Australia | Jun 15 2017
Australian retailers have been doing it tough and real spending growth is at its lowest point since 2011. Where are the growth options now?
-Downward pressure on non-food prices will intensify with increased online retailing
-The bigger the retailer the greater the threat from Amazon
-Increased levels of part-time employment reduce Australians' purchasing power
-Sharp increase in young Australians investing in share market
By Eva Brocklehurst
Australian retailers have been doing it tough. Real retail spending growth is at its lowest point since 2011, Deloitte Access Economics notes, and recovery is expected to be slow as underemployment and record low wages growth mean household income is stagnant.
Deloitte Access Economics' latest report suggests turnover growth was just 1.2% in the year to March. The report author, David Rumbens, believes challenges are a likely to continue in 2017-18 although labour income growth should drive better expenditure over the next few years.
The wealth effect from a surge in Sydney and Melbourne house prices has provided significant support for retailing in recent years, underscoring a declining savings rate and stronger consumer confidence among home owners. Nevertheless, many are now holding huge mortgages and servicing these debts is expected to contain consumer capacity to spend going forward.
Rumbens also believes this creates macro economic risks, the subject of which has been raised increasingly by the Reserve Bank of Australia. While jobs growth is steady in aggregate terms, the high part-time component is associated with rising underemployment. Meanwhile, spare capacity in the economy is pushing down wages growth and, in turn, inflation.
The report suggests that the wealth from the housing market may be keeping consumer spending humming along but is not enough to offset the impact of record low wages growth.
That said, analysis suggests the March quarter may mark the low point in the current retail spending cycle, and food expenditure is expected to fill the gap left by discretionary retail in the short term, while population growth and international influences are expected to support non-foods expenditure over time.
Discretionary Goods
Apparel expenditure growth has weakened this year and the hype from international fast fashion houses entering Australia has faded, the report observes. What is left behind is fierce competition. Meanwhile, luxury retailers have been supported by tourists, particularly from Asia, and revenue is expected to continue growing well over 2017/18.
The reports suggest downward pressure on non-food prices will only intensify as online retailing captures more share of the discretionary market.
Nevertheless, technology is also being used to enhance customer experience, which the report suggests is more important than ever before in order that bricks & mortar stores can compete with lower-cost, highly accessible online platforms. Nevertheless, adoption of technology in retailing brings in customers but also increases costs.
Technology has allowed Australian retailers to expand business overseas. Australia retains a reputation in emerging Asian economies for high-quality exports, particularly food products. The geographical proximity of these economies also means there is an advantage over other developed economies when it comes to shipping costs.
The report notes, as a result, domestically produced products do have some protection in terms of costs from international competition, particularly given the downward trend of the Australian dollar. Admittedly, this is not much help for importers of goods, which form a high proportion of non-food retail items in Australia.
Amazon
The main risk detailed in the report is Amazon. Amazon presents a series of challenges for existing retailers in terms of heightened competition in both online and in-store sales. Amazon has an effective omni-channel strategy as well as strong brand equity. Customer service will be crucial to existing retailers to maintain shoppers at their outlets.
Moreover, Amazon has scale and is able to absorb very low margins in most of its products. Amazon is expected to disrupt almost every retail category, particularly non-food, but also food once the grocery business ramps up.
The bigger the retailer the greater the threat from Amazon, and the reports suggest the most direct competitors are department stores and other large retailers with a wide variety of products. The report suggests small retailers have a chance to thrive by leveraging Amazon's role as a consolidated market place.
Online retail growth for small-medium enterprises was in the order of 23% for the year to March and total online retail sales growth was 9%, the report notes. In terms of preferences, catering is winning as consumers move to experiences and away from hard goods.
Catered food expenditure grew by 4.0% in the year to March and beat all other retail categories in the analysis. Cafes and restaurants, combined with rapidly growing technology in takeaway platforms, are construed as beneficiaries of this increased expenditure.
Supermarkets
Supermarkets have not been winners recently, as sluggish wages growth has limited the average Australian's grocery budget. The reports suggest supermarket expenditure, on a per capita basis, fell by -1.1% over the year to March and total real supermarket turnover grew just 0.3%. Unlike discretionary categories, supermarket turnover is not much impacted by wealth effects. Instead, wages growth is the main driver.
The resources states of Western Australia, Queensland and Northern Territory are struggling, despite an improvement in China's economy, and the report indicates growth trends favour the south and east of the continent. Nevertheless, Queensland is expected to get a boost from a surge in gas exports and rising export earnings should eventually tilt growth back to the resources states.
The report indicates Tasmania and South Australia currently have the highest proportions of part-time employment at 37.1% and 35.7% respectively. The rise in part-time employment also reduces the bottom line purchasing power of Australians.
Meanwhile, international investor demand for retail property is strong. The report suggests shopping centre assets to the value of $2.3bn were acquired by overseas buyers in 2016, representing more than one quarter of total retail property transactions that year. Top investors by country were the US, accounting for 51%, followed by Singapore, Hong Kong, China and Taiwan.
Deloitte Access Economics has also produced a report for the ASX which shows that although share ownership has continued a slow recovery from the GFC, there has been a sharp increase in the proportion of young Australians investing in the market. The number of “millennials”, those born after 1982, investing money in the Australian share market has doubled over the past five years, yet they appear to be more risk averse than their grandparents.
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