Property News

Fridge outlets mark hidden growth areas

25 October 2006

Population growth areas are important to the property industry. New residents convert into demand for new housing at a rate of about 2.7 persons a dwelling.

The 6000 net new residents added to metropolitan Adelaide in any given year, therefore, convert into demand for 2200 new homes. This is augmented, however, by a further 1600 new dwellings demanded by new households that have cleaved from the existing household stock.

This equation applied to Melbourne's annual demand for 24,000 new dwellings.

New housing stimulates demand for financial services as well as for fixtures, fittings and furnishings.

This is why property developers as well as the suppliers of bricks, concrete and tiles are well represented in locations such as the Gold Coast.

But also well represented in these lifestyle hotspots are bulky goods retailers. After all, every new dwelling needs a stove, dishwasher, television, carpet, light fittings, refrigerator and the like.

Based on this logic, bulky goods retailers should cluster in areas of rapid population growth. This is certainly the case.

However, large-scale bulky-goods outlets are also popping up in slow-growth cities such as Adelaide.

The number of new households added to Adelaide over the five years to June was 19,000. Brisbane, on the other hand, added 95,000 new households over the same period.

Given this information, why would bulky goods operators develop outlets in Adelaide? Why not just focus on growth areas?

At the end of June, there were about 7.696 million households in Australia. This number is now expanding at a rate of 125,000 a year.

The well being of the property development and construction industry is determined by the rate of household formation. But this logic does not apply to retailers of household durables.

In broad terms, the Australian property industry must deliver in one way or another around 125,000 new dwellings each year.

The suppliers of household durables, on the other hand, must also meet this demand, as well as the demand for the products that are obsolete or is considered unfashionable.

Take, for example, refrigerators. If there are 7.696 million households in Australia, then there is likely to be around 8.5 million domestic refrigerators, allowing for holiday houses and the odd mini-bar in suburban pool-rooms.

There must be a baseload annual demand for about 125,000 refrigerators in new dwellings in Australia.

If you are a seller of refrigerators, then you might like to position yourself in a city with strong population growth.

However, like all electrical products, refrigerators are rendered obsolete after a period of time. The needs of the household change, the old fridge is palmed off to the kids setting up an apartment, and the parents buy themselves the latest and smartest product.

The question then becomes one of the average lifespan of a fridge, before it either breaks down or is superseded. I think that lifespan is about 15 years. This means that in a city like Adelaide, the existing base of 450,000 households would yield an annual replacement market of 30,000 new refrigerators.

The market for new households in Adelaide is about 3800 a year.

If you are a retailer of refrigerators in Adelaide, then your market is split about one-eighth new households and seven-eighths replacement product.

On this basis, you would set up shop in the heart of the replacement market (giving you access to 30,000 potential sales) rather than in a growth area (with access to 3800 sales).

Even if the obsolescence rate for Adelaide refrigerators was 20 years rather than 15, the annual replacement market would drop to just 22,500.

There is still a compelling demographic argument for bulky goods retailers to position themselves closer to the replacement market than to the new dwelling market.

The reason is simple: household formation in Adelaide is 1 per cent whereas the replacement market (at 15 years) is 11 per cent.

Even in fast-growing Brisbane, the rate of household formation at 3 per cent is barely one-quarter of the replacement market.

The replacement market should drive bulky goods store locations.

But, of course, the best strategic location for bulky goods retailers looking to maximise their exposure to potential sales is in middle suburbia at the head of a growth corridor. In such a location, retailers get a grab at both the vast replacement market as well as at the new dwelling market.

Dandenong offers just such a location in Melbourne. So, too, does Cross Roads in Sydney, Mt Gravatt in Brisbane, Salisbury in Adelaide and Stirling in Perth.

In provincial cities, the location of bulky goods outlets is less critical: most parts of even quite large provincial cities can usually be accessed within a 20-minute drive of a development site.

The important point to note from this analysis is that the demand driver for the residential development and construction industry is different to the driver of demand for bulky goods outlets.

These facilities are less dependent on new urban growth areas than you might think.

In fact, the real market for bulky goods outlets over the next 10 years will not be in middle or outer suburbia. It will be on the edge of the inner suburbs.

These locations will offer retailers of refrigerators, and other household durable products, access to an especially rich, dense and fashion-conscious market that has yet to be tapped by competitive retailers.

The difficulty is in securing not only the sites but also the appropriate zoning and approvals, and configuring a development that stacks up with the outrageous cost of land demanded by the vendor.

But this is where the development industry earns its money.

If it was easy, everyone would be doing it.

Bernard Salt is a KPMG partner

bsalt@kpmg.com.au