The increasing product range of Coles & Woolworths has reduced the number of specialty retailers that can "hang-off" a supermarket, potentially making many older neighbourhood centres unattractive investments.
In the early days of neighbourhood shopping centre development, supermarkets generally only sold dry grocery items. The green grocer, butcher, baker and delicatessen sold the fresh produce. Independent butchers, delicatessens and fruit & veg operators are now very rare and need to offer high quality value-add produce to survive whilst bakers have now been largely franchised. The small independent hardware store is extinct as is the haberdashery and neighbourhood fashion retailers.
The relevance of this to an investor is that a neighbourhood supermarket can now only anchor approximately 6 profitable specialty shops instead of 10-12 in days past. Initially this is more of a problem for shopping centre developers than it is for investors, however investors need to be mindful that when buying a neighbourhood centre they are realistic about the number and type of businesses that can profitably service in the long term, and treat vendor rental guarantees on vacant shops with extreme caution.
The other issue affecting older neighbourhood centres is quite often a lack of convenience in terms of road access, car parking and overall layout. Convenience shopping is about the shopper being able to get their groceries from the register to the car as easily as possible preferably not having to walk around the street corner or push a full trolley uphill. Does the centre layout pass the "pregnant mother with a baby on her hip pushing a full trolley of groceries" test? Easy road access from both directions on a main road is very important and good line-of-sight to the shopfront encourages spending.
As shopping centre investors our major interest is secure income. The key ingredients that go into providing that income are:
- The fewer specialty shops the better, as we want the proportion of rent secured by Coles or Woolworths to be as high as possible.
- Good car parking directly in front of the shops, not at the back and preferably with the aisles running towards the shopfronts. Ideally shops wrap around the car parking both for convenience and line-of-sight.
- Vacant shops are vacant for a reason. Either do not pay for them or have a strategy for changing their use.
Changing consumer spending habits and higher living costs mean that shopping centre investors need to pay close attention to tenancy type and mix within a centre. Retailers of generic and long shelf life products are most affected by online shopping - electronics, sporting goods, books, music and general apparel. Groceries, fast food, liquor, hardware, luxury fashion retailers and healthcare providers are much less affected. Convenience based neighbourhood shopping centres are therefore less impacted by online competitors that much larger regional and sub-regional centres.