The King has left the building

As professional investment advisers when we look back Australia’s biggest success stories, the Lowy name is right up there. Frank Lowy’s story is truly amazing, born in the former Czechoslovakia, his family lived in a Hungarian ghetto during World War II. After fleeing the Nazi-occupied country, Mr Lowy migrated to Australia in 1952 and founded a smallgoods delivery company. Then he started building shopping centres to service the new need of consumer choice, of course that grew at an incredible pace into the Westfield chain, with centres opening across Australia and the US. Mr Lowy served as the director of the Reserve Bank of Australia several times and knighted by the Queen. Essentially, he is the King of Shopping centres. When the King calls it quits and has left the building, investors need to take note and listen to the underlying message. The retail bricks and mortar shopping world is changing, and changing at an incredible pace, so fast that even the Lowy’s know, it’s time to get out.

One of the reasons for Frank’s call could be that Australian retail sales have been pretty weak recently, even with an unusually large bounce in November last year. According to the ABS, sales increased by just 2.6% in the year to April, continuing the deceleration seen in the past few years. Sales are weak, especially given Australia’s population is increasing at 1.6% p.a. However a trend that I am sure Frank is aware of is that domestic online sales account only for 5% of total retail sales, according to the ABS, but they are currently growing at 32% per annum. Domestic online sales currently account for more than half of total retail sales growth in Australia. A year ago the share was half that, and two years ago it was less than 10%. If you needed a statistic to summarise the disruption currently occurring in Australian retail, it is this. Consumers are becoming more comfortable with the e-commerce and thanks to the Amazons and Alibaba’s, less emphasis is placed on stores but rather on entertainment and the customer experience. So if the customer is in control, what do they want?

What retail will look like in 2030?

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In 2030, the retail store as we know it is dead. The digitization that swept through books, music and travel has blown an equally chill wind through all retail categories. For shoppers, the preferences of millennials and Generation Z have taken precedence, and both demographics now move fluidly from “experiencing” products in stores to ordering them online. Their smartphones and wearables buzz with customized assistance from virtual agents. Surviving retailers are the ones that have embraced digital and envisioned new ways to serve their customers. Physical stores have morphed into lively, immersive environments. They rely on sensors to capture and analyse data in real time, and all boundaries between online and offline shopping have blurred.

Collaboration is the order of the day. Supply chains have moved to starring roles. Digitization has rewritten the rules of competition in every retail function, and after much trial and error, supply chain operations now hum efficiently as a result of connected, automated elements, including inventory, logistics and fleet management systems. Airborne fulfilment centres and drone-launching delivery trucks have closed the last-mile gap.

Change can be daunting, but it brings with it enough opportunities for retailers to move ahead, unconcerned by the gloom that pervades much of the traditional sector.

What the customer will look like in 2030

In 2030, millennials will rule retail. Representing a quarter of the U.S. population, and overtaking baby boomers as the largest generation, their numbers are expected to swell to 95 million by 2030 as young immigrants expand their demographic ranks. The characteristics that define millennials include: A love of convenience. The easier and more effortless the retail experience, the better.

Millennials expect the latest technology to be applied from the time they start researching products, through purchase, shipping and delivery. Convenience will accelerate, powered by the rise of innovative payment methods, such as mobile checkout in the fitting room, and emerging fulfilment technologies (think airborne warehouses A preference for visual and experiential retail. Millennials expect not only immersive and interactive customer journeys but also fun, one-of-a-kind experiences, supported by technologies such as augmented reality (AR). Home improvement chain Lowe’s has been quick out of the gate on AR, taking the wraps off several tools, including an in-store smartphone app that layers a to-do list over a store map and also lets shoppers click on product reviews. Desire for complementary products and services. Based on their expectation for convenience, millennials see services such as banks, dry cleaners and bistros to be natural extensions of retail.

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Disdain for traditional sales events and promotions. By 2030, millennials’ response to time constrained deals will have had a major impact on sale season. For millennials, promotions are digital, communicated one to-one and in real-time via mobile devices instore and online. Store sales events, as a result, will become highly personal and immediate; as shoppers enter a store, they will receive alerts for price breaks on items they purchase regularly or have browsed online. Retailers will use the same avenue to offer discounts on slow-moving inventory. Enthusiasm for content, and lots of it. With attention spans collapsing, it’s imperative for retailers to quickly captivate millennials. The key to success will be custom content. Retailers such as Bloomingdale’s and Sephora already gather images, videos and text and share them with followers on Snapchat Stories. “Food is the new fashion” is the mantra that increasingly guides development. The expression reflects the idea that food has usurped fashion as a force in retail and travel. One example is the fast-growing trend toward healthy eating, driven by millennials’ preferences and government policies to  curb obesity. Food-focused digital platforms that see consumers routinely reading online reviews before choosing restaurants or ordering through food-delivery platforms are on the rise. Quick-service restaurants are upscaling through furniture and technology changes. At the same time, casual-dining restaurants are transitioning to two established formats—fast casual and casual premium.

On the other hand, fine dining is embracing new and niche concepts, such as multisensory experiences. The sector is also adapting itself to provide more accessible dining formats. Transportation Getting into and out of the mall is an important part of the shopping experience—and often a frustrating one, when it comes to parking, safety, and convenience. Here are some approaches that  real-estate developers might consider to improve this part of the experience: Technology-enabled parking, including use of robot parking valets to perform the last-mile parking service and maximize the available parking space. Integrating parking apps and sensors can help shopper’s spot spaces and then get to them. Redesigning car parking to include dedicated e-hailing pick up zones, shared economy parking, and fast-charging stations for electric vehicles. Preparing underground parking space for possible future conversion to retail or commercial space as autonomous vehicles gradually reduce the need for private-car parking. Redesigning entertainment hubs, such as movie theatres, theme parks, and gaming parlours as interactive experiences  with virtual-reality content and immersive experiences where the customer becomes part of the store. By 2018, the millennial generation will comprise the largest online audience, and they will have more buying power than any generation ever. Almost seven in ten say they are influenced by friends’ social-media posts; 83 percent say they trust recommendations by friends and family. They rely on peer recommendations, and increasingly discover products online before going out to shop. But they still want to touch, feel, and explore products before purchasing them. The need, then, is to create a seamless chain between online and on-site shopping. Digital technologies and changing shopping habits are a clear threat to traditional retail business models. But there are positive ways to respond to these trends. To embrace these opportunities, real-estate developers must get closer to consumers and figure out how to meet their evolving wants and needs. That means rethinking the role of the shopping mall, and adapting its strengths to those of the virtual world.

As they battle the rise of e-commerce, Shopping Centres are trying to clear their books of fading centres so they can focus on the most-profitable ones. That’s proving difficult, with just a shallow pool of investors  who are willing to take on a declining mall and even fewer who would pay what the landlords want. Mall giants such as Simon Property Group Inc. are spending billions to update their centres, adding experiences that can’t be found online and reinventing the cavernous spaces left behind by failing department stores. But there’s a growing set of lower-tier malls that have slid too far toward irrelevance to be worth a costly overhaul. In the good old days a shopping centre owner had a complete understanding of the turnover and thus the profitability of the tenant. In many examples the shopping centre has access to the  inancial records and charges accordingly. But e-retailing is going to disturb this balance, as the revenue becomes untraceable, essentially marketing. Telsa has a store in Chadstone Shopping  centre, (Chadstone is Australia’s largest shopping centre that was opened on 3 October 1960) 100% on experience, something that you can’t get online, the Tesla store has no need for storage thus the store layout is substantially different. We can’t access the numbers but we are sure Chadstone doesn’t have a problem with visitors, however we suspect the revenue change has been substantial. But the million dollar question, in fact problem a billion dollar question is how do the charge for the visitors.

Follow the money

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Interesting to us, was Lowy’s decision to retain its stake in Westfield’s technology arm, OneMarket. Listed on the ASX under code OMK, OneMarket has created a retail platform that connects physical retailers with shoppers when they are near stores. It collects Big Data from shoppers and shares this data with retailers to give them a leg up in the fight against Amazon, Alibaba and  bricks and mortar retailers. OneMarket is working with the tech giants Facebook, Google and Apple to connect with shoppers on these platforms. Being chaired by Frank Lowy’s son, and led by former PayPal vice president of global retail Don Kingsborough it is aiming to bring the benefits associated with pure play online retailers such as deep customer knowledge, data analytics, artificial intelligence and targeted advertising to physical retailers. The company makes money by getting retailers and retail property owners to sign up to these services. It has already launched five products; Live Receipts, Shopper Exchange, Shopper Profiles, Shopper Intelligence and Intelligent Parking Technology.

A well know phrase in the finance world by Willie Sutton says “Go where the money is… and go there often.” With that in mind, Frank obviously thinks the money is in using technology to service the bricks and mortar.