DMX Asset Management - April 2019
Much has been made of the rise of online shopping, the emergence of Amazon, and the demise of traditional department stores. Given this backdrop, and the current subdued retail environment in Australia, it is easy to come to the conclusion that the glory days of the local shopping centre have well and truly passed.
However, managers of more progressive shopping centres are taking advantage of an opportunity to evolve the centres into genuine community ‘hubs’. Destinations where one can work, be educated, be wined and dined, see a doctor, test drive and buy a car, go to the gym, and have your child minded.
In these cases, what has traditionally been known as a shopping centre, is actually becoming more and more reflective of a ‘living centre’. (Scentre Group (ASX:SCG) in fact began referencing the term “Living Centres” in its recent half year results).
Underpinning this evolution is basic sociology - humans are social creatures, and shopping (living) centres are uniquely positioned to be a ‘hub’ to offer experiences and provide community services far beyond the traditional shopping offering. There is certainly an opportunity for these centres to provide an ‘experience’ that is far more gratifying than simply undertaking an online transaction.
Innovative retailers continue to be keen to be part of this unique community opportunity, with Apple and Tesla producing the highest sales per square foot of any mall tenant in the United States. On the other hand, tired, aging, and increasingly irrelevant department stores are vacating large chunks of floor space. This is providing an opportunity for forward thinking services businesses to take their offering into this powerful ‘live, work, play’ lifestyle destination, and, in doing so, broadening the experiences available to consumers in the ‘hub’.
Across DMXCP’s investment portfolio, we are seeing first hand evidence of this evolution.
Last year Blackwall Limited (ASX:BWF), opened their first WOTSO co-working space at the refurbished Chermside, Brisbane shopping centre. WOTSO Chermside offers open plan workspaces, offices on flexible terms, and event and corporate meeting space for hire all within a Westfield shopping centre. It occupies 1,400sqm of space vacated by a department store major. At the time of the opening, Scentre Group COO, Greg Miles, said “The addition of a new WOSTO co-working facility complements our total offer and reflects Chermside’s evolution into a genuine living centre”. WOTSO is one of Australia’s largest operators of co-working spaces with 16 locations across Asia and Australia. WOTSO Chermside had the fastest uptake of all its new centres – highlighting the genuine demand for such an offering. WOTSO’s turnover is expected to reach $13m this year (up from $6m two years ago), and a partnership with a shopping centre operator has the potential to accelerate WOTSO’s already very strong growth.
After 40 years of operating from high street businesses, Kip McGrath Education Centres Limited (ASX:KME) in April opened a tutoring hub in a Westfield for the first time. With close to 600 centres around the world, Kip McGrath is one of the largest global tutoring businesses. It sees the potential to benefit from the powerful centre foot traffic and the convenience of a mall offering. Intuitively, it makes sense for a parent to utilise the parking options available at a mall and drop their child in for a 60 minute Kip McGrath lesson, while they take advantage of the myriad of other things to do at a mall. As a result, Kip McGrath intends to offer far larger footprints here than its traditional high street offering. Success at Kotara Westfield is likely to lead to further centre openings, to enable Kip McGrath to quickly capture further market share, to build on its existing strong market leading position.
Both of these businesses represent compelling tenants for centre operators, given they are market leading brands that introduce a differentiated service offering to a centre, while they both have very strong track records and balance sheets.
While it is likely to be some time before it is common parlance to say, “just off to the local living centre”, the evolution has certainly begun. Progressive centre owners continue to look at ways to innovate. Many owners are looking at how to better utilise the airspace above their existing centres. While the focus of this is on the potential for apartment development, in city areas where space is at a premium, this could be extended to accommodate further community services such as schools or emergency clinics. Therefore, in the not too distant future, we could potentially see centres further evolving into fully self-contained communities/villages.
It is clear that the evolution of the traditional shopping centre still has some way to go. Meanwhile, those centres that are currently embracing change are providing a broader enriched experience. This benefits consumers, retailers, landlords and the wider community.
And what this means for investors is interesting opportunities through market leading services brands such as WOTSO and Kip McGrath as they develop their businesses and seek global growth opportunities. Key to generating respectable long-term returns is investing with conviction in companies that can ride the waves of disruption and build significant and sustainable business value in the process.