Retail cannibalisation is becoming a growing reality in South Africa and, until now, it has been all too easy to place the blame for this squarely at the feet of shopping centre developers. However, on closer inspection, Marius Muller, CEO of leading shopping centre investor Pareto, believes this retail cannibalisation is largely being driven by retailers themselves.
“Retail value is being eroded by retailers chasing the top line at the expense of defending what they already have,” says Muller.Muller shared his views on the controversial issue at the South African Council of Shopping Centres (SACSC) Annual Research Conference, held in Sandton Central recently. He was joined by Maurice de Villiers of Woolworths and Craig Coetzee of The Spar Group in a panel discussion on retail cannibalisation moderated by Executive Director at MSCI Phil Barttram.
Cannibalisation refers to a situation where a retailer opens a new store location close to an existing store. When this happens, the existing store loses customers to the new store. Retailers are usually willing to take the risk of cannibalisation if they believe the new store will also attract new customers that do not currently shop at the retailer, boosting combined sales. However, this isn’t always the result.
“Retail value is being eroded by retailers chasing the top line at the expense of defending what they already have,” says Muller. “The unchecked expansion of retailers is, in an increasing number of cases, diluting existing store sales in a significant manner. While retailers’ trading statements may show double-digit turnover growth, like-on-like store growth is often only low- or mid-single-digit, and in some cases there is no growth at all.”
Muller explains that shopping centre developers, investors and funders won’t push the button on new schemes without a high level of retailer commitment.
“Developers regularly put their projects out to the market, but there is no real way to make them work financially without retailers signing up,” explains Muller. “In the case of larger mall developments, usually the big fashion, department, and grocery retailers, all chasing market share, are the first to commit and to give impetus the project. Then, everyone else follows defensively.”
When the race for market share results in cannibalisation, the consequence is ailing retailers trading at rates and rentals that they cannot stick to and the developer or landlord has to take the hit.
“There is talk from retailers that they are changing the way they operate to focus on profitability instead of chasing market share. We don’t see this happening though. The talk isn’t translating into action,” says Muller.
He warns that if someone doesn’t draw the line, retailers won’t achieve the profitability levels they need in their stores and will find themselves on a slippery slope, especially with the economy teetering on recession with less than 1% growth expected this year.
Muller says: “In the US and China, we’ve seen wholesale exits from malls by retailers. Already, there are signs of blood in the local market, but we can still stanch this if retailers can just say ‘no’ to new stores with a higher risk of cannibalisation.”
As South Africa’s premier shopping centre investor and one of the country’s leading retail property industry players, Pareto owns an unmatched portfolio of regional and super-regional shopping centres. Besides being the full owner of Menlyn Park Shopping Centre in the East of Pretoria, Cresta Shopping Centre, Southgate Mall and Value Market, and Westgate Regional Shopping Centre, all in Gauteng; it also wholly owns The Pavilion in Durban; and Mimosa Mall in Bloemfontein. In Cape Town, Pareto co-owns Tyger Valley Shopping Centre. Pareto also holds 25% of Sandton City and its surrounding assets in Sandton Central. These prime properties include three high-rise office blocks, the Sandton Convention Centre and three hotels: Sandton Sun, The InterContinental Johannesburg Sandton Towers and Sandton Garden Court.
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