Why it’s not going to get better for retailers: Gottliebsen

When Wayne Swan and Joe Hockey berated the banks last November consumers got nervous and buttoned their wallets. They were starting to open their purses again when the full force of Queensland’s floods hit in January this year. Those two events have triggered thousands of retailers around Australia to ask the question: “Where are we heading in the next five years”.

And a lot of them are coming up with answers that are a little unpleasant.

Most of the major retailers are revamping their business models and those that get it right will prosper while those that get it wrong face a tough future.

Myer is lifting its service levels and using the internet as a discount vehicle; Big W is coming to grips with the price onslaught triggered by Kmart; groups like Target will be examining their merchandise mix and how to develop direct internet selling; Bunnings is preparing for the war with Woolworths; and so on.

In addition there are a series of economic and market forces that are going to make life very different for many retailers.

A large number of consumers are doing it tough because of higher interest rates, bigger power bills; petrol, council rates and water.

That’s going to get worse. And it is sucking the discretionary dollar out of middle and low income Australia. In the next year or so it’s almost certain that those forces will be compounded by higher food prices.

And the inflation caused by these events is likely to keep an upward pressure on interest rates. So while consumer expenditure may well be beginning to recover as the flood crisis recedes, a return to buoyant times is not likely. As a result retailers are going to have to be cleverer.

For the last few years non-food retailers have been experiencing deflation because the cost of buying clothing, computers and other goods from China has been falling. Many retailers have found it hard to maintain sales figures because of the lower prices.

But that is beginning to change and we are seeing higher prices from China and retailers are struggling to alter the mix of their product to maintain their margins. At this stage most retailers are reluctant to increase prices because of the affect it will have on the fragile consumer demand.

But there are more China-driven price rises in the pipeline, and so at some point retailers are simply going to have to lift their prices – and that won’t help sales volumes. Of course Coles and Woolworths, as well as the other supermarkets that have been engaged in a price war, also face higher food purchasing prices because of global food scarcity.

Most retailers are operating under labour agreements reached some years ago and in the year or so ahead most agreements will have to be negotiated with new agreements under the new Fair Work Act. Australian retail labor costs are already about twice that of the US.

So higher labor costs will add to the mix affecting margins and then of course the internet is giving Australian consumers a chance to buy products off low cost distributors overseas and not pay GST.

Myer is now starting its internet operation offshore and many others will probably follow but whether they go offshore or stay at home the net will provide more competition for their physical stores.

We are also going to see big changes in the product mix of larger stores. The days of selling DVDs, music and even books in large volumes look numbered as demand for those products goes to online providers.

That means the space that is occupied with these activities will either require different products or be handed back to the shopping centre owners. Shopping centre owners like Westfield have enormous power because they know exactly what the retailer’s turnover and profits are and know that if they push the rent up a little the retailers won’t walk away.

But the above forces are going to make retailers look very carefully at how much space they will need and shopping centres may not have it all their way in the next five years.

Shareholders should be monitoring their companies approach to these changes more closely than simply the quarter by quarter profit announcements.

This article first appeared on Business Spectator.