Michael Baker
January 25, 2012
The Age
ANALYSIS
A new report from Citigroup paints a gloomy outlook for the Australian retail sector in 2012. In essence, it predicts similar conditions to those experienced by retailers last year.
The report, by the group’s retail analysts, also adds its voice to the chorus arguing that the major problems facing retailers are not the ones that retail company executives incessantly talk about.
Mainstream retailers have been at pains to defend their weak sales performance of the past couple of years on grounds that their underperformance was due to factors beyond their control. These include weak consumer confidence, global economic uncertainty and the weather.
Poor consumer confidence, or its close cousin “consumer caution,†are special favourites in the retailer lexicon. But according to the analysts, this amounts to pinning the tail on the wrong part of the donkey. In the report’s own words: “The weakness in retail spending is a retailer’s problem, not a consumer problem.â€
The Citigroup research team, led by Craig Woolford, points out a persistent disconnect between broad consumer spending trends and retail sales. While consumer spending has been growing at a robust 5.7 per cent clip during the past 12 months, retail sales have grown at only 2.1 per cent. Take food out and the picture is even worse. Non-food retail sales have grown by just 1 per cent during the same period.
If consumer spending is growing strongly but discretionary retail trade is not, then it suggests consumers are not really as cautious as widely perceived. Rather, preferences have switched away from retail goods and services sold in Australian stores.
This implies that the retailers themselves are part of the problem. Specifically, they have not done enough through merchandising, pricing and shopping experiences to keep consumers from diverting their resources elsewhere.
The Citigroup report identifies three main culprits that have collectively lowered retail sales by more than an estimated 5 per cent over the past year: foreign travel by Australian residents, e-commerce (much of which isn’t captured in the ABS retail trade survey), and deflation in key retail categories such as electronics.
The report also notes that the savings rate is relatively high compared with historical norms. This reflects caution to some extent, but may also be at least partly the result of disenchantment with the retail offer itself.
Unfortunately, none of the major factors underpinning sluggish retail sales growth are likely to reverse themselves quickly. E-commerce growth, a large net tourist outflow, deflation and robust saving are all set to continue, resulting in a continuation of current retail sales trends.
This assumes to some extent, perhaps ungenerously, that mainstream retailers don’t do very much differently this year to what they did last year.
But if the problem with retail is on the retailer side, rather than the consumer side, then there is room for some hope. Retailers’ fates are in their own hands and they are not simply at the whim of external forces. Investments in technology, new pricing strategies, differentiation and localisation of the merchandise mix, and more prudent management of real estate have proven to be particularly promising avenues for managing costs and restoring same-store sales growth for retailers overseas.
Shopping centre operators will need to chip in too because they are the ones who determine which retailers get a guernsey, the amount of rent they pay and the environment in which they operate. Centres will absolutely have to evolve at a faster rate than they have in the past and with strategic vision rather than piecemeal tinkering around the edges of the leasing formula.
If 2012 is set to repeat last year’s experience, then business as usual is not an option for either retailers or their landlords.
Michael Baker is principal of Baker Consulting and can be reached at michael@mbaker-retail.com and www.mbaker-retail.com.
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