The pandemic has induced behavioural changes amongst consumers that are likely to stay permanent. This has hit the physical retail and F&B sectors hardest and the industry has to be quick to adapt to this new reality in order to nurture the sector back to recovery, albeit in an evolved form.

Phase 2

CBD Retail & F&B – Weekday

F&B

These are generally suffering because the majority of white-collar workers are still WFH, resulting in low lunch time crowds.

But an overall reduction in office space may not be the case if certain conditions are met. What are these conditions? In brief, we believe they are:

• High end F&B: Very low sales, ranging from 10% to 25% of pre-COVID levels;
• Hawker centres : 70%-80% of pre-COVID sales;
• Take-aways : 30-50% of pre-COVID sales;
• Companies remain undecided as to whether they wish to shrink their space usage or kick the can down the road till there is better visibility on how their industry will function in a Covid world;
• New to market F&B concepts priced <S$16 per meal - depends on the concept, but there is a not an insignificant probability that they are doing extremely well, especially those that were set up just before the lockdown on 7th April 2020. E.g. new sandwich dine-ins and takeaways, new Chinese Mala restaurants
• Dine in restaurants : Generally doing 20% to 60% of pre-COVID level sales
• Bars, Pubs, Bistros – 30% to 50% of ore-COVID sales. Reason: WFH has depleted the office crowd

Retail

• One word to describe them – Kaput! Unless you have a sale e.g. Coach bag sale
• Supermarket – 30% of pre-COVID sales if they are located right in the heart of the CBD. However, some located near Orchard Road are probably doing >100% of pre-COVID sale levels.
• Wine and alcohol retailers – doing a roaring trade. Could be up to 300% of pre-COVID levels because people appear to be consuming more alcohol during this WFH period

Suburban Retail and F&B

They are faring much better than their CBD counterparts but most are still raking in sales significantly below pre-Covid days.High end F&B: Still low sales, ranging from 10% to 25% of pre-COVID levels. Hawker centres : Still about 80% of pre-COVID sales for those selling food catered to labourers. The Malaysian workers have been a source of revenue but the border lock downs are choking that source of demand. However, stalls that sell renowned local food are seeing business back to normal and even exceeding pre-COVID levels. Take-aways : Generally 50%-90% of pre-COVID sales. Some takeaways located in hawker centres are registering revenues slightly above pre-COVID levels. However, the shop must be renowned to begin with. New to market F&B concepts priced <S$12 per meal - depends on the concept, but they are probably around 70-80% of pre-COVID. Dine in restaurants : Generally doing 20% to 60% of pre-COVID level sales. Some more popular (as in they had been popular before COVID) could hit 70% - 80% of sales.Bars, Pubs and Restaurants – Depends on location and concept. For those located in the midst of upper middle income to affluent neighbourhoods, they can be earning supernormal profits. In one instance, the owner told me his takings in July had been 3x pre-COVID levels. Though they have been falling month after month thereafter, they are still at over a multiple of their average takings in 2019. WFH makes residents more willing to fan out from their homes to explore their neighbourhood for food and/or destress.

One word to describe them – Fairing better than the CBD but generally still losing money. Supermarket – 150% of pre-COVID sales if they are located right in the heart of public housing estates AND including their online sales. Wine and alcohol retailers – doing a roaring trade. Could be more than 200% of pre-COVID levels because people appear to be consuming more alcohol during this WFH period.

Some F&B entities were doing well prior to the lockdown (in fact some for decades). However, this time round, they appear to have lost their shine. The crowds that form at the more successful F&B outlets are generally those in their 20s to early 30s. People were initially less price sensitive at F&B joints in the early days of the lockdown. However, as incomes become degraded, price elasticity becomes more pronounced.

Footfall

Footfall numbers will be hard-pressed to return to pre-COVID levels so long as the need to social distance is enforced. The takeaway channel is therefore vital. With incomes falling and unemployment rising, food delivery companies are seeing a decline in activity from the peaks witnessed in the months of April and May. Parents are telling their children now not to order frivolously. Footfall ebbs and flows with some days seeing much greater activity than others (same as our office – some days we have 30% of the workers back while for most of the time, it’s just 15% to 20%). It is difficult to predict the daily flow these days. Whenever helicopter money is disbursed by the government, the crowd emerges in the suburbs. But give it about 10 days and the patronage falls back to pre-payout levels.

The points highlighted above are summarised in the following heatmaps. Table 1A and 1B show the heatmap of revenues by broad tenant types in CBD and Suburban locations. These are the findings obtained after spending weeks soliciting feedback from various retail and F&B operators plus plying the grounds to weed off the weekend-weekday effects.

Rank:

1: ≤ 20% of pre-COVID-19 levels

5: pre- COVID-19 levels

10: double of pre- COVID-19 levels

The heatmaps are likely to change when Singapore’s economy and cross border travel opens further over time. Also, if more landlords swing over to the GTO modus of rental collection, we may see another shift in the retail landscape with recovery coming earlier than if the status quo is maintained. On balance, rents for 2021 may still be biased downwards.

Phase 3

It is early days in this phase and the heatmaps of Tables 1A and 1B have not changed. We do not believe that these colors of the heatmaps will change much unless our borders open up to freer travel. Intuitively, one would expect that the upon the implementation of Phase 3 of our pandemic measures, activity in the retail arena would have risen significantly. However, Google’s mobility report shows otherwise. It is likely that the data has been confounded by the year end school holiday effect which bumped up footfall for the period from 20th December 2020 (school holidays began on the 21st of December, but we brought forward the start date because of the euphoria surrounding the last day of school) to 3rd January 2021. Indeed /the year-end school holidays gave retail and grocery activities a kicker when we see from Table 2 that post-holidays, despite Phase 3 being in force, Google mobility for this category fell 4.8%.

Graph 1 shows that mobility activity for retail and groceries have been rising even during Phase 1 of the lockdown here. To most observers, we believe that they would opine that retail footfall is clawing its way back up to pre-pandemic norms. But the data tells more if we partition it into periods. Analysing by periods where they are major school exams, holidays and other effects, it reveals something more disconcerting: trendline growth towards pre-pandemic norms is slowing and perhaps even reversing!

Graph 2 highlight this effect when we see that for subsequent periods beginning from the left, the trendline showing the improvement in mobility has been declining. It is only during the year end school holidays that we see a revival. However, when school reopening on 4th January, the trend line reversed direction. This is despite the fact that the economy is operating under Phase 3 conditions. There are some possible explanations to this behaviour. We lay down a few.

• People here are getting bored with trips to malls because they are not offering anything exciting given the Covid restrictions e.g. no games and activities, no shows and performances, no singing for the festive season etc.
• People feel that their disposable income has fallen and conserve more after the initial feeling of freedom in the first few weeks of Phase 2.
• Owing to supply chain disruptions, goods and services have gone up in prices. People prefer to order online for durable goods.
• People find spending outdoors e.g. walking, cycling, trekking as an alternative to visiting malls.

There is much more that can be written about the observed mobility pattern. But given the space constraints of this blog, we shall defer it to another time.

Retailers and F&B operators’ response

Let us now separately examine the prospects for retail and F&B in a Covid world.

F&B

However, there could be a possibility that for F&B operators in retail malls, growth in takeaways may be able to offset the decline in foot traffic to their establishments. Indeed Graph 3 shows that the food delivery business is expected to grow strongly over the next 4 years with the Restaurant-to-Consumer segment forecast to increase at a CAGR of 10.5% (2021 to 2024).

However, will this be able to offset the lack of physical interest in going shopping or eating out (dining in)? Prima fascia, yes, but it will take time for the share of online orders to grow to offset the decline in in-situ diners. We say prima fascia because the longer the time it takes for revenues to recover, the probability of market behaviour changing and going against our forecast increases. Returning to our question of how long it will take before F&B revenues recover to 2019 levels. For this, we look at the rate of growth of Restaurant-to-Consumer delivery revenues and this is expected to continue growing at an estimated CAGR of 10.5% from 2020 to 2024. With total F&B sales revenues still down 22.5% YoY in November 2020 and online sales constituting 19.3% of total revenues (please refer to Graph 4), an off the envelop calculation that takes into account the expected growth rates of online (CAGR 10.5% - source: Statista) and dine-in sales (CAGR 5.7% -source: Statista, Savills Research & Consultancy) shows that it will be in the year 2024 when total revenues will return to 2019 November’s figures.

In short, there is light at the end of the tunnel for the F&B sector. However, the industry has to be patient about the recovery that will come mainly from the online sales segment. The takeaways for this sector are:

• The market is active amongst the younger age groups, from secondary school going to those in the mid-30s. These are the Instagram generation and therefore the F&B presented must also be Instagramable.
• F&B outlets in the suburban areas are performing much better than those in the CBD. However, although revenues for some F&B outlets during Phase 2 and Phase 3 have been better than their pre-Covid days, it is not across the board. Much depends on the location e.g. located in middle to upper middle-income areas and the type of F&B offered.
• F&B in the CBD can do as well or even better than pre-Covid days if they cater to the Instagram generation and/or foreigners living within the CBD.
• Online sales is crucial to growing the business moving forward
• It may take till 2024 before the F&B industry as a whole return to their 2019 sales level.
• Given the long lead time recovery, landlords will have to tread carefully in their relation with F&B tenants. To do that, the GTO rental collection model may be the preferred as they would benefit from those whose revenues were never better than before while nursing those whose business has still to recovery back to their pre-Covid norms. If landlords were to continue with a high fixed rental base, then given the long lead time, there is a chance that F&B operators, whether they are prospering or not in this environment, may be tempted to look for alternative platforms to do their business e.g. Central Kitchens. The Platform-to-Consumer sales business is expected to shows a CAGR of 10.9% for the years 2021 to 2024 (source: Statista).
• Given the expansion of online sales, landlords may reduce the average size of F&B space to accommodate a greater variety of concepts in their malls. This will improve the footfalls as well as expand their GTO base to cover more food concepts

Retail

Though the YoY statistics for November 2020 doesn’t quite show it, the retail sector will be harder hit than their F&B counterpart. (Please refer to Graph 6). On a YoY comparison, retail sales excluding motor vehicles fell just 2.9%, much lesser than the 22.5% recorded for the F&B sector. The mild decline does not gel with market feedback where retailers in general have been saying that they are very hard hit by the pandemic even till this day in Phase 3. The explosive growth in online revenues could have partially offset the decline as well as the sharp uptick in supermarket and telecommunication equipment sales.

The continued growth of online sales has not helped both retailers and landlords as well. With user penetration at 69.3% in 2019 and expected to reach 73.2% by 2023, the onslaught of e-commerce will mean radical changes to the space allocated for this segment in a shopping mall. (Please refer to Graph 7 and 8.)

For most sizeable shopping malls, as retail occupies between 60% to 65% of their total net lettable area, landlords will have to be even more watchful of how this sector will perform in the coming years. The pandemic has speeded up the gravitation of shoppers migrating to the online platform thus substitute the need for physical shop fronts.

Unlike their F&B counterparts, there will be greater challenges for retail landlords. While there is light at the end of the tunnel for retailers, but for landlords, their tunnel is more convulated and they will have to wade through a structural shift in shopping channels by taking cognizance of the following;

• Online sales is here to stay and it is unlikely to be overcome by play on words e.g. experiential, big data, Cloud POS, etc. Also, the retailer has to demonstrate to the landlord that his/her concept is survivable in an online shopping world.
• New fangled ideas like data analytics and other IT equipping of malls e.g. store of the future, may not be as effective as they have been thought out to be. Just pure discounting or traditional shopping/F&B vouchers may do a better job. Social media influence remains important.
• The GTO rental collection model may have to be toned down here because Omni marketing channels by the retailer may make it difficult for landlords to keep track of their online sales in their respective malls. The base rental model may be preferred unless the retailer is sensitive to location e.g. branded goods that need to be located in prime Orchard Road malls.
• The mall concept for F&B may lead the way to determine the retail usage. So, if the F&B concept is targeted at the millennials, then so should the retail segment.
• Ultimately, base rents will have to fall. Even without the pandemic, online shopping has been predatory towards traditional retail establishments. The pandemic has simply accelerated the downward reset for base rents.
• Delaying or kicking the can down the road on rental resets is not advisable because given the limited spending power for real time physical shopping, any landlord that moves to lower rents significantly may bite off a chunk of the spending power in a particular location.