WHEN Woolworths boss Michael Luscombe warned last week that 2012 would be the retail sector's most challenging year, he wasn't kidding. While the sharemarket has factored in profit downgrades for retailers in 2011, deep sales discounting in July of up to 70 per cent across many retail shops should give consumers, business and the government some food for thought.
Solomon Lew's Premier Investments, which owns Just Jeans, Smiggle, Peter Alexander and Portmans, was the latest listed company to issue a profit downgrade.
It comes as the industry awaits the release next month of a draft report by the Productivity Commission into the competitiveness of Australian retailers, which will look at the rise of online retail. It is also believed to canvass the impact of introducing GST on online imports.
Premier's downgrade follows similar downgrades from Country Road, David Jones, Noni B, JB Hi-Fi and Billabong.
There is no doubt that retailing in Australia is hurting, but like the two-speed economy, retail spending is showing signs of being on different speeds in different places.
CFS Retail Property Trust, which includes shopping centres such as Chatswood Chase in Sydney, Chadstone in Melbourne, Northland and Rockingham, indicated as much yesterday. In light of the negative sentiment surrounding retail sales, it released the trust's headline numbers ahead of its annual results announcement. The breakdown was illuminating.
It showed that retail sales went backwards by 9.1 per cent for department stores for the six months to June 30, and were down 3 per cent for the year. Discount department stores also struggled, with retail sales down 1.6 per cent for the year and mini majors were down 1.1 per cent. But the bright spots were supermarkets and retail speciality shops, both of which managed to lift retail sales over the six-month and 12-month periods.
The figures show that quality shopping centres, particularly quality regional shopping centres, picked up a greater market share of retail sales.
Other figures show that online spending is going gangbusters. There is an estimated $12 billion a year spent on online retail, but it could be much higher than this. Domestic online sales have been growing at 5-10 per cent a year while overseas online sales have been growing at 20-25 per cent a year. For Australian retailers, the presence and power of internet shopping is hard to underplay.
The structural shift has been accelerated by the strong dollar, which is making overseas retail offerings vastly cheaper than those sold in Australia. Other factors contributing to the migration to online shopping were cheaper products, increased broadband penetration and greater comfort with online payment security. For this reason, traditional retail operators need to get their act together and focus on merchandising, cost controls and margin expansion. And they need to clean out their inventory position rather than bringing in cheap rubbish during sales and putting out sales stickers. Shoppers have wised up. It is no longer just about creating efficiencies, it is also about product range, product quality and a lack of magic in much of Australia's retail.
The opening of supermarket group Costco in Sydney and Canberra last week attracted huge crowds. Likewise Zara when it opened in Sydney and Melbourne.
It also goes a long way to explaining the significant increase in overseas travel by Australians. Last week, Melbourne airport announced that out of Melbourne there was a 14.7 per cent increase in the number of Australian passport holders travelling overseas. This is an additional 400,000 people out of Melbourne alone. When David Jones announced a profit downgrade two weeks ago it suggested that the reduced retail spend was due to concerns about the carbon tax. It would seem from the Flight Centre and Melbourne airport stats that Australians are going overseas and doing their high-end shopping.
After two decades of continuous increase, Australia's debt-to-income ratio has stabilised. Over the past two decades, household debt has grown far more rapidly than income, such that the debt-to-disposable income ratio of the Australian household sector has increased by a factor of more than 2.5 times, from 70 per cent of income to 175 per cent of income, according to Goldman Sachs chief economist Tim Toohey. Toohey makes the point that if the household sector takes on debt at a rate more in line with income growth, there won't be a sharp reversal of the savings rate in the near future. But if the debt-to-income ratio is too high and in time decreases, the savings rate will increase and consumption will continue to underperform income growth in the short term.
Whatever the case, there is a structural shift in consumer behaviour between online retail and bricks and mortar. In the case of Premier, its new boss, Mark McInnes, the former head of David Jones, understands the shift and has announced a six-point plan to revamp Premier. It is all about making it efficient, leveraging off the brands and dipping deeper into the online world, which includes using social networking.
This is a strategy that will become a blueprint for other traditional retailers who have been struggling to grapple with the structural shift. It has happened in the media and book industries and it is now gathering momentum in retail.
But it involves pain. The knock-on effect of weak retail sales is profound across the supply chain. It can lead to a build-up of inventory, which is a profit killer for retailers, and result in tighter margins and potential redundancies. For the government, it needs to think about some of the Productivity Commission's recommendations and weigh up whether it is worth introducing tax on online imports to save some jobs.
aferguson@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
Why are Australian retailers issuing profit downgrades and what does it mean for investors?
Many listed retailers (Premier Investments, Country Road, David Jones, Noni B, JB Hi‑Fi, Billabong) have downgraded profits because sales are weakening, discounting has increased and consumers are shifting spending to cheaper online and overseas options. For investors, downgrades can signal margin pressure, inventory risk and potential share-price volatility — it’s a cue to review exposure to weaker retail names and to focus on companies executing clear turnaround or online strategies.
Which parts of the retail sector are performing poorly and which are holding up?
According to CFS Retail Property Trust data, department stores were hit hardest (retail sales down 9.1% over six months to June 30 and down 3% for the year), while discount department stores and mini‑majors also fell. The bright spots were supermarkets and specialty retail shops, which lifted sales over both six‑ and 12‑month periods. Quality regional shopping centres also picked up market share.
How fast is online retail growing in Australia and why does that matter to investors?
The article estimates about $12 billion a year is spent on online retail. Domestic online sales are growing roughly 5–10% a year, while overseas online purchases are expanding faster at 20–25% a year. For investors, the structural shift to online means traditional bricks‑and‑mortar retailers face competition on price and selection — companies that invest in e‑commerce and digital marketing are more likely to protect market share.
How is the strong Australian dollar affecting retail and investor decisions?
A strong dollar has made overseas online offerings cheaper for Australians, accelerating migration to offshore shopping. This reduces sales for domestic retailers and can pressure margins. Investors should consider currency effects on consumer behaviour and on retailers’ competitive positions when assessing earnings risks.
What turnaround steps are some retailers taking and what should investors look for?
Premier Investments’ new boss Mark McInnes has announced a six‑point plan focused on efficiency, leveraging brands and expanding online (including social networking). Investors should look for clear execution: inventory cleanup, cost control, improved merchandising, margin expansion and credible online strategies as signs a retailer can adapt to structural change.
What are the likely supply‑chain and margin impacts of weak retail sales?
Weak retail sales can lead to inventory build‑ups, which hurt profits, squeeze margins and may force redundancies across the supply chain. For investors, this raises the risk of earnings downgrades and increased operational restructuring costs for retailers and suppliers.
Could government policy, like taxing online imports, change the outlook for Australian retailers?
The Productivity Commission is examining retail competitiveness and may consider recommending GST on online imports. Introducing tax on online imports could reduce the price gap between domestic and overseas shopping and help protect some retail jobs, which would be material for investors assessing long‑term sector dynamics.
How do household debt and travel trends affect retail spending and investor expectations?
Goldman Sachs’ Tim Toohey notes household debt‑to‑disposable‑income rose from about 70% to 175% over two decades and has now stabilised. If households prioritise paying down high debt, consumption can underperform income growth. At the same time, increased overseas travel (Melbourne airport reported a 14.7% rise in Australians travelling overseas) is shifting some high‑end shopping offshore. Investors should factor in constrained domestic consumption and cross‑border shopping when modelling retail demand.
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