Picture the potential of a “big flat block of land” that attracts more than five million visitors each year. As Region Group, Australia’s largest landlord of convenience-based neighbourhood malls, reimagines retail, new business opportunities abound. But those opportunities also introduce new levels of complexity.
Call it the village square or high street, the agora or piazza – every neighbourhood has a place where people gather to connect with their community and to buy their groceries. In Australia, around 1,200 convenience-based neighbourhood malls are the contemporary interpretation of the ancient village square. Australia’s largest landlord, with a $4.4 billion portfolio of 100-plus malls, is Region Group.
Region spun out of supermarket giant Woolworths in 2012 with the name Shopping Centres Australasia, or SCA. It came with a “skeleton team” and a strategy to outsource “everything” to agents, Chief Operating Officer Mark Fleming told Bernie Devine in the latest instalment of Yardi Proptech Insights.
Last year, Region broke into the ASX100 for the first time and rebranded in a move Mark said “puts us closer to our end customer”.
“We don’t want to be just an operator. We want to be the best operator. That means being the most efficient, low-cost operator, being more customer focused on local communities, and to add value to our assets,” Mark said. To support this ambition, Region has teamed up with Yardi.
A destination for distribution
The convenience-retail segment is advancing rapidly in response to customer demand and technological change. Online food retailing now accounts for 5.7% of all retail spending in Australia. This is simply the latest chapter of remote ordering’s long history, one that covers catalogue, phone and fax ordering, Yardi’s Senior Regional Director for Asia Pacific noted. “Woolworths had drive-through grocery pickup in the 1970s.”
Grocery retailers have many choices for consumer delivery: pickup, kerbside, locker, scheduled, same-day and instant delivery. While choice is appealing to consumers, most grocers opt for one of two distribution models: store-based fulfilment or centralised distribution.
Store-based fulfilment works best in markets like Australia, Mark said. “The reason for that is the last mile. They’ve got efficient supply chains to the store and it’s just that last mile delivery – that’s the expensive bit.”
Density is an obvious consideration. Hong Kong’s most densely populated areas have around 33,000 per square kilometre compared to Melbourne’s 3,000. “The reverse challenge in Hong Kong is getting a truck down a street,” Bernie said.
Australia also has its climate to contend with. “A bit of dry ice” may work for deliveries in two-degree London, but “delivering milk or ice cream from [Sydney’s] Eastern Creek to Palm Beach without refrigeration won’t work,” Mark noted. “That’s why we think store-based fulfilment is the right model.”
Reimagining rental revenue
Store-based fulfilment brings with it new complexities for leases. Traditional leases are usually based on turnover. But as the omnichannel or hybrid model takes hold, the village square is as much logistics hub as it is a retail centre. “Supermarkets now have bigger back-of-houses that are mini distribution centres and many of our other tenants are moving the same way,” Mark said. “How do we measure the sales of the online component? And are they included in the lease or not?”
Supermarkets leases in Australia usually begin with a 10-to-20-year initial term and then 40 years of options. “From the tenant point of view, it is a 10-year commitment. But from the landlord point of view, it’s a 60-year commitment,” Mark observed.
If online grows disproportionately to instore – which it is – then “potentially you have situations where the rent doesn’t grow for 60 years. Think about what the rents were on a supermarket back in 1963.”
New business booms
It’s easy to see why non-rental revenue – or what Region calls “new business” – is set to become a larger portion of its income in the years ahead.
“Five years ago, we would have said, ‘We have a simple business. We lease shops, we collect rent, and we try to control out costs. That’s what we do’.” But now Region is looking at a range of new revenue streams, from renewable energy to electric vehicles, 5G telecommunication towers to big screen advertising and casual mall leasing.
A greater set of services requires process, “to make sure the customer is aware of the service, can request the service, that the service actually gets delivered – and that no one forgets – and finally that no one forgets to include it in the bill,” Bernie said. “All of those things can be gaps where money falls through.” To minimise this risk, successful retail operators are “automating their processes end-to-end.” That is where Yardi excels.
Region’s team has transformed the way it looks at its business. Each shopping centre is not just a bricks-and-mortar retail asset, but a “a big flat block of land with lots of car parks that attracts over five million visitors per annum”, Mark said. Uncovering the hidden value in each asset will create more vibrant retail centres and stronger local communities.
Download the latest episode of the Yardi Proptech Insights program with Bernie Devine or check out our back catalogue.