westfield, the shopping centre is struggling

Budget shopping draws the big spenders

James Kirby
February 1, 2009
WESTFIELD, the shopping centre giant, is struggling. You'd hardly believe it if you had tried to get a car space in your local mega-mall during the week, but all those people looking for a few hours of air-conditioned comfort aren't buying much more than ice creams.

Retail sales are down. The key stress indicator for shopping centres is a ratio called rent-to-sales: when it's low, everyone is happy and sales easily cover the rent; when it's high, both shopkeepers and their landlords are in trouble. The ratio (17 per cent) at Westfield has never been higher.

In other words, all those shops in all those centres are very soon going to start struggling to pay the rent and the manager — Westfield — is going to have to loosen the rack a little bit.

As the rest of the shopping centre sector struggled in recent times, Westfield, boosted by the remarkable reputation of billionaire chairman — and Socceroos supremo — Frank Lowy, seemed untouchable. The collapse of local rival Centro barely hit Westfield; likewise it stood in splendid isolation as copycat operations such as Macquarie Countrywide followed the Lowys into the US shopping centre sector.

Only last week Macquarie Countrywide announced it was selling — at a loss — 30 shopping centres it had clearly overpaid for in regional USA. Until now Lowy has dodged this sort of embarrassment. After all, this is the man who entered a deal to develop a centre at Manhattan's Twin Towers six weeks before the 9/11 attacks and later managed to extract his company from the site without losing a dollar.

But the problem now for Lowy is Westfield's operations are exposed not just to our own ailing if government-supported shopping trends, but equally to offshore shopping in the US and UK where consumer spending has fallen off a cliff.

The market will watch Westfield very closely from here, but the omens don't look good. After announcing a $3 billion drop in the value of its centres and a dividend cut of 9 per cent, Westfield's stock hit its lowest level in five years a few days ago, and the prospect that the Lowys might raise money in the market also overhangs the stock.

Already we are seeing what you might call "spot" problems across retail: the company behind Go-Lo, Crazy Clark's and Sams Warehouse has gone into receivership, while at the top end we are seeing the first signs of real stress with the Herringbone fashion chain going into administration.

But Simon Wheatley, a retail analyst at Goldman Sachs JBWere, says: "I don't think you'll see a lot of closures in the centres. What will happen is the landlords — such as Westfield — will end up helping tenants to stay in business through rebates and other measures — nobody wants empty space in a centre."

Though analysts such as Wheatley expect consumer sales to drop across the board in the coming months as people try to reduce debt and the number of jobless rises to perhaps 8 per cent (from 4.5 per cent), the last recession saw higher-end shopping suffer and lower-end — basic supermarket shopping — fare a lot better.

In fact, the champion stock of the last recession was Woolworths under the legendary Reg Clair (chief executive from 1993 to 1998). Now as we face a possible extended replay of those conditions, Woolworths (also known as Safeway) is looking strong again.

Woolworths, led by Michael Luscombe, has just released its results for the three months to December 31 and they were excellent with an increase of 8 per cent in sales.

But if you want proof that it is bottom-end, well-managed budget stores that will thrive in the months ahead, look no further than budget supermarket Aldi, a privately held German-owned group. Aldi's sales are growing at a spectacular rate of 30 per cent and the low-key group plans to double the network to more than 400 stores. Justin Ganly, managing director at consultants Deep End Services, says "inside the shopping centres you've got to watch Aldi. They started here just a few years ago on highway sites. Back then they couldn't break into the shopping centres … now they're a drawcard."

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