Supermarkets

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GUEST OBSERVER
It’s reporting season, and over the past few weeks some of Australia’s biggest companies have been releasing information on how they’re travelling.
These reports reflect key themes of how things are going in key sectors of the economy. Over coming days we’re going to report on the results a handful of major companies in key sectors, transport, construction, retail, mining, insurance and banking. Today we look at the retail sector.
Dominant retail giants Wesfarmers - owner of Coles supermarkets - and Woolworths hold a 70 percent of market share of Australia’s fresh food grocery market, but have had contrasting fortunes over the past few years. Half-year results for Wesfarmers and Woolworths for 2016 show very different outlooks.
 
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Meanwhile, the major retail players are continuing to feel the disruptive impact of smaller players such as Aldi and highly competitive market conditions; both will have employ new strategies away from the tried and true defensiveness that has worked in the past.
Wesfarmers reported a net profit after tax of $1.4 billion, up 1.2% since the same time last year, while Woolworths reported a net loss of $973 million after a profit of $1.3 billion. Over the last few years Coles has seen stronger sales growth and comparatively better market share.
By contrast, Woolworth’s strategy problems with its home improvement business, Masters, has been widely ventilated. The company attributed $1.8 billion loss to the costs related to its exit from Masters.
Woolworths' underlying profit was $925 million, still down 33 percent on prior year. Woolworths would hope that its exit from the ultimately costly Masters endeavour will serve as a boost to investor confidence.
Woolworths has also struggled with branding and has seen advertising agency changes over the last few years the most recent being the dropping of Leo Burnett and a return to M&amp;C Saatachi.
Perhaps more revealing to the outlook of the industry are some of the underlying similarities in strategy. Both Woolworths and Wesfarmers emphasised price deflation, cost reduction and further price cutting, as key strategies.
The companies expect highly competitive market conditions and consumers to remain price sensitive, and will largely focus on improving supply chain productivity, through cost reduction. Woolworths is reducing its spending on activities such as marketing, property acquisition and rent as part of $500 million in cost savings during the 2016 financial year (July 2015 to July 2016).
Likewise, Wesfarmers has highlighted similar measures, with cost cutting objectives, the company hopes will allow them to lower their prices in the supermarket even further.
In an industry where profit margins are already low, such intense competition would carry significant risk. If sales don’t meet expectations, the retailers have little room to lower prices when margins are low. As a consequence, covering fixed costs like maintenance and rent of stores becomes increasingly difficult and the likelihood of making a loss is higher.
To some extent these price wars reflect the two retail giants directly competing against each other, but another factor is the disruption caused by new entrant Aldi. The supermarket chain has gained 11% of the market since it came onto the scene in 2002, using its streamlined, low cost supply chain to undercut Woolworths and Wesfarmers on price.
Aldi is a unique player in this space. In the past Coles and Woolworths could exercise their market share and size to squeeze out small producers; but Aldi is a different beast, a global company with a presence in both Europe and the USA.
Aldi may not even be the biggest problem facing the locals, if reports that European retailers such as German retailer LIDL are sizing up the Australian market prove true. LIDL is the fourth biggest retailer in the world, with $128 billion in annual sales. Whatever hold true for Aldi is doubly true for LIDL. Other hypotheticals floated around Danish discounter Netto and UK grovery giant, Tesco.
The traditional defensive strategy against competitors employed by the Aussie giants relies on economies of scale, being larger than your rival and being able leverage this efficiency to deliver a cheaper end product or more controversially to loss lead and force your opponent out of business maintain your market share and eventually maximise your profit.
Woolworths and Coles are falling back on their old ways to try and beat Aldi, the companies' corporate strategy for the most part is focused on a doubling down on the traditional squeeze out all newcomers approach. However Aldi brings global resources to the table that Woolworths and Coles don’t have access to.
In the retail sector Aldi will continue to steal market share from Wesfarmers and Woolworths more so if the companies continue with old strategies and don’t think of a way to innovate the retail space.
 
Shumi Akhtar is senior lecturer, University of Sydney, and can be contacted <a href="https://theconversation.com/profiles/shumi-akhtar-228494" target="_blank">here</a>.
Farida Akhtar is lecturer, Curtin Business School, Curtin University, and can be contacted <a href="https://theconversation.com/profiles/farida-akhtar-228499" target="_blank">here</a>.
Both are authors for The Conversation.
 
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Big retailers feel the pressure of the new challengers

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GUEST OBSERVER
For 25 years, Woolworths told shoppers they were “the fresh food people”. It was a very clear point of difference and delivered the group a sustainable competitive advantage. Any attempt by a competitor to replicate it would have been dismissed as lacking credence; a simple market-follower strategy.
In contrast, Coles appeared lost and without direction, the result of an ever-changing senior leadership team, until Ian McLeod arrived in 2008. Prior to 2000, Coles was “serving us better”, then in 2002 shoppers were “saving everyday”. In 2004, Coles was “delighting their customer” and then things were getting a “little better … every day”. Finally, the more recent “down, down” campaign has aligned with its “quality food costs less at Coles” slogan, cutting through with shoppers.
Somewhere along the way Woolworths was blindsided. The group fell out of favour with suppliers and was distracted by its troubled Masters hardware chain. The turnaround plan suffered a further blow with the news chief executive Grant O'Brien would step down after less than four years in the job.
<h2>Lack of differentiation</h2>
At the same time Coles was closing underperforming stores, <a href="">cutting its range</a> to streamline supply chains, cutting overhead costs and investing heavily in store refurbishments.
The fastest, although not the smartest, way to compete with an aggressive competitor is to replicate; that’s exactly what Woolworths and more recently IGA did. A quick look at Coles', Woolworths' and IGA’s catalogues and stores today illustrates the same deep discounting strategy.
It was clearly an error of judgement for Woolworths to move away from its very successful “fresh food people” position. The “cheap, cheap” campaign confused loyal shoppers and played into the hands of Coles, which was better positioned to deliver on price. With both majors driving a message of “price”, more shoppers also started trailing the German discounter Aldi.
<h2>The lowest price doesn’t necessarily win</h2>
If you are not a discounter, move away from price. While most supermarkets will carry a range of low-priced, generic private-label products to service the discount-shopper segment, sending the message that you sell groceries “cheap, cheap” and “down, down” every day is risky.
Even Metcash-owned IGA has moved away from its “local” campaign to now promote itself as “the same” as the big two with a recently launched “price match” campaign. Price is easily comparable and replicated, and this has been played out across Australian supermarkets over the last few years.
Internationally, grocery discounters like Lidl and Aldi continue to take market share away from the major full-line supermarkets, while the supermarkets continue to discount heavily. The practice of deep, unsustainable and potentially unprofitable deep discounting has even begun to attract criticism for grocers.
However, while Australian supermarkets and independent grocers continue to focus on price, shoppers will continue to shop between all brands for the lowest; loyalty is lost. This is most evident with Aldi, which in Australia has the lowest customer loyalty at 7%, compared to the majors at 25% and IGA at 30%. Supermarket retailing in Australia has become a race to the bottom.
<h2>Fresh – the future fight</h2>
Discounters will always win on price. The smart approach to combating this threat is not to position yourself as the same, but different. A focus on what the discounters don’t offer – such as range, value, service and fresh foods – is a much smarter approach.
The price of a litre of milk or a loaf of bread is easily comparable, whereas “fresh” is not. The fresh food component of a supermarket also delivers more profit than dry groceries. Fresh is where the next battle will be fought and won.
Now that Coles has established its position as the provider of low-priced groceries, its next move will be to focus on the “fresh food” space now vacated by Woolworths, which still appears to be cutting prices.
<h2>The future of convenience</h2>
When shoppers have been conditioned to think about the price they pay each week for a basket of groceries, the franchised grocer model no longer works. Already, experts have suggested that within 10 years Metcash’s independent grocers will no longer feature in the Australian grocery market.
Yet overseas the convenience store model is growing faster than full-line supermarkets. While some of this growth comes from the ability to embed small store footprints into high streets and high-density areas, much of it is the result of major supermarkets moving into this space with their brands: Tesco Metro, Tesco Express, Sainsbury’s Local and Carrefour Metro.
With Roy Morgan’s latest shopper loyalty research illustrating IGA has the most committed shoppers, even with perceived higher prices, IGA would be best to walk away from a price war. If IGA is unable to defend against the growth of Aldi and a re-energised Coles and Woolworths, it is highly probable it will either exit the market or reposition itself upmarket as a premium grocer.
Either way, it is likely that both Woolworths and Coles will look favourably at moving into this space with a chain of Woolworths Metro or Coles Express convenience stores.
Gary Mortimer is senior lecturer, QUT Business School, Queensland University of Technology and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/gary-mortimer-1322" target="_blank">here</a>.
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Australian supermarkets in race to the bottom

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<img src="https://counter.theconversation.edu.au/content/63317/count.gif" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
Supermarkets have moved quickly to capitalise on a growth of inner city dwellers with smaller houses but some retailers like Walmart, Tesco, Morrisons and even Woolworths are back peddling due to the risks.
With the rise of smaller one and two bedroom apartments with smaller kitchens and an abundance of restaurants, bistros and cafes that amass inner-city streets, consumers are accordingly purchasing groceries more frequently, up to three times per week and in smaller volumes.
Convenience store growth, online grocery sales and the aggressive expansion of discounters like Aldi, have progressively changed shopping behaviour, encouraging regular top-up shopping rather than weekly one-stop shops. As a result, the big four UK grocery retailers now run more convenience stores like Tesco Express, Tesco Metro, Sainsbury’s Local and M Local, than full-line supermarkets. Woolworths have also dipped their toe cautiously into the convenience market.
<h2>The challenge of convenience</h2>
While the convenience market proposes opportunities for large supermarkets, it also presents risks. The attractiveness of lower build, fit out and leasing costs associated with opening smaller store formats, is weighed against less space and accordingly, less range. Misreading the needs of the local market and getting that range wrong, will negatively impact on sales.
The costs associated with running convenience are significantly higher than large format supermarkets. Wage costs in convenience stores can hover above 13 percent, whereas a full-line supermarket can run on less 9% wages to sales. Waste, shrinkage and other operating expenses are inflated as a result of lower sales.
Competition is ferocious. While a supermarket may compete with another neighbouring supermarket, supermarket run convenience stores may find themselves in direct competition with local delicatessens, bakeries, butcheries, news agencies, all vying for the best locations and customers’ dollar.
<h2>Eating themselves alive</h2>
There are no switching costs in grocery retailing and shoppers today are not mortgaged to any food retailer. This lack of shopper loyalty has driven UK supermarkets to ultimately cannibalise their own sales by rushing to open smaller format stores.
By opening convenience stores on high streets, transit hubs and inner-city areas, the supermarkets have encouraged consumers to shop more frequently for groceries, rather than doing the one big weekly shop.
Today, shoppers now pop into the convenience store to purchase their evening meal on the way home from work, shop in a supermarket for non-perishable foods and then drop into a discounter like Aldi for a bargains. While a move into convenience and smaller store formats make sense, supermarkets should be aware of the risks ever present.
<h2>Abandoning the small store strategy</h2>
In response to an aggressive rollout of small format stores and the protracted price wars, Tesco announced it would review its fleet of stores. It closed 43, 18 of which were Tesco Express convenience stores and 12 smaller Tesco Metro urban stores. Similarly, UK grocery chain Morrisons also moved to closed around 10 convenience stores.
In the US, Walmart announced the closure [over 100 Walmart Express stores] [https://blog.walmart.com/business/20160115/doug-mcmillon-answers-questions-about-sharpened-focus-on-stores], citing a return to the big retail store format.
Here in Australia, four Woolworths metro stores are targeted for closure with the renewal of leases of a further five stores in jeopardy.
It appears Woolworths CEO Brad Banducci has taken a leaf out of the play bookof Morrisons' Chairman Andy Higginson’s , who said he now wants Morrisons to focus on its supermarkets. Banducci’s briefing to the market illustrated a returned focus on Woolworths’ core business of supermarkets and liquor.
The strategy involved slashing ranges of tiered private label products, closing under performing stores, [increasing productivity and cutting costs.] [https://www.smh.com.au/business/retail/woolworths-ceo-brad-banducci-unveils-growth-aspirations-20160606-gpctce.html]. It’s a smart strategy indeed that will lead to a leaner, meaner, agile Woolworths in the years ahead.
Gary Mortimer is associate professor, Queensland University of Technology and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/gary-mortimer-1322" target="_blank">here</a>.
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Big retailers are realising the risk of moving into convenience stores

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A recently opened boutique grocer in Sydney’s Milsons Point has been listed with $5.5 million hopes.
The property at 88 Alfred Street is run by QE Foodstores and is the group’s ninth offering, with other stores in Balmain, Camperdown, Darlinghurst, Newtown, Randwick, Waterloo and Waverley.
It is set to go under the hammer in early November.
Interest is expected from local, interstate and offshore investors, said Savills Australia’s David Hickey, Tom Tuxworth and Nick Tuxworth.
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/10/10/88%20Andrew%20Street%20Milsons%20Point%20-%20internal%203.jpg" alt="">
“The new 10-year lease with two five-year options to renew and strong annual increases will attract buyers from local, national and international markets looking for secure, super-prime investments in the sub-$10 million category,” Hickey said.
“Throughout 2018, we have seen a weight of capital chasing retail properties in prime locations, particularly in highly populated and affluent inner-urban and suburban areas.
“Investors are certainly looking for quality over quantity in the current market, and 88 Alfred Street fits that category.” 
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He said QE Foodstores owners had recognised a gap in the Lower North Shore retail market for a boutique grocery store.
“QE Foodstores took a strategic view on the local Milsons Point, Kirribilli, McMahons Point and Blues Point precinct when they noticed the community had been starved of a quality supermarket for a very long period of time,” Mr Hickey said.
“The business decided to venture to Sydney’s North Shore and open its ninth grocery store to cater to this pent-up demand for fresh, quality and artisan produce.
“At 88 Alfred Street, the store benefits from being situated in Sydney’s second most-liveable suburb, only a 10-minute walk from the Sydney CBD and North Sydney.
“These shoppers demand personalisation, special services and quality products, which is what QE Foodstores has strived to deliver since opening its first store 16 years ago,” he said.
“The owners’ goal is to keep growing and provide a great range of products and services to many more Sydney neighbourhoods.
“They are constantly on the lookout for new sites in the inner city and east, and they’re now very seriously considering additional sites on the Lower North Shore.”
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Boutique Milson's Point supermarket set for auction 

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SUPA IGA Doonside, a freestanding supermarket in an established suburb west of Sydney's Blacktown, has sold for $14,750,000 via an expressions of interest campaign.
A private investor bought the property on an initial yield of 6.1 percent, said selling agents Steven Lerche and Pat De Maria of Savills.
“The opportunity to secure a supermarket with both a net lease structure and built in rental growth is a rare prospect and therefore resulted in overwhelming interest from local, interstate and overseas investors," Lerche said.
The property has a gross leasable area of 4,402.3 square metres and is 100 percent leased to a wholly owned subsidiary of ASX-listed Metcash Limited, expiring in 2024 with a 10-year option. There are an additional four internal sub-lease tenancies. 
The centre sits on a site area of 15,300 square metres with on grade parking for about 224 vehicles.
Its location also allows for future redevelopment due to its B2 Local Centre Zoning allowing for a multitude of uses subject to council approval.
The Doonside suburb is 40 km west of Sydney’s CBD.
The centre is close to the junction of the M4 Western Motorway and the M7 Westlink. 
“The infrastructure planned for the Greater Western Sydney Region will result in a windfall for Doonside. With the release of designated development land throughout the North West corridor it will allow for further business and housing to be built for the area surrounding Doonside,” added Lerche.
Across the country, offers are due today on a fully leased neighbourhood shopping centre in Swan View that comes with an IGA store.
It is the first neighbourhood shopping centre to head to market this year, and includes a centre anchored by as 1204sq m IGA Supermarket, a Caltex Service Station, 10 specialty retail shops and four ATMs. 
The IGA Supermarket is on a 20-year lease, not expiring until 2028, and the total estimated net income exceeds $1.1 million per annum.
It is listed through Colliers International and Savills.
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Private investor snaps up SUPA IGA in Doonside for $14.75 million

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Coles has placed its newly developed Coburg North Village shopping centre — anchored by a flagship Coles Supermarket — in Melbourne, on the market through Savills.
The 6,283 square metre GLA centre, on the corner of Gaffney and Sussex streets, will by sold by expressions of interest closing July 13.
The deal includes a new 15-year lease to Coles and Liquorland with the property earning an estimated $1.9 million per annum.
According to marketing agents Pat De Maria, Tom Forrest and Steven Lerche, the complex is expected to attract strong local and off-shore interest due to the appeal of retail investments.
Retail property transactions are currently running at $7 billion to $8 billion a year, bolstered by off-shore and institutional investors and compressed yields, according to Savills’ research. 
“The limited availability to purchase quality retail investments, and the high level of investment demand has intensified competition for available assets,’’ De Maria said.
The centre opened in August 2015 and has a flagship full-line ‘market style’ Coles Supermarket and Liquorland of 4,175 square metres. 
There are 15 other retailers, including a medical centre and pharmacy.
Forrest said the centre benefitted from a large main trade area accommodating more than 46,000 residents and was forecast to grow to 52,050 by 2026.
 
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Coles puts flagship Coburg North Village in Melbourne on market

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ALDI have secured a 1500 sqm store site on Sydney's affluent Lower North Shore in Bridgeport Shopping Centre in Mosman.
Set to open in May 2017, ALDI will now be able to fill a major gap in their network with their nearest stores being in Manly, North Sydney and Chatswood.
“ALDI will function as the major customer attraction on Level 1 of the centre – complementing the offer of Harris Farm and IGA on the ground floor," said Bob Walsh, Principal of centre managers and retail leasing agents Ray White Retail. 
“The addition of ALDI will reinforce Bridgepoint's position as the premier shopping centre on the Lower North Shore."
“Bridgepoint is already rated in the top six shopping centres nationally for sales per square metre for centres of this type,” he said.
Bridgepoint Shopping centre is 6800 sqm in size and, in addition to the three major food tenancies, has 35 specialty stores. 
It was acquired by a local property trust through Ray White Retail for $43 million in mid-2011.
The announcement comes as the centre embarks on a $10 million refurbishment that will involve the provision of new enlarged customer amenities, as well as a comprehensive aesthetic upgrade.
Most notably, a new large passenger lift will be installed that will link both retail levels with all car parking levels.
 
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Aldi set to open Mosman store

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A supermarket in the regional Victorian town of Stawell has sold for $5.11 million.
The <a href="https://www.realcommercial.com.au/property-retail-vic-stawell-502257578" target="_blank">126-130 Main Street</a>, Stawell property comprises a total trading area of 1,622 square metres and more than 100 onsite car parks.
The property is anchored by a new 15-year lease to Ritchies SUPA IGA.
It received eight offers during the sales process, according to CBRE’s selling agent Joseph Du Rieu.
Du Rieu, who brokered the sale with Kevin Tong and Justin Dowers, said the sale – reflecting an initial yield of 5.82% – is a sign of the strength of Victoria’s retail investment market.
“Although there have been well publicised concerns around the potential increased cost of debt in the coming months, this transaction highlights the strength of the current buyer market and is further evidence of investors taking a long term position on these supermarkets,” he said.
“We were blown away by the response for this property from the 90 plus buyers who enquired, particularly given the location in a township where the permanent population is less than 10,000 people.
“Given that yields of 5% have typically been reserved for supermarkets operated by Coles or Woolworths, we feel this is a very strong result and a sign of the current market environment.”
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Stawell IGA supermarket sells for $5.11 million

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A private owner has placed his Woolworths and Big W anchored sub-regional retail centre in the Upper Hunter Region – Muswellbrook Marketplace – up for sale in a move calculated to take advantage of a strong retail investment market.
The single-level mall at 72-78 Brook Street is the single largest landholding in the regional city’s CBD. 
The mall comprises 12,838 sqm of building area on 1.65 hectares.
The Centre includes a Woolworths Supermarket, Big W DDS, three mini majors and 28 specialty stores, and offers an estimated fully leased net annual income of $2.99 million, according to listing agents Steven Lerche and Andrew Palmer of Savills.
The property will be sold by expressions of interest closing March 8.
Lerche said he expected strong interest from investors given the dearth of sub-regional shopping centre assets currently available and particularly those which could offer such significant value add potential. 
“Obviously, Muswellbrook Marketplace offers exceptional income security through Woolworths Limited and Big W et al, but it also offers investors significant scope to add value through a refurbishment and remix and that is going to be particularly attractive to investors in what is set to be a busy 2017,’’ Lerche said.   
According to Savills Research, investors spent $6.5 billion on retail assets nationally in 2016, including $1.94 billion in NSW, pushing yields in some instances below 5 percent.
Lerche said all indications were that demand for well-located assets with strong lease profiles, would be as strong or greater in 2017.
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Muswellbrook marketplace in Upper Hunter region hits the market    

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A neighbourhood centre anchored by Woolworths and Aldi in Brisbane’s northern suburb of Warner has been listed for sale.
MarketPlace Warner is a ‘best in class’ shopping centre, with the Woolworths supermarket believed to be one of the best performing Woolworths in Queensland by MAT, with turnover well above Urbis benchmarks for a double supermarket anchored shopping centre.
It is being marketed by JLL through an expressions of interest campaign closing July 27. 
The listing agents are JLL’s Jacob Swan and Sam Hatcher.
Swan said neighbourhood shopping centres remained tightly held with only $347.6 million transacted this year, compared to a total of $1.6 billion in 2016. 
“Interestingly, of the 15 transactions that have occurred this year, nine have been in Queensland, highlighting investor confidence within Queensland’s retail market,” he said.  
He said private investors, syndicators and funds management groups were still actively seeking to invest in neighbourhood shopping centres, with competition for quality centres remaining strong.
“The defensive nature of these non-discretionary-based assets continues to appeal to the market.”
“The low-volatility of the spending profile within prime neighbourhood centres presents an ideal vehicle for capital preservation, while also providing a stable and attractive running yield.”
<a href="https://www.propertyobserver.com.au/images/2017/06/28/Woolies1.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/06/28/Woolies1.png" alt="">
The shopping centre was redeveloped in 2014 to include an upgraded Woolworths supermarket spread on 4,485 sqm, a new Aldi supermarket and 37 other stores.
The site area is about 6.5 ha. 
The offering also includes a freestanding development pad site of 2,456 sqm, freestanding Goodstart Early Learning Child care and an adjoining balance land component of 4,305 sqm.  The centre provides a total combined GLA of 11,477 sqm.
JLL’s Sam Hatcher said there was significant growth to be had locally.
“We see growth in the retail spend and rental profile being realised through a large population of almost 70,000 in the Main Trade Area, projected to increase at 1.7% to 87,280 persons by 2036. In addition there are a total of 712 new dwellings under construction in the catchment/region, due to be completed in 2020.”
Total trade area retail expenditure is estimated at $905.5 million and is projected to grow to $2.3 billion by 2036, an average growth rate of 4.6%, he added.
 
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