Amazon in Australia Is Dead on Arrival

Another one bites the dust.

Err, sorry scratch that. Another two bite the dust.

This morning, two Australian retailers found themselves in the hands of administrators within 12 hours of each other.

Thursday began with news that SurfStitch Ltd [ASX:SRF] had been placed into administration.

Since the retailer listed on the ASX at the very end of 2014, it’s been mostly downhill for early investors.

SurfStitch Price Chart

SurfStitch chart 25-08-17

Source: Google Finance
[Click to enlarge]

If you’d bought shares in the initial public offering (IPO), you would currently be sitting on a 92% loss.

According to The Australian, the retailer had been suffering internal problems for quite some time, writing:

The long-troubled surf and sports products online retailer SurfStitch has collapsed into voluntary administration, ending the public life of one of the worst floats on the market in recent years, leaving its shareholders likely facing a complete loss on their investment.

A run of profit warnings saw its share price collapse to under 7 cents, representing a 90 per cent-plus wipeout to early investors in the IPO. At its peak in late 2015, SurfStitch shares had traded as high as $2.

The online retailer was one of the first streetwear companies in Australia. Shortly after the IPO, the company was hailed as the ‘wunderkind business’ with their concept of combing edgy streetwear, targeting a consumer market made up of savvy social media employees.

Yet, the past 12 months have been troublesome for the business. Prior to filing for administration, the company claimed that material costs were rising. And there have been whispers of boardroom-level in-fighting for just as long.

A few hours after SurfStitch announced the company had entered administration, news came out that Bubs Baby Shops was placed into administration last week. The toddler-clothing retailer cited ‘…falling sales and strong competition in that sector’ as the reason why Bubs Baby Shops outlets were shut down across New South Wales and Queensland.

SurfStitch and Bubs Baby are just the latest two retailers joining the incredibly long list of stores closing down in Australia. Already this year we’ve had Australia’s arm of Topshop go under, followed by Payless Shoes, Dick Smith, Marcs, Pumpkin Patch and David Lawrence. This is before we look at the closures over 2015–16, which include Colorado, Seduce, Kit & Ace, Crazy Clarks and Rhodes & Beckett.

For the past couple of years, a number of retailers in Australia have been struggling. A common argument that you’ll read in the media for why local retailers are struggling is that it’s down to the effect of international retailers setting up shop in Australia.

While I agree that department stores like Myer Ltd [ASX:MYR] need to step up their online processes for customers, I’m not convinced that international stores are the reason the retail market in Australia is dying.

Wages in Australia are barely growing. In fact, as of last month, private sector wages grew at a slower pace than inflation. An administrator for Ferrier Hodgson recently wrote for Ragtrader magazine:

In the last two financial years, over 2,100 retail business closed their doors or went into administration — more than the mining and manufacturing industries combined.

Long-term annual retail sales growth has not returned to pre-GFC levels of six to eight per cent and many predict structural shifts mean that growth rates of 2-4 per cent are the new standard.’

We’ve run out of stuff to buy

The June quarter consumer price index demonstrated just how tough the retailing gig is at the moment.

The clothing and footwear sector fell 0.3% for the quarter.

A report from Westpac suggested: ‘…the more significant observation was the lack of price pressure in some major retail sectors and in particular, clothing & footwear. Normally clothing & footwear prices rise in the June quarter post the New Year sales in Q1 (first quarter), as prices are reset before the post June 30 sales in Q3 (third quarter).

To us, people appear to be spending their discretionary income on things like travel. This is evident in travel-related stocks such as Webjet Ltd [ASX:WEB] and Flight Centre Travel Group Ltd [ASX:FLT] rising 7.58% and 32.62% respectively during the June quarter alone.

Qantas Airways Ltd [ASX:QAN] shares were up an incredible 47.04%. Arguably, lower oil costs are contributing to the profitability of the airline. Although, as Greg Canavan, editor of Crisis & Opportunity, has been writing, oil prices won’t remain low for much longer.

How much of this is driven by demographics is something I will be keen to watch over the next few years.

The ‘Age Wave’ theory, put together by gerontologist Ken Dychtwald, explains the massive global population and cultural shift that will affect consumption in the long term. It suggests that the ‘baby boomer’ demographic started retiring in 2008–09.

Because the right retirement age varies for everyone, we have another decade or two of baby boomers leaving the workforce permanently. How this generation spend their income during their twilight years may have a large impact on both the services and retail sector.

Perhaps consumers consider travel and leisure activities a more rewarding way to spend their money. In other words, people value experiences over things.

Or, perhaps we’ve just run out of stuff to buy.

Amazon’s arrival is all hype

Unless you’ve been living under a rock, you’ll know that Amazon is in the process of setting up logistics warehouses across Australia. It’s big news. A lot of noise is being made about how Amazon will decimate Australian retail.

But there’s a problem with that analysis. The Aussie consumer isn’t going to play ball. I wouldn’t be surprised to see the share prices of Harvey Norman Holdings Ltd [ASX:HVN] and JB Hi-Fi Ltd [ASX:JBH] suffer in the short term. Yet retailers in Australia are going broke without Amazon’s presence.

Amazon isn’t going to be the retail behemoth in Australia the mainstream suspects it will. The time to set up shop in Australia was when we rode China’s construction boom. It’s rocking up to the party too late.

Kind regards,

Shae Russell,
Editor, Markets & Money

Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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