authentic experiences like travel or culture, rather than material goods.
Growth in retail turnover is fastest in cafes, restaurants and takeaway food. This taps into something that online shopping can’t always provide: the experience of eating a meal.
In Australia, recreation and culture is the highest component of household expenditure after rent and food. In New South Wales, it has been one of the fastest growing components of household expenditure in the last 5 years.
Research suggests consumers get more happiness from spending their money on experiences over material goods.
But there are moderators to this, as presented in a 2016 paper from the journal of consumer behaviour. Researchers argued that happiness can also be derived from objects that fulfil a psychological need. Specifically, things that help you become more like the person you think you should be.
This doesn’t just mean buying fancy clothes to elevate status; it could be the gift of a rare poetry book to an English literature student.
What do these studies of purchasing and happiness have to do with retail investments?
It suggests that different purchases can create happiness for different people. Retail that is tailored to the local demographic of an area could reduce tenant turnover, and increase sales of goods, keeping the brick and mortar store alive in Australia.
Commercial Research Analyst, CoreLogic
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