It shouldn’t have taken yesterday’s profit warning from Billabong to alert the market that the retail sector is in trouble.
It was obvious over the course of this year that retail conditions have been deteriorating and it was becoming obvious that despite the usual retail optimism, this Christmas period wasn’t going to produce a reversal in their fortunes.
Department stores and speciality retailers alike — witness last week’s shock earnings downgrade from the previously impregnable JB Hi-Fi group — have been struggling against the tide of consumer conservatism and price deflation. Those unprepared — and Billabong and David Jones have admitted to excess inventories — will carry a particularly unpleasant legacy into the New Year.
There is a cyclical element to what is occurring. Households have, ever since the financial crisis erupted in 2008, adopted a safety-first approach, saving at rates not seen for generations. The two Reserve Bank rate cuts haven’t altered that stance.
A sense of unease about the peculiar balance of power in federal parliament and the quality of policy making it is producing may also be a factor. The carbon tax is, of course, on the horizon.
The strength of the dollar also hasn’t helped retailers, given that is has been reflected in price deflation within the intensely competitive environment rather than a lowering of costs and a widening of margins.
Billabong, of course, has the additional problem of having a major exposure to Europe, where the sense of crisis and of impending doom have been escalating month by month.
Beyond the cyclical influences (and accepting that it is a protracted cycle), however, there also appear to be elements of the structural. Online retailing may still represent only a relatively modest proportion of overall retail sales but it does appear to have reached the point of take-off.
Myer’s decision to close some stores and re-think its future stores program is significant. While Myer will still open some new stores, it appears to have decided that in the face of the growth of e-tailing it is going to need to be more proactive and aggressive in managing its portfolio of physical stores, closing some and downsizing others when the opportunity arises.
Myer’s Bernie Brookes, rather than continue to complain about online retailers and the absence of GST on online purchases, has decided to join them and is now aggressively expanding Myer’s online presence.
Solomon Lew’s Premier Investments had already adopted a similar approach, with chief executive Mark McInnes telling Business Spectator earlier this year that he planned to close 50 stores and downsize others, while also building on an already strong Just Group internet strategy and presence.
With weaker business models like Colorado, Border’s and Fletcher Jones, among others, now broken and the bigger retailers rethinking their strategies for responding to the growth in online retailing, the pressure on landlords to end the spiral of ever-increasing rents will continue to grow.
Premier and Myer appear to be taking similar stances in relation to the need to reverse the spiralling cost of their retail spaces, renegotiating deals or walking away from onerous rental agreements when their leases expire and shrinking the size of their store footprints to lower costs where possible. Most of the bigger retailers are also narrowing the range of products offered, particularly in the difficult electrical and white goods segments.
McInnes said it would be a “five to 50-year” change program to get landlords to recognise that the model of ever-increasing rents wasn’t sustainable long-term in the face of the rise and rise of e-tailing. The landlords have the luxury of a product for which demand still outstrips supply.
If all the major retailers follow suit, however, and retail conditions continue to remain depressed, it may not take up to half a century for landlords to recognise that the growth in online retailing doesn’t just threaten their tenants’ business models but also their own.
*This article first appeared on Business Spectator
Since the first supply ships arrived in Botany Bay to bring much-needed goods to the new colony, Australian consumers have been treated like they must be grateful for the retailers and their ludicrously high prices and huge profits.
Oh, and someone told the landlords about this, and they kept increasing their rents?
Is it time for a government subsidy, perhaps?
Over priced items, what did they expect.
Then there is very green shopping centre landlords, who jack up the rents, with no increase in centre foot traffic (eg WestfieldTuggerah, Erina Fair etc).
Then there is the incompetent ACCC who are sleeping as Woolworths and Coles mop up one category after another. They need some retail SMART people there, not career public servants.
Then there is the Reserve bank Board – how any of the RBA Directors that were on the Board in 2008 and before are still there amazes me. They should have been stood down pending fraud investigations / incompetence at the note printing subsidiary.
There is a recession, and its biting, its just mining is masking it, so Swan can dance around smiling pretenting all is ship shape.
Billabong is a brand with label shops in Europe. Its exposed *directly* to European shopping quietus.
DJ’s and Myers are selling domestically, selling import brands and own-brands in Australia.
This is apples and cake. Oranges and Meat. Its not a mashup comparison.
Bill-a-bonged went bust because they over extended and have been in dire trouble since the surf went out.
DJs and Myers bounce around. Its not a one-way story for either of them. Deep discounting has kept people in the door.
I think this is two stories. not one.
The problem for clothing manufacturers and retailers is far deeper than the glib reasons suggested. Clothing manufacturers seems to know nothing about their target markets and what they want or need, so is doomed to fail as people will just wear their old clothes instead of wasting money on what is inappropriate. People will buy what is cheap and nasty instead of expensive and nasty. I think clothing is doing much worse than other retail, and furniture and electrical goods have different reasons for struggling now. How about some analysis of the different industries instead of lumping all of retail together?
Shopping centre owners are the bullying feudal barons of the modern era. In recent days I’ve watched them [b]force[/b] small shops to open late every night til 9pm (and midnight soon) only to have zero sales after 6pm. The anchors like Woollies and Big W are doing reasonable trade but the small specialty shops get no traffic. One instance is the ice cream concession where the owner has to have 2 staff on pay for 3 to 6 extra hours for practically no sales at all. Why 2 staff? Because it takes 2 to clean up and close the shop to the required health standards.
Owners mandate opening hours and take the rent but do nothing to generate traffic.