For retail, the real trouble's in store
In the past week the release of a few sets of figures should be keeping department store chiefs and the heads of other retail outfits awake at night. The figures, including GDP, retail sales and trade figures, suggest they should stop with the blame game and start addressing the real problem: consumers are spending but they are spending elsewhere.
The most telling were the June-quarter GDP figures, released on Wednesday, which show total consumption spending rose 4 per cent, yet retail spending grew less than half that at 1.9 per cent. Even more telling was that net expenditure overseas was up a whopping 15 per cent.
In a separate report released by Citi, titled What's in Store, total spending on overseas travel topped $35 billion in the past year, which accounts for 12 per cent of all discretionary spending. It said almost a third of Australians took overseas trips in the past year.
Over the past three years, travel has grown by $7.5 billion and it estimates retail spending was cut by $3.7 billion as a result. It says the growth in travel reduced retail spending by 1.2 per cent a year and was a bigger drain than leakage to offshore online shopping.
It says offshore online sales have increased by $252 per person when comparing 2010 to 2013, while domestic online is up $503, with most of the growth coming at the expense of stores, which, according to Citi, have seen sales down $838 over the same period.
The numbers are sobering and when they are put into the context of the latest ABS figures for retail sales, they look even worse for local retailers. Sales flatlined at 0.1 per cent in July, largely due to a 7.9 per cent fall in sales at department stores month on month and 3.4 per cent year on year, seasonally adjusted.
Even more interesting were the trade figures for July, which were ugly but showed a 2 per cent increase in imports on consumer products including toys, books and leisure goods.
Against this backdrop, the Australian dollar has been falling, which makes imports relatively more expensive, and interest rates are at record lows.
Retailers have blamed everything but themselves for the reduced spending that is plaguing Australian outlets. Their latest excuse is the election. They also continue to blame the GST-free threshold on internet purchases, which allows shoppers to buy overseas goods below $1000 in value with no GST charged. But this doesn't explain why people are continuing to travel overseas despite the fall in the Australian dollar. Nor does it explain why people still want to shop at Bunnings and eat out at restaurants.
David Jones boss Paul Zahra attributed its poor results to weak consumer sentiment and an unseasonably warm winter. The department store chain reported sales in the three months to July went backwards, making it the third consecutive quarter of declines in comparable-store sales.
It helps explain why Citi has put sell recommendations on stocks including David Jones, Billabong, Harvey Norman, JB Hi-Fi, Super Retail Group and Oroton. Myer has a "neutral" recommendation.
While the weather, a strong dollar, the election and the online disadvantage due to the GST-free threshold can all be connected to the lacklustre spending on retail in Australia, particularly in department stores, clearly there are other factors at play.
These factors are having a knock-on effect on property trusts with an exposure to retail. For instance, Westfield Group has been offering up to 10 per cent discounts to new tenants. And while retail has been going backwards and small shops have been closing down like billy-oh due to a lack of foot traffic, international shops have been opening in Australia. The latest is Sweden's H&M, which announced this week it would open one of its biggest stores in the world in Melbourne next year.
In the past few years offshore groups including Topshop, Gap, Zara and Costco have all opened stores in Australia. US department store Nordstrom now counts Australia as its second-biggest foreign market after Canada.
Their success takes market share and dollars away from existing retailers. According to the AFR, in its second year Zara's Australian business generated $107 million in sales revenue and a gross profit margin of 66.7 per cent. Ikea and Costco together divert more than $1 billion in turnover a year away from the coffers of Bunnings, Harvey Norman and the supermarket chains. Speciality stores take foot traffic away from the department stores and offshore department stores are shaping up as formidable competitors.
The brutal reality is price isn't the only reason why customers are spending more online, overseas or in other areas. Service still has a long way to go and so does product range, quality and mix. In addition, retailers need to clean out their inventories rather than bring in cheap products during the sales.
Frequently Asked Questions about this Article…
Recent GDP figures show total consumption spending rose 4% in the June quarter while retail spending grew only 1.9%. The article explains that consumers are simply spending in other areas — notably overseas travel, dining out and home-improvement — which explains why retail growth has lagged behind overall consumption.
Citi’s report noted Australians spent more than $35 billion on overseas travel in the past year (about 12% of discretionary spending). Over three years travel grew by $7.5 billion and is estimated to have reduced retail spending by $3.7 billion — roughly a 1.2% hit to retail sales per year.
Online shopping has contributed — offshore online sales rose about $252 per person (2010–2013) and domestic online grew by about $503 — and store sales fell about $838 per person over the same period. However, Citi says growth in travel was a bigger drain on retail than offshore online purchases, so online shopping is a factor but not the sole explanation.
According to the article, Citi put sell recommendations on David Jones, Billabong, Harvey Norman, JB Hi‑Fi, Super Retail Group and Oroton. Myer received a neutral recommendation.
Department stores are under pressure: ABS retail data showed July sales flat overall, with department store sales down 7.9% month‑on‑month and 3.4% year‑on‑year (seasonally adjusted). David Jones reported three consecutive quarters of comparable‑store sales declines, with management citing weak consumer sentiment and an unseasonably warm winter.
Weak retail and lower foot traffic are forcing landlords to make concessions — the Westfield Group has offered up to 10% discounts to new tenants. Smaller shops have been closing while some international retailers continue to open, shifting the tenant mix and rental dynamics for property trusts exposed to retail.
Offshore brands are taking market share and customer dollars: Zara generated about $107 million in sales in its second year with a high gross margin; Ikea and Costco together divert more than $1 billion a year away from chains such as Bunnings, Harvey Norman and supermarkets. Speciality and offshore department stores are attracting foot traffic that previously supported local department stores.
The article suggests retailers need to focus beyond price — improving customer service, product range, quality and assortment, and clearing outdated inventories rather than flooding stores with cheap sale lines. Addressing these fundamentals is presented as more helpful than blaming external factors like the election or the GST‑free threshold for internet purchases.
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