Are we in the midst of a retail downturn?
It certainly seems that way, with well-known brands JB Hi-Fi, Billabong and David Jones copping sharemarket dives and analyst downgrades amid warnings of lower profits and tough conditions.
Further, the Royal Bank of Scotland says shorting of landlords is on the rise – meaning investors are betting on share price falls for the likes of Westfield, GPT Group and Colonial First State Retail.
SmartCompany has been writing about troubles in retail for some time; the Productivity Commission recently highlighted “challenging” trading conditions and worrying longer-term trends for the sector.
So what’s next for 2012? Forecasting is a mug’s game, but here’s our guess on what the New Year will bring.
It’s fair to say many retailers are relying on a strong Christmas. Although it’s too early to call whether this festive season has delivered, insolvency experts expect the first few months of the New Year – traditionally a good time for liquidators – to deliver in 2012. Reasons for collapses will likely centre on years of weak growth, the growth of online and rents that are no longer commensurate with sales. Going on this year’s retail sales figures, those particularly vulnerable to collapses are in fashion, footwear and jewellery.
With Billabong down a further 13% this morning after yesterday’s 44% plunge, you can bet your bottom dollar that cashed-up and opportunistic businesses will be eyeing the rout and looking to mop up what they can at discount prices.
The silver lining is the doom and gloom should result in cheaper rents. Chapel Street is Melbourne’s premier retail strip but “for lease” signs have become much more common the past couple of years. It’s not a good look, so landlords who have become used to annual rent growth of up to 5% over the last couple of decades will continue to privately lower the bar, subject to shareholder commitments. Expect landlords to be more receptive to a rate cut, or shorter leases. And as Simon Fonteyn of Leasing Information Services has previously pointed out, independent retailers can use their point of difference to their advantage. Landlords will also be taking note of warnings from high-profile retailers Premier Investments and Myer on rents.
Retail is Australia’s second-largest employer, but unless there is a dramatic uplift in sales, chances are it will employ fewer people this time next year.
Don’t get us wrong: the online market is no panacea. The Australian dollar might well fall below a point where it’s no longer as attractive as buying from a shop. The retail taskforce might well find financially viable ways of applying the GST and import duties on purchases below $1,000.
But some online retailers are going gangbusters, and as ANZ pointed out this month, non-store based retail employment soared by 40% in the year to November, and wholesale trade employment lifted 8.7% over the same period. That segment accounts for just 1.6% of all retail workers, but will likely grow in line with growth in online sales.
Cost-cutting is a natural response to lean times, so we expect stores with excess space to trade down to smaller sites where they can – something Premier Retail and Myer has already flagged. At the very least, department stores will need to maximise each inch of floor space they have given their lagging fortunes through 2011.
The big retailers have decided to join ’em this year, as seen by renewed focus on online from Myer, David Jones and Harvey Norman. You only have to walk along shopping strips to see retailers advertising their online presence, betting that an additional sales channel is worth the trouble and probably the way of the future.
The retailers had a win this year with a ruling they could hire high-school students for fewer than three hours during the week, so long as parents agree. But the Australian Retailers Association has its sights on another issue: weekend pay. They argue penalty rates are an anachronism and a disincentive from keeping open on those key trading days. There’s also the point that that many people who work weekends choose or like to do so, and are no more worthy of penalty rates than weekday workers. We’ll be seeing what the review in to Fair Work throws up with interest, but wonder whether the retailers’ push for worker pay-cuts will go the way of Gerry Harvey’s calls for GST on online overseas sales – that is, not far.
We’ve been hearing retailers talk about the end of discounting for some time, but it hasn’t happened yet and is unlikely to do so when tight competition for the consumer dollar continues through another volatile year.
JB Hi-Fi created headlines this year by going the direct-sourcing route; discount department store group Target has also raised eyebrows by flagging it would pay suppliers 5% less to deal with difficult conditions. With every dollar counting, you can bet companies will be looking to cut costs by cutting out the middleman.
Zara and Topshop have been retail success stories this year, grabbing market share from locals with their attractive designs at attractive prices. Australia’s relatively strong economy make the country an attractive spot for international retailers, and will continue to provide competition for locals.
Smart Company is the leading online publication in Australia for free news, information and resources catering to Australia’s entrepreneurs, small and medium business owners and business managers.
