Not all doom and gloom for retailers

Reports have been gloomy regarding the retail sector in 2011, with low retail spending stemming from low consumer sentiment, increased saving, consumers paying down debt and price deflation. The year has been a difficult one, with flat or declining sales for many Australian retailers, as well as job cuts and store closures from major players including Borders, Colorado Group and Premier Retail Group.

Despite these difficulties, IBISWorld General Manager (Australia), Ms Karen Dobie says some retailers are bucking the trend. Harvey Norman, Woolworths, Wesfarmers, and JB Hi-fi all reported higher profits in 2010-11. Overall, Australia’s retail spending this financial year is expected to be 3% higher than last year at $237.2 billion – or $10,312.50 per person ($26,812 per household).

“While much has been made of store closures, we’re also seeing a significant number of new stores opening, “Ms Dobie explained. “Spanish retailer Zara has been a resounding success since opening earlier this year; American giant Costco earned $166.4 million from one store in its first year of operation; Bunnings is expanding its store numbers and Woolworths will make a splash in the hardware market, opening 15 big-box Masters stores within the year.”

The retail sector includes bookstores, clothing retailers, hardware stores and supermarkets, with some areas performing better than others.

Retail segments	2011-12 spending ($m)	Growth (%)	2010-11 spending ($m)	Growth (%)
Food and liquor	96,838.5	3.0	94,017.8	2.6
Electical retailers	20,800.0	1.5	20,495.3	-1.9
Department stores	20,618.7	0.5	20,516.1	0.3
Clothing retailers	12,516.4	2.0	12,271.0	1.0
Hardware stores	11,575.0	2.2	11,329.4	1.2
Bookstores	7,979.0	1.0	7,900.0	0.7

Winners

IBISWorld reports that food and liquor retailers have been particularly strong performers in the past 12 months, with liquor sales rising 2.1% in 2010-11, and overall supermarket sales expected to rise 3% in 2011-12, partly due to higher liquor, fruit and vegetable prices.

Ms Dobie also said that hardware retailing has shown improvement, with sales increasing both last year and this year.

“After declining for a number of years, the hardware market enjoyed somewhat of a renaissance during 2010-11, boosted by the popularity of shows such as The Block and The Renovators,” Ms Dobie added.

Clothing retailers also performed better in 2010-11, up 1.0%, which might sound minimal but actually reflects a very strong performance, Ms Dobie explained, considering that the average price of clothing has fallen. “The price of men’s clothing is down 5%, women’s clothing is down 5.7% and kids clothing has dropped by 7.8% over the last year.”

Losers

The past financial year has played havoc with electrical retailers, with the high Australian dollar causing such a sharp decline in prices that even with higher purchase volumes it has been difficult for retailers to post growth in revenue.

“Price deflation has been a major driver of retail sales in the last year. The price of major household applicances fell by 5.6%, small electrical items fell by 1.6% and audio visual and computer equipment prices dropped by a remarkable 42% last year.” While good news for consumers, Ms Dobie said this was particularly challenging since electrical goods retailers typically derive more than half their revenue from audio visual and computer sales.

Turning to department stores, Ms Dobie said sales grew by just 0.3% last year, in yet another bad year for the industry. “While stores have cited online retail competition, new taxes and poor consumer confidence as reasons for their lacklustre performance, this is not a new trend for these players – with revenue rising just 0.3% per year for the past five years, and declining in three out of the last five years.”

“Australia’s savings rate has grown to 13% – its highest level since 1986, indicating many Australians are choosing to pay down debt or put money aside rather than be seduced by the sales. Having said that, spending on luxury goods is up, indicating that the wealthy have not stopped shopping yet.”

What’s next?

The period from 2003 to 2009 was a golden period for Australian retailers. Australians flocked to shopping centres with spending being funded by easily accessible credit cards, interest free offers and equity from the booming property and share markets. However, 2010-11 marked a return to spending patterns similar to that observed in the 1980s and 1990s. Australians are and will continue to spend but retailers will need to work harder to get customers through their doors and squeeze open wallets.

IBISWorld expects conditions to improve for retailers in the coming 12 months, with growth forecast for all leading retail segments, largely on the back of a steadier Aussie dollar keeping the price of imported goods low.

“We expect the Australian economy to continue to perform relatively well, interest rates are low, unemployment is low and disposable incomes are increasing. This will make Australia an attractive location for international brands, with both Costco and IKEA planning further stores, and UK mega fashion store Topshop opening its first Australian outlet by 2012,” said Ms Dobie.

Sourced from IBISWorld dated 21/09/2011, retrieved from www.ibisworld.com.au