US retail crisis will hit Australia

ROBERT GOTTLIEBSEN
April 26, 2017
The Australian 

A large number of Australian retailers have modelled their operations on developments in the US but conventional American retailing is in crisis. It will take time, but the US retail crisis will hit Australia because, in addition to Amazon, it was triggered by fundamental American social change, which will spread here.

The Australian housing boom has insulated our retailers from tough times but as the housing boom ends our retailers will experience two simultaneous blows — the full force of American style social change plus Amazon. It will not be a happy experience.

Out of the crisis will come many successful retailers but a lot will die and the high profit/over expansion era for retail malls and shopping centres is coming to an end. 

Again some will proposer but many will be hit very hard. With the help of American Monthly and the Wall Street Journal I will summarise the US disaster and then look at the reasons — first the non-Amazon reasons and then the gorilla.

Australian retailers that sit on their hands are likely to die. The recent optimistic statements two of our retail hero’s Woolworths former boss Roger Corbett and Gerry Harvey of Harvey Norman might lead some retailers into fatal complacency. 

In the US there have been nine retail bankruptcies so far in 2017 — as many as in all of 2016. Department stores including Macy’s, RadioShack Sears Holdings and JC Penney are closing hundreds of locations. Some retailers intend to use the savings created by the closures to increase their efforts to capture more e-commerce spending. Ralph Lauren is closing its flagship Polo store on Fifth Avenue, one of several brands to abandon the iconic thoroughfare. 

In recent times many retail shares have hit new multi-year lows, including Lululemon, Urban Outfitters, and American Eagle.

Apart from the Amazon factor, why is this happening? 

American shoppers used to make several trips to a store before buying expensive items like furniture. As they wandered around on each trip, they were likely to make other small purchases. Now many consumers do all their research online, which means less ambling through shopping centres and making incidental purchases at adjacent stores.

Second, according to Cowen Research, between 1970 and 2015, the number of malls in the U.S. grew at twice the rate of population. The U.S. has 40 per cent more shopping space per capita than Canada, five times more the U.K., and 10 times more than Germany. That means too many US malls and too many retail sores. Adjustment was required. US mall visits declined 50 per cent between 2010 and 2013 and have continued to fall so slashing retail revenues.

Thirdly there has been fundamental social change. During the 1990s and 2000s, coolness in school corridors was defined by the size of the logo emblazoned on a polo shirt. Big brand logos are no longer ‘cool’.

With incomes restrained, consumers have become bargain-hunters so discounters, fast-fashion outlets, and club stores have taken market share from department stores.

In addition, American priorities have changed, in part driven by what attracts attention on social media. Many people are now driven by the experiences that will make the best social media content. Acquiring “stuff” does not win on that front so Americans are spending more of their discretionary dollars on travel and restaurants. Domestic airlines are booming and since 2005, sales at “food services and drinking places” have grown twice as fast as all other retail spending.

Finally Amazon. Amazon is not just another on line shopping operation. Amazon has taken data driven knowledge of each customer to levels not dreamt of by sleepy conventional retailers. Pricing policy has been turned on its head. Suppliers own the stock and set the prices. If their stock does not sell they are charged a ‘holding fee’ so they quickly moves their prices down to the market.

Amazon did not invent new technology. They showed how you can do use it ends