Big US retailers lease out space in stores as online sales bite, Australian store formats tipped to keep shrinking

Iconic US retailers such as Sears and Home Depot have started offering empty portions of their stores and parking lots to other companies, as retailers downsize stores in reaction to the growing shift to online sales.

There are signs the trend is heading for Australia, with leasing experts saying examples of co-location of complementary retailers with one store, and a general shift towards smaller shopfronts is being driven in part by the rise of online retailing.

The trend in the US is best illustrated by mid-range department store Sears, which also owns the Kmart chain. According to the Wall Street Journal, Sears is letting prospective tenants browse a list of retail spaces available in Sears and Kmart stores across America. Tenants that have signed up range from dentists to small grocery stores.

Similarly, Home Depot is looking to lease parts of its parking lots to fast food franchises and mechanics.

Simon Fonteyn, managing director of leasing research company Leaseinfo.com.au, says the US market is different to Australia in that large retailers who are anchor tenants in a large shopping centre often own the actual land, meaning they have a greater ability to sub-let store space.

In Australia, most large retailers are simply leaseholders, and sub-letting space would require the permission of the landlord, such as Westfield.

However, the idea of big retailers allowing other stores to operate under their roof isn’t completely foreign to Australia. Most department stores, for example, allow other retailers (typically cosmetics and fashion brands) to operate concession outlets in their stores.

“The big department stores have been doing that for years,” Fonteyn says.

Another trend similar to that in the US is co-locating, where a retailer will take out one corner of the store of a complementary retailer.

Fonteyn says this model is particularly popular in the food sector. One example occurred in Sydney, where Krispy Kreme took space in the corner of an Oporto store.

Fonteyn is seeing an overall push towards smaller store formats, sparked partly by the rise of internet sales (although he feels this may have been overdone) and partly by a desire for retailers to cut costs.

However, he also points out that some retailers are seeking to move to smaller stores in shopping centre environments in order to position these stores as “showcases” for their brands. In the new Westfield Sydney centre for example, 35% of the stores leased in stage one were under 60 square metres.

“It’s not necessary any more for a lot of stores to carry these massive ranges. They tend to have only their premium ranges in stock in the shopping centre stores and then use a clearance outlet to sell their seconds or cheaper brands.”

But Fonteyn is quick to point out that the smaller store trend is one the landlords love – the more retailers they can get into a centre, the more tenants they can charge.

“If it was up to the major landlords, the smaller the better. Australian landlords have worked out that retailers are prepared to pay much higher retailers per square metre for a small space.”