Clothing retailers on the rack

Clothing retailers are highly dependent on changes in consumer sentiment and have had a bumpy ride over the last five years. High petrol prices and rising interest rates for much of the period made shoppers think twice about what they spent their money on, but cheap clothes and a strong Australian dollar has kept the cash registers ringing.

The large number of industry participants has ensured that competition remains fierce in all market segments. There has also been increased competition from department stores, which have renewed their focus on clothing, right across the price spectrum. But despite this strong external competition, niche segments in this industry continue to perform well, particularly men’s fashion.

During the five year period ending 2008-09, industry revenue increased by an average annualised real rate of 1.1%. Industry revenue growth has been facilitated by establishment growth, a stronger labour market for much of the last five years and falling apparel prices, which stimulated demand. Over the next year, increased consumer uncertainty may create inventory build-ups and overall profit margins are expected to be down from 2007-08, as retailers are forced to discount prices to attract nervous consumers. The impact of lower interest rates, falling petrol prices and government assistance is also expected to flow through into next year and see that overall revenue growth, while constrained, will remain positive.

Outlook

Belts will be worn tighter early in the outlook, after which major players will continue expanding their presence to compete with department stores. Babies and baby boomers will be key markets for niche operators to target, and a world of shoppers awaits retailers who establish an online store. IBISWorld forecasts industry revenue will grow at an average annualised growth rate of 2.9%.

Despite lower petrol prices, increased consumer uncertainty will weaken a number of clothing retailers that target the upper end of the market. This market segment will be most susceptible to changes in consumer sentiment and purchases are likely to be postponed or forgone altogether. Establishment growth will also slow, reducing the incremental gains to industry revenue while the labour market will continue weakening. Some recovery is expected in the labour market in 2011-12 with unemployment expected to drop. Solid revenue growth is anticipated, but non-essential discretionary spending, particularly on men’s clothing, will be soft.

As with most long term forecasts, growth projections can be altered significantly by a factors that may presently be benign. Factors that may affect industry revenue include the ratification of further Free Trade Agreements (particularly with China), which will essentially reduce wholesale clothing prices, ultimately leading to a reduction in prices at a retail level. A change in taxation thresholds will impact household disposable incomes, which is a significant driver of industry revenue.

Key Success factors for operators in the industry

• Having a good reputation. A strong brand, quality products, good value and superior customer service will ensure that customers keep coming back.
• Ability to control stock on hand. Adequate stock controls are needed in order to reduce inventory costs and increase stock turns.
• Superior financial management and debt management. Cash flow management controls must be in place.
• Having a clear market position. Market positioning projects a clear and consistent image of the company.
• Production of clothes currently favoured by the market. Popular, fashionable styles and brands can be sold at a higher margin. Keeping up with trends also attracts repeat visits from fashion-conscious customers.
• Establishment of brand names. Stocking recognised and in-demand brand names attracts sales and customers into the shop.
• Experienced work force. The quality of staff needs to be high to ensure quality customer service.
• Attractive product presentation. The store layout and display of stock must encourage customers to purchase and reinforce the company image.
• Proximity to key markets. The store needs to be located where there is a high volume of passing traffic.