Too many cafes: bubble building in F&B retail leasing
The food court is abuzz during a summer’s day at Westfield on Pitt Street, Sydney. Cole Bennetts
Leading leasing agents, retail consultants and valuers are warning of a bubble building in Australia’s booming food and beverage sector as mall landlords like Scentre Group, Vicinity Centres and GPT turn to cafes, restaurants and the latest eating fads to fill the gap created by the collapse of fashion brands.
The explosion of eateries is also hitting the major CBDs, with developments like Lendlease’s Melbourne Square in Docklands and Mirvac’s Riverside Quay on Southbank packed with espresso bars, Asian eateries, juice bars and cafes.
On the major retail strips like Chapel Street in Melbourne and Oxford Street in Sydney, private landlords are also turning to cafes and new burger chains to fill long-vacant shops.
Snigdha Sharma, a consultant who has helped master planning of food and beverage spaces for the likes of Frasers, Dexus and AMP Capital, estimated that F&B now accounted for 20 per cent of space in shopping malls up from about 7 per cent to 8 per cent five years ago.
“It was Mexican outlets, then Poke bowls, frozen yoghurt and bubble tea. Now it’s burgers. But for how long. How can it be sustained? I am aware of one that is already struggling,” said Colliers International retail leasing director Cameron Wakeham. Vicinity Centres
These estimates are born out by ASX-listed Vicinity Centres, owner of malls like Chadstone, Emporium Melbourne and QVB, which said, as part of its 2018 full-year results, that food catering as a proportion of its retail mix had increased a whopping 59 per cent in the five years.
While Ms Sharma said it was hard to say if there was a bubble yet, based on rent abasement assessments she had done for shopping centre owners, F&B operators were starting to feel the pinch.
“You can add more and more F&B but there is only so much of the cake that you slice up. You can keep decorating the cake and get the best retailers in town, but then you see your customers go from 200 one day to 180 the next and then 160 and so on,” she told The Australian Financial Review.
“When leases expire, landlords are looking to squeeze every corner of their malls and make it into F&B,” said Ms Sharma, who is also the owner of a Mad Mex restaurant in South Melbourne’s Clarendon Shopping Centre.
“Operating margins are shrinking and this is where we have to watch out.”
In its most recent survey of the shopping centre owners, JLL found that many had shifted their offering to focus on food, services, entertainment and leisure.
However, JLL head of property and asset management in Australia, Richard Fennell, noted that the increased use of food and beverage tenancies had begun to create competition for existing operators.
“And the expanded offering of the supermarkets has started to result in lower demand from speciality food retailers,” he said.
Official ABS figures show turnover growth for cafes, restaurants and take-aways over the past decade (5.1 per cent a year) and food (4.2 per cent) has outperformed fashion (3.1 per cent) household goods (2.7 per cent) and department stores (0.3 per cent), making a strong case for more F&B outlets.
However, figures reported this year by Westfield owner Scentre Group, which operates the country’s leading mall portfolio, suggest landlords may be already over-saturating their mall with food-based retailers.
Scentre Group reported that food retail sales growth across its portfolio more than halved to 1.3 per cent in the 12 months to June 2018, with food dining sales growth retracting to 1 per cent from 1.7 per cent in the 12 months to December 2017.
The Scentre Group figures also show a speciality occupancy cost of 17.8 per cent (with Vicinity Centres at just under 15 per cent).
Many leasing agents told the Financial Review most cafe operators needed to keep these well under that figure to be profitable.
“Generally food and beverage operators will pay 5-10 per cent of their anticipated turnover in net rent,” Knight Frank leasing director Paul Pellegrino said.
Mr Pellegrino said he believed an over saturation of F&B was occurring in suburban retail strips as seen by the amount of food retailers being integrated into new residential and mixed-use developments.
“This increase in available stock in my opinion has flooded the market with F&B and had a significant effect in the increase in vacancy in our major retail strips. Nearly every new development has an F&B option and with the explosion of cafe culture there is nearly one on every corner,” he said.
Beller Commercial director Fred Nucara, who monitors leasing activity on 29 Melbourne strips, said the market had hit its peak in terms of F&B offering.
“I’m aware of a restaurant owner who signed a seven-year lease on a major Melbourne strip and then sought to exit that lease even before opening,” he said.
In Sydney, Colliers International retail leasing director Cameron Wakeham said a dozen interstate burger chains including Betty’s Kitchen, Huxtaburger and 8Bit Burgers had recently opened their first stores in Sydney. Mr Wakeham said he thought many would not survive.
“It was Mexican outlets, then Poke bowls, frozen yoghurt and bubble tea. Now it’s burgers. But for how long. How can it be sustained? I am aware of one that is already struggling,” he said.
Figures prepared for the Financial Review by CBRE show cafes, restaurants and takeaways now account for more than one in four tenancies in the CBD and one in five on retail strips in Melbourne.
CBRE leasing director Zelman Ainsworth said hospitality operators could afford to pay a rental of 5-10 per cent of their annual turnover and be profitable. But he was less concerned about a bubble than others.
“The demand for F&B services is surging – it’s common for the average millennial to eat out as much as four times a week – so there is plenty of room for more hospitality operators to join the market and/or occupy further space in shopping centres and retail strips, particularly when other retail services are moving online,” he said.
Published 24th October