International retailers like Zara, GAP and TopShop are targeting Australia, but existing retailers will carry the cost of their expansion through decreased profit and higher shopping centre leases, according to research from Morgan Stanley.
“Our retail team (and we) believe the global brands will now target expansion in Australia, particularly given their ability to compete aggressively on price, range and fashion/quality against the existing local players,” said Morgan Stanley’s analysts in the report Global Retail Brands: The Saviour for Landlords?.
Morgan Stanley analysts Lou Pirenc, Todd McFarlane and John Meredith said international retailers tend to pay less rent per square metre on longer leases than other tenants, and take up more floor space, making them more difficult to accommodate in shopping centres.
“The generous lease terms these retailers will seek in top centres mean landlords will need to make up the difference from other retailers,” the analysts said.
Morgan Stanley understands Zara has a 15-year lease at an original base rent of $2,800 per square metre at Westfield Sydney, compared to nearby retailers Esprit on a 12-year lease at $3,450 per square metre, Nespresso on a 5-year lease at $6,100 per square metre and Tag Heuer on a 9-year lease at $11,000 per square metre.
Morgan Stanley said their need for more floor space meant global players were only likely to enter Australian shopping centres after they were expanded or refurbished.
The report said global apparel brands, Zara, GAP, Topshop/Topman, H&M, Uniqlo, Victoria’s Secret, Abercrombie & Fitch, and Forever 21 were likely to have 182 potential stores in Australia by 2016 delivering $1.9 billion in sales or 6% marketshare of the apparel market.
Morgan Stanley forecasts that by 2016 international fashion retailers would demand about 160,000 square meters of store space, mostly in the major regional shopping centres.
The report predicts that domestic retailers will suffer a fall in profits as a result of the expansion of the international retail giants.
It highlights David Jones, Pacific Brands, Myer and Premier Investments as “most exposed to these forces” and predicts the new global entrants, internet and private labels will shift $3.6 billion in sales away from the incumbent apparel retailers over the next five years.
“That’s significant in an apparel market worth $30 billion,” the report says.
“We expect the incumbents’ sales to decline at a 2.8% compound annual growth rate over this period.”
Brian Walker, retail specialist at the Retail Doctor, told SmartCompany the Morgan Stanley research was fundamentally probably right.
“I think domestic Australian retail is going through huge shake up and it is in the early stage of it, international retailers have great pre research on our market and on a global scale we are a relatively healthy economy so they are coming to this country in a big way,” says Walker.
“The effect of this is that landlords will have space for them, they are still going to need to make that up in other areas.
“The opportunity for Australian retailers is to be as good, if not better and as compelling in their offer as their international compatriots.”