January sales: a perfect storm of local and international pressures

marcs

By Adrian Clerici, partner and executive director of business advisory and assurance at services firm, Pitcher Partners.

Australia’s retail sector is looking miserable. Retail companies reporting one of the worst January results in recent history, and Australian retail stalwarts Marcs and David Lawrence have entered administration.

It’s been a pretty bad couple of months all around – December trade figures will show anaemic growth for most retail categories, especially fashion and with the exception of electrical goods. Preliminary data being provided by those in retail sector suggests that for some shopping centres foot traffic in January is down over 10 per cent on this time last year.

This is a significant drop that will be concerning most retailers, large and small along with shopping centre owners. Major Australian retailers are privately, and not so privately, reporting a very flat summer with January being significantly lower than last the same time last year.

Therefore, perhaps unsurprisingly we hear Marcs and David Lawrence have called in the administrators with insolvency practitioners reporting significant enquirers from retailers about their services.

Over the December/January period we’ve lost Payless Shoes, Howards Storage and Pumpkin Patch. When you look at retail trade figures from the period, it becomes pretty clear that slow sales and decreased revenue forecasts have pushed these retailers over the edge.

The usual source of blame for an Australian retail slump is strong competition from international retailers, instore and online. In part, that’s certainly true – it’s becoming increasingly difficult for Australian brands like Marcs and David Lawrence to compete with newer international entrants like Zara and H&M, which offer greater variety and more competitive pricing as a result of global economies of scale.

The shift to online retail has likely also hurt Australian retail fashion brands, broadening choice and accessibility of products and increasing competition for the same consumer dollar. More retailers are competing over the same consumer dollar pie, but the pie isn’t getting any bigger.

But to properly understand what’s going on with Australian retail we need to look a little broader than international competition. Other local and international factors have combined to result in a perfect storm of bad retail trading conditions.

Christmas, shopping, retail

Retailers started discounting earlier than usual to combat overseas online events

Christmas was intensely competitive, with shoppers confronted by sales of increasing magnitude at every opportunity, and with discounting starting even earlier than usual to compete with US Black Friday sales in November. January figures, in retail as in life, will show a hangover from Christmas with shoppers having reached peak sales fatigue. December’s unusual weather probably didn’t help matters either.

Looking at broader economic conditions, this has been a long time coming. The Australian dollar has devalued 25 per cent in the past three years but prices broadly have not increased, so the consumer has been winning. Ultimately retailers can’t sustain this sort of margin pressure, and having tightened up all possible cost areas. Those retailers not increasing their volume of sales have started to hit the wall.

Globally, just about every market is looking pretty volatile. Uncertainty over the short, medium and long-term impacts of major upheavals like Brexit and Donald Trump’s ascension to the US presidency are impacting investor and consumer confidence. That volatility and uncertainty has only increased over the December/January period, especially in the lead up to and following Trump’s inauguration.

Australian consumer confidence dropped to an eight-month low in December; we can reasonably assume this has had a bit to do with the month’s low retail sales. In addition to global uncertainty, concerns over unemployment, mortgage interest rates and domestic politics are likely contributory factors. But until global volatility settles down it’s unlikely that we’ll see consumer confidence pick up and retail will suffer as a consequence.

Australian retailer’s woes aren’t unique in that respect; low economic confidence as a result of high volatility is impacting everyone, and predicting sector growth at this stage is a pretty difficult ask.

With that caveat in place, we do think that retail sales will rebound at some point – the question is how many Australian retailers will the current turmoil claim along the way. If December and January are anything to go by, we could be looking at more closures yet.

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Comments

5 comments

  1. Jasoos posted on February 4, 2017

    So the government must take action. Australian retailers closing down means jobs are lost and people employed in retail are unlikely to have other skills to go into other employment outside of retail. The answer is lower the minimum wage significantly for workers in retail because brick and mortar retailers in Australia for the most part cant compete with online retailers and the mostly unskilled workers in retail will either have to be educated or be required to have skills to work in other industries if they want better pay. Why should unskilled or uneducated workers in the retail industry have high pay anyway?, it doesn't happen in other countries. reply

    • Jan Deane posted on February 6, 2017

      It is not fair to reduce the minimum wage significantly, or at all, for retail workers. Despite your comment that they have high pay in comparison to other countries - this may be the case, but our cost of living is much higher in Aust. and this always drives the level of wages. Retail workers deserve to earn a decent level of pay and retailers need to find another method of maintaining sustainability. Not opening so many branches of the same shop would be a start and also introducing more overseas "brands" into an already crowded retail space - what is the point? As the article points out, there is a finite number of dollars in the pot so more shops/brands = smaller proportion of profits to each shop. STOP OPENING MORE SHOPS! Also, landlords have to get real - there are dozens of empty shops along Chapel Street, with many independent shops having been priced out of the market. The only ones that can afford the high rents are the chains so your unique shopping strips, such as Chapel St in its hey day become clones of every other suburban shopping centre with all the usual chains moving in. The last point is that as a shopper ( and i do love to shop), shopping fatigue is the correct term to use. The best Boxing Day sales stock is gone, the dregs are left, same old stuff in the shops until the new season's stock starts arriving - and when it does in Feb, it is too hot to even contemplate trying on winter clothing! I won't be shopping again until March/April. reply

  2. Daniel Healy posted on February 6, 2017

    My wife and I owned a Franchise business for nearly 14 years trading in a regional environment in Nth Qld. Over that period we had some success mainly fueled by the mining boom, ie of 14 years 3 were decent profitable years, the rest we were chasing our tails trying to tread water coping with all the factors mentioned in your article. Our Franchisor stepped in at a opportunistic time and purchased the franchise back for a nominal amount giving us the impression we were not fit to run the business and were the main problem. No field visit was made to our local region other than to take over our business. The ATO should and would have statistics of Retailers going into voluntary receivership, but whilst this is happening on their watch they continue to ask small business to collect 10% GST on all goods whilst they are aware of millions of dollars of imports purchased daily and imported into this country free of GST. So the question I ask our Government today do they actually want Retail in this Country, and if they do what are they doing and how many more Retailers need to fall before they wake up in Parliament to take action to create a fair paying field here.?? We had cut all costs and our table cloth was basically cut smaller than our table itself, which left us working 7 days per week for no pay at all. I don't know too many jobs where you get paid nothing. Not even super. When you start to struggle all of those listed above basically collaborate and look to recycle you from the system. 1. The Australian Tax Department 2. Landlord 3. Franchisor 4. Major Suppliers. 5. The Banks that financed our Retail Venture. What I can say to any person contemplating financing a Franchise in a regional centre in retail is be careful get independent advice and speak to current retailers in the centre you may be venturing into. Buyer Beware. I don't want to be the disgruntled former small business operator franchisee here but I would like to share my experiences with the hope to protect any other young potential investors who may follow our path. I witnessed different Franchisee's meet the same demise as ourselves and basically lose there livelihoods and homes to go with it. Under the current playing field which is tilted uphill against retail small business you are far better off in paid employment where you have no financial risk and you have an employer paying into your superannuation. Leases are negotiated by Franchisors with Landlords which I question the ethics of, as they have a strong relationship with each other ie over 140 stores, I note the department that negotiates the lease also issues the breaches. Advice get a independent company to negotiate your Lease if you can. You can be left paying rent 3 to 4 times higher than a temp tenant neighbouring your shop. These temp shops can reside in shopping centres for up to 3 years. The Leases being advertised as current are often on paper only and can have under the table or underlying rebates etc which alter the actual rent a tenant may be actually paying. This is to uphold shareholder value in the shopping centre. Remember as a Franchisee you may only hold a License to Operate which means you have no power whatsoever with the Landlord ie for rent abatements in difficult circumstances they will deal direct with your Franchisor, who holds the Head Lease. Basically the ball is not in your court here. You will be at the peril of whatever the Landlord and the Franchisor negotiate and decide. Its all good when sales are up and you are a star performer in the system/group but if your region has a economic cyclonic downturn as we experience the mining exodus, worst in History the business that you may have invested a good portion of your life into can be swept from under your feet. All of the above 5 can afford lawyers to represent their interest in your small business. The small business local operator or franchisee has no organised retail union representation to act on behalf in difficult circumstances. I am writing this email to share my experience with others contemplating taking a risk and venturing into small business, retail. One may believe the old adage that if you commit and open and shut the business for its days will be successful however this principle may no longer apply in todays small business Landscape. Those days people sought freehold and it was a cash society. Beware prior to signing any lease the ATO, Landlords, Franchisor's Suppliers Banks, will have zero interest in you if you are working to pay your lease, and you may be left swimming against a current too strong until change is instigated. Daniel Healy Former Franchisee Ph 0429065875 reply

    • Evan posted on February 6, 2017

      Daniel this is by far the best advice and most well written story I have ever read on this site, I have been reading this site since 2010 and all contributors with the exception of the so called "Retail Doctor, Brian Walker" offer good reading. Brian Walker's only interest is to disrespect failed or struggling retailers and to peddle his own business. Inside retail should dispose of Brian Walker and let you write some segments Daniel. reply

  3. Peter klemenc posted on April 21, 2017

    Daniel Healy. Your comments are so true. I have been in property for 31 years and there are alot of sad stories. The truth is there is no one representative for small business. I have heard all the associations rhetoric but none offer the practical services small business need. Politicians do not care about small business and as a business person i think they should hang their heads in shame. Considering what small business contribute to local communities Australia wide. There are easy ways politicians can help but there is no fire in their bellys to do so because big business pulls their chain and most politicians have not run a business with their own money on the line. Courage is what is needed to do this and we dont have leaders with that in this country. They are too busy fighting and blaming each other desperate to keep their own jobs. When drama increases, productivity decreases. reply

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