PAVILION KL, one of the largest assets in the listed Pavilion REIT, ended a very challenging 2020 on a high as footfall and sales volume roared back in December — a harbinger perhaps of better times ahead for the retail industry this year.
Whether it was a positive blip or a sustainable uptrend can only be ascertained in the coming months, but the KL mall is taking heart from the return of shoppers after nearly a year of Covid-19 movement restrictions of varying degrees.
“In December, sales and visitors at Pavilion KL just suddenly shot up. This was evident already in the first week of December. I can share with you that for Pavilion KL, traffic went up to almost 80% to 90% [of normal footfall] from a low of nearly 20% to 30% during the latest CMCO (Conditional Movement Control Order) that was implemented in October. In terms of sales, December numbers increased to 70% to 80% from a low of about 20% [of normal sales] in October,” Pavilion KL’s CEO (Retail) Datuk Joyce Yap tells The Edge.
“Overall, surely four good months of good business (January, February, July, December) will not be able to cover for all of 12 months,” she concedes. As conditions are now about the “survival of the fittest”, she anticipates further consolidation in the industry.
The year 2020 has been the worst for retailers since 1987, when Malaysia plunged into a recession.
In the April to June period, the industry suffered a 30.9% contraction year on year — likely the worst quarter ever recorded — as the MCO imposed in mid-March led to a standstill in retail activity for most of the quarter.
Following a partial relaxation and the implementation of a recovery MCO in June, in general, shopping malls enjoyed an increase in footfall and sales, Yap says.
From June to early October, footfall at Pavilion KL reached as high as 75% to 80% while sales recovered to about 50% to 60%, before the third Covid-19 wave hit.
“So we were very confident then that things would recover by November, as November onwards is the peak period for retail. However, the third wave hit Malaysia in October and unfortunately, there was a sharp drop ... Immediately, traffic dropped to 20% to 30%, and so did sales.”
Given the unpredictability of consumer behaviour, coupled with the fast-changing retail environment clouded by the pandemic, Yap believes retailers and mall operators need to be “tactical” in their strategies in the new normal.
Flexibility and speed are crucial, she says.
“Shopping malls and retailers need to apply tactical strategies to increase and entice sales, which means no longer planning long term. Usually, we plan six months ahead, but you actually have to react every week — that is very important. That is a real test of the fitness level for retailers and mall operators.
“Today, consumer behaviour has changed. They are smart shoppers, they check and check and check. So you must offer value. That is when psychology becomes very important. There is also a need to find a niche,” Yap observes.
Some analysts believe the worst is over for the industry.
AmInvestment Bank Bhd in a Dec 24 note upgraded Malaysia’s real estate investment trust (REIT) sector to “overweight” from “neutral”, pointing out that in the next 12 to 18 months, REITs will be broadly on a recovery path as consumer spending and footfall recover.
“While we are aware that any further outbreaks of Covid-19 might still cause bumps to the recovery, earnings visibility has been improving following the encouraging development of vaccines, with vaccinations already beginning in some countries,” it states.
“We believe the REITs under our coverage will stage a firm recovery post-pandemic, especially once international travel is allowed. This is mainly due to their strong market position and brand name, as well as their strategic location in the heart of the city, which give them the advantage of being the ‘chosen malls’ over the neighbourhood malls.”
“While we believe Pavilion REIT (fair value: RM1.84) and YTL Hospitality REIT (FV: RM1.26) will face more challenges in [their] recovery due to the greater reliance on tourist traffic, we remain positive on their long-term outlook as we believe the rebound in footfall will be strong once the travel ban is lifted,” AmInvestment adds.
The pandemic has certainly accelerated the pace of consumers moving to online shopping, although Yap does not believe offline shopping will be replaced.
“They will co-exist. The speed for online business has picked up faster than what we expected before, but I still believe there is a need for offline. It’s important to have online and offline, so customers can go to the outlet and see the quality for themselves,” she reasons.
Yap believes that it is essential for retail business models to “go back to fundamentals” — know your customers, what they want, how to reach them, how to deliver good service to them and how to do repeat purchases.
She reveals that occupancy at Pavilion KL remains at an impressive 97%.
“For the year 2020 and the upcoming next three months, I have 40 new brands opening, which translates into a total of up to 170,000 sq ft,” says Yap.
Best time for savvy retailers and entrepreneurs to get into malls
While occupancy has not been negatively impacted, Yap describes the current situation for mall operators and retailers as “painful”, given that costs are increasing even as revenue is slowing.
“Due to Covid-19, there is an unbudgeted cost that is quite painful and quite high for us,” she says, revealing that the mall’s unexpected costs since the start of the pandemic are about RM3 million.
The unbudgeted costs includes an increased investment in sanitation works, electricity, Covid-19 tests for employees and promotions such as cash rebates to entice shoppers.
Citing the example of higher electricity costs with no accompanying inflow of revenue, Yap says malls are still open during an MCO as they have tenants in essential businesses such as supermarkets and pharmacies. But even though 90% of the other shops are not open, that does not mean they save 90% on electricity costs.
“It doesn’t work that way. The supermarket could be in a separate zone from the pharmacy. We have to keep the mall open and bear the cost. Yes, malls are planned smartly in a way, like, for example, Pavilion has an Entertainment Wing that groups together tenants providing entertainment, but no mall layout is planned for a pandemic,” she says.
In the midst of all the doom and gloom, Yap sees a bright spot for retailers and entrepreneurs to shine.
“If you’re good, smart, cope well and decide well, go knocking at shopping centres because at this moment, they may not only have space for you but they may even work out a feasible rental package with you or they may already have space fitted out for you ready to move in.”
“As the saying goes, in every crisis, there is opportunity.”