Perhaps unsurprisingly, analyst group IBISWorld named online retail as one of the industries it expects to grow the most over this financial year as more and more consumers spend their money online.
Online retailing offers companies a much more cost-effective way to operate their business, which allows for cheaper products to be offered to consumers. Meanwhile, it also offers consumers a much more convenient way to do their shopping from the comforts of their own home. With the industry to experience growth of 13.3% for the year to come, the question needs to be asked: how will shopping centre operators be affected?
In order to compete with lower prices and convenience offered by the likes of Amazon.com (Nasdaq: AMZN), eBay (Nasdaq: EBAY) and other online stores, traditional retailers such as JB Hi-Fi (ASX: JBH), Myer (ASX: MYR), and Harvey Norman (ASX: HVN) have been forced to increase their own online presence. Whilst this will likely prove to be quite profitable for these companies in the longer term, it reduces the need for so many physical stores to drive revenues.
Should specialty retailers begin to close their stores, property developers and shopping centre operators such as Westfield Group (ASX: WDC) and GPT Group (ASX: GPT) would likely be faced with higher vacancy rates and thus, lower lease revenue.
On the other hand, the internet cannot offer consumers everything that a shopping mall can, such as restaurants, clubs and cinemas. Many consumers also still prefer having the ability to purchase an item and take it away with them immediately, as opposed to waiting for it to be delivered.
As such, Westfield and GPT are both focusing on strengthening their portfolios by divesting in poor performing assets and expanding or developing their most profitable ones. In doing this, a favourable environment can be established that will keep consumers wanting to go back, in which retailers will want to keep their stores open.
Westfield has given investors excellent returns over the last 12 months, but has fallen away as the market has corrected itself. Currently trading at $11.80, the company is well worth your consideration as a core addition to your portfolio, whilst also offering plenty of growth potential.
Although the expansion of online retailing certainly poses a threat for the company, its strong management team and long-term focus should see it continue to give excellent returns.
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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.
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