Armchair Traveller

There is a confusing amount of noise around the performance of the retail industry that sometimes makes it hard for investors to get a confident feel for the way the consumer dollar, and therefore the economy is going.

The retail industry isn’t as bad as, say, hoteliers or property developers in shamelessly twisting facts to support their perceived vested interests, but it’s not uncommon to encounter a fair bit of spin while trying to get a handle on the state of the retail sector. There’s also the problem of the various sectors within retailing sometimes marching to different drums '” household goods running hot while fashion cools, department stores improving while electronics slump, or various combinations of all the above.

Thus it is occasionally helpful to take the unusual step of interviewing a friend, someone you’ve known for too long to suspect anything less than an honest opinion. That’s what I’ve done with Peter Brennan, finance director of furniture retailer and manufacturer Fantastic Holdings, with interesting results.

Far from seeing furniture in a trough as the housing bubble continues to deflate, Brennan reckons the retail market is showing healthy normality. Rents are coming down, container shipping rates from China are down by about 40 per cent, there’s on-going rationalisation as smaller and newer players shut up shop and managing deflation has been a major challenge, but that’s all to be expected.

As you can see in the accompanying video interview, the fundamentals for retail remain strong. But there are a couple of surprises about what’s driving some of the changes.

I’ve long thought our retailers don’t get the recognition they deserve for managing years of deflation. As a simple example, if you run a widget shop and the price of the widgets halves, you have to sell twice as many of them at the same margin just to stop your profit going backwards. Moving that 100 per cent extra volume means you’re running very hard indeed just to stand still.

But of course it’s not as simple as that. The extra volume means more transport and warehouse costs and suddenly logistics become a key factor in determining the success or failure of the business. Peter Brennan believes it’s a major driver towards rationalisation of his industry into just a handful of major players. As usual, such rationalisation is painful with stores closing down and an unusual series of factory fires.

But the former banker also thinks the years of furniture deflation (and, by implication, of most manufactured goods) could be coming to an end with currency the main wild card in retailers’ budget. The possibility that the Australian dollar could retreat and the Chinese Yuan rally is the reason why Fantastic has gone against the general trend '” by maintaining a manufacturing presence here, along with the extra flexibility and logistics benefits that provides. (Yes, there’s that logistics issue again.)

The message that comes through for the investor is one of confidence for the foreseeable future in the domestic economy and a valuable reminder about the importance of picking "best of breed" in any industry.

Disclosure: The Pascoe family happily owns Fantastic shares. The company floated in 1999 at 50 cents and is now trading close to $4 after two one-for-10 bonus issues.