When the going gets tough
Retailers pining for the good old days of healthy margins and full-employment–era consumer fundamentals are in for a shock if they think that the current retail climate is a largely cyclical phenomenon.
That’s the message from ANZ’s latest retail report, which has cast a sombre tone over the prospect of a retail turnaround anytime in the foreseeable future.
From below decade-average growth in operating profits (1.3 per cent year-on-year in December) and sales (two per cent industry-wide in 2016) to the shedding of more than 40,000 jobs across the sector last year – the picture isn’t pretty.
Granted, the signs of a stagnating consumer economy are there, such as weak wage growth and historically high levels of household debt, but ANZ senior economist Jo Masters is not convinced that a pick up in consumer activity can save the day for Australia’s struggling retail brands.
“An improvement in customer demand just encourages more international players to the market,” she told IRW.
Masters, who maintains that the current state of retail is the new normal, echoed a Deloitte report from earlier this year that found room for significant growth in the number of international competitors Down Under.
According to Deloitte only 16 per cent of the world’s top 250 retailers are currently in Australia, which, given our relatively high margins, makes for an attractive business case for large operators adjusted to low-cost environments.
The disruptive effect of international brands is well-known, and will see price pressures continue to mount until they plateau at globally competitive levels, Master says.
But the current climate has already claimed several retail scalps, especially due to what Masters describes as a structural shift towards services and away from consumer goods pressures the size of the pie.
The most disruptive potential entry is that of e-commerce giant Amazon, which could hit Australian shores by the end of 2017. Analysts have predicted a significant impact on local brands, but retailers themselves are apparently more confident.
A Commonwealth Bank survey of 608 retailers released on Monday found that 49 per cent do not think that Amazon will have an impact on their business, with a further 30 per cent assessing it as a threat and 11 per cent deeming it a significant threat.
Bravado aside, Deloitte Australia’s national retail lead, David White, says that while clients may be projecting strength publically, they are conducting high-level strategy meetings about how to navigate Amazon’s entry.
Answers to the Amazon question are more likely to be partial than complete, but a look at international markets like the UK, where Euromonitor data pins Amazon as the source of 26.5 per cent of total internet retail value, may provide insights.
White says initial reactions to the introduction of Amazon overseas involved trying to fight fire with fire, beefing up investment in online and dropping prices – something that prominent Australian retailers like Gerry Harvey have already indicated they’ll bank on.
But ultimately, White says that strategy merely slows the rot and does not succeed in the long term.
“Retailers have been trying to invest in areas where Amazon can’t compete quite as well; connecting with customers directly – through loyalty or brand in particular,” White explained.
There are, however, indications that differentiation works, particularly when it comes to proprietary brands, as Australian retail stalwart Solomon Lew told investors earlier this week when reporting Smiggle UK’s results.
Lew and Premier managing director Mark McInnes sported a 26.4 per cent in global sales for
the stationery brand last week, a result that was majority-driven by international sales revenue. Premier is particularly bullish on its UK prospects, underpinned by the success of its transactional website.
“We’ve competed with Amazon in the UK, which has a strong foothold in that market. Our Smiggle online sales have gone from strength to strength,” McInnes told investors last week.
Smiggle has now emerged as one of the fastest growing retail brands in the UK, having opened 48 British stores in the last 12 months. Philip Benton, a senior research analyst for Euromonitor in the UK, believes that Smiggle has managed to hit a demographic sweet spot with six to 14-year olds resonating with its omnichannel model.
“Although Smiggle faces tough competition from a variety of online specialists, its focus on a niche consumer group and a strong brand presence, both online and in the high-street, is a unique selling proposition which ensures their competitive edge,” he said.
Hedging with proprietary brands
The company is backing the same proprietary-driven strategy in its hedge against Amazon’s Australian entry, brushing off a recent Credit Suisse report that put its potential earnings losses as high as 22 per cent within five years of any prospective Amazon expansion.
“The retailers who are most vulnerable are retailers who don’t own their own brands or are in commodity categories,” McInnes said. “We are the owners of seven proprietary brands. Unless we sell Peter Alexander to Amazon, Amazon can’t range it.”
But it’s not all roses for Premier, as Citigroup notes the other brands in Lew’s stable aren’t performing nearly as well. Citi analyst Craig Woolford reckons that Smiggle, Peter Alexander and Just Jeans drove the entirety of the brand’s 2.1 per cent like-for-like sales growth in the previous half, with both Portmans and Jacqui E exhibiting declines that are closer to the broader industry.
Citi estimates that more than half of Premier’s profits for the half come down to Smiggle and Peter Alexander alone, signalling the strength of vertical integration but also the weakness of replicable womenswear brands.
But Lew isn’t the only one banking on intellectual property, online retailer Catch Group is backing a similar strategy, having acquired insolvent childrenswear brand Pumpkin Patch for an undisclosed sum last week.
Catch Group CEO Nati Harpaz will now oversee Pumpkin Patch’s transition to an online-only model, telling IRW that the brand’s intellectual property was the key draw card as one part of a wider Amazon battle plan.
Queensland University of Technology associate professor Gary Mortimer says the move maintains a striking similarity to Ruslan Kogan’s Dick Smith purchase, noting that a bolstered brand stable will be key for pureplay retailers looking to stem the Amazon tide.
“While bricks-and-mortar retailers will be to some extent insulated [from Amazon], it is group buying sites, online grocers and pureplay apparel retailers with the most to lose,” Mortimer said. “It will be important for these pureplay retailers to capture brands, like Pumpkin Patch and Dick Smith, as they become available in the market.”
As Masters noted, Australia’s retail landscape is likely just at the beginning of its exposure to international competition, necessitating forward planning and creative business decisions.
Nati Harpaz is the chairman of Octomedia, Inside Retail’s parent company.
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