Aussie retail is in trouble.
And the trouble has nothing to do with Amazon setting up shop in Australia.
For most people, it’s the time of year that they start planning holidays, while letting the stock markets wind down. However, the retail sector is entering the most important time of the year.
The next six weeks is all about sales and volume. And getting you to spend money.
Last year, Australians spent around $48 billion on goods for loved ones. That was slightly higher than the $46.7 billion from the year before. This year, however, Roy Morgan says we could blow up to $50 billion.
The only problem is that this boost in retail spending isn’t likely to prop up the retail sector for long. Cracks are beginning to show in one retail giant in particular — which I’ll get to shortly.
Last year, spending across Aussie department stores fell 0.1%. So if you think Myer Holdings Ltd’s [ASX:MYR] stock is looking cheap at 72 cents, just wait until January when end-of-year sales results roll in.
Most of our coin will go to food and homewares, according to Roy Morgan — growing 3.27% and 2.37% respectively. Yet clothing, apparel and accessories may only eke out a half-a-percentage rise this Christmas.
Does this mean we care more about what Nana thinks of the tableware than the shirts on our backs? I don’t think so.
Let me explain why.
One of the things affecting the Aussie retail sector is price deflation. A stronger Aussie dollar, lower commodity prices and offshore manufacturing have reduced the cost of apparel and footwear. As a keen shopper, I find that, even at full price, I’m paying the same for my t-shirts today as I did four years ago. Same with shoes.
Furthermore, there are the ongoing sales in every store. Fast fashion items mean retailers are regularly discounting to move ‘old stock’. You don’t need to wait for financial-year clearance discounts or Boxing Day sales anymore. You can rely on a retailer to drop prices any time of year. And if they don’t, you wait longer.
Online loyalty hurting retail
Another thing that’s possibly hampering the retail market could be the industry’s drive to cultivate loyal customers. They think they’re data-banking your shopping habits when you sign up to receive updates and alerts from them. But you have to wonder how much this alters consumer behaviour.
I receive 30 retail emails a week telling me about what’s new, hot and on the must-have list. Yet I know all too well that if I wait a week or two, they’ll send me another email. But this time, with a discount to entice me into the store.
Yes, retailers are up against falling prices. Yet, thanks to the internet, you can wait it out until they offer you a price that suits you.
Compounding all this is choice. Aussie retailers now have massive international chains to compete with.
Although, perhaps some of the newcomers have cottoned on to the fact that local trading conditions aren’t as rosy as they thought they would be.
During the week, word got out that international fast fashion retailer Inditex SA [BMAD:ITX] — owner of Zara — was looking to break a lease for one of its Gold Coast stores.
Facts on this are scant. But closing one of its 15 Australian stores in a tourist hotspot is an ominous sign.
This store opened only four years ago. Chances are that part of the lease agreement involved Zara being an ‘anchor’ store. A drawcard to bring more people to the Robina Shopping Centre. Anchor stores often pay less rent per square metre than smaller retailers. The idea is that large flagships are the reason why people go to shopping centres. So they get a discount on rent.
I’m not quite prepared to call it the canary in the coalmine just yet. Nonetheless, jumping out of a lease before it ends is expensive. Accountants don’t like it. And it definitely isn’t a positive sign for retail in general.
The retail market in Australia is my favourite sector to analyse. There’s a simple rule to follow when it comes to investing in retail stocks: You’re a consumer first and investor second.
But there’s more to it than that.
You ignore the role retail plays in the Australian economy.
We talk about the mining boom as a driver of economic growth. But that ebbs and flows. And then there’s housing as well, of course.
But retail is different. Household consumption was responsible for two-thirds of economic growth over the past year.
Not only that, it’s the second largest employer in Australia, with 1.2 million holding jobs in this sector. The only employment sector larger than retail is healthcare and social assistance.
Housing and mining may keep the Aussie economy ticking. But retail keeps more than 11% of the Australian workforce employed. Employed people spend money in the economy. They pay home loans and bills. And they buy more things to keep this service-based economy of ours moving in the right direction.
We won’t know exactly how retailers will fare until January next year when the results begin rolling out. Should spending slow, chances are we’ll be seeing more retailers closing up shop.
Editor, Markets & Money