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| Travel retail’s enemy; not online |
   
Posted Date: 24/01/2012
By Robert Stockdill
At last, some rational analysis of the reasons for Australia’s current retail malaise...
Forget the factors retailers are blaming for their poor performance: consumer confidence, floods, online competition, the weather, for starters. Independent analysis by Citi Investment Research senior analyst Craig Woolford shows travel accounts for the single greatest diversion of consumer spending from retail.
In an extensive overview of the current Australian retail sector, with corresponding assessment of the immediate fortunes of listed retail companies, Woolford starts with some blunt truths: retail spending might be “in recession”, but the Australian economy remains at full employment.
And even more tellingly, consumer spending is up 5.7 per cent yet retail spending - including food - is up just 2.1 per cent.
Woolford concludes that three factors are significantly taking spending from retail sales:
- Travel is taking 2.3 per cent away.
- Online retail sales are taking 1.7 per cent away.
- Deflation is taking 1.3 per cent away.
“These factors are likely to remain detractions from retail sales in 2012 unless there is a steep change in the Australian dollar, product innovation or rapid rollout of online by large retailers.
“The comment that "confidence" is low has been overused by retailers to explain the retail weakness. Consumer sentiment indicators are just below 100. Australians are equally optimistic as they are pessimistic.”
“Retail spending is weak because consumers see better value elsewhere.”
Woolford agrees retail “has never had it tougher”, with retail sales depressed since November 2009. Over 2010 and 2011, non-food retail sales growth has averaged one per cent.
“This is slower than the 1990-1991 recession when non-food retail growth was 2.8 per cent. The average retail sales growth over the last 26 years is 5.5 per cent, while the past 10 years average growth is 4.6 per cent.
But in a conclusion unlikely to win friends amongst retailers - although it is true in Inside Retail’s opinion - Woolford says the weakness in retail spending is “a retailer’s problem, not a consumer problem”.
“The retail downturn is at odds with consumer spending which is at trend growth. The divergence between retail spending and consumer spending is unusual.
“The previous deviation in retail sales and consumer spending was in 2005, when petrol prices spiked and house prices fell slightly.
“The retail downturn continues despite a weak baseline. Our feedback on Christmas 2011 sales suggests a deterioration in trading conditions compared with November 2011, despite interest rate cuts.”
He goes on to debunk another excuse by retailers for poor performance: the weather.
“Some retailers have cited poor weather, but temperatures, were warmer in Melbourne, Perth and Adelaide in December 2011 compared with December 2010. While in Sydney the weather was 2.7 degrees Celsius colder and Brisbane was only 0.5 degrees cooler.
Woolford does agree that two other broader detractions are affecting retail sales: higher savings - running at nine per cent, which is much higher than the previous decade average of 3.8 per cent, and utilities costs and other living costs, but their “magnitude is smaller”.
“In the 12 months to September 2011, Australians spent $40.5 billion on outbound travel, up 12 per cent. Over the same time period, Australian households spent $26.9 billion on utilities (electricity, gas and water), up 15 per cent.
“Travel is a bigger drain on retail spending than the leakage from online retail sales. Australians are increasingly travelling abroad, while fewer tourists are arriving in the country. For the 12 months to November 2011, 7.8 million Australians travelled overseas. Over the same period, only 5.9 million tourists arrived in Australia on short-term visits. The net tourism drain is likely to be near 1.9 million people outflow for the 2011 calendar year. Only five years earlier, that figure was 600,000 people inflow of tourism.”
Woolford estimates there has been an additional $3.8 billion spent on tourism in 2011 compared with 2010. The change has been driven by a 10 per cent increase in Australians travelling abroad.
“ABS data indicates that an Australian tourist spends $5205 when on an overseas trip. This amount includes airfares and accommodation, but excludes retail goods purchased while overseas. It is plausible there is another $1000 spent on retail given the high Australian dollar.
“If the $3.8 billion tourism spend is a direct substitute with non-food retail spending, then the drain is 3.3 per cent of retail spending.”
He says online spending is a drag on ASX-listed retailers in two ways - leakage of sales and price deflation.
“Our estimate of total online retail sales for FY11 is $11.9 billion, or 4.9 per cent of Australian retail sales. The penetration of online is closer to 10 per cent when we exclude food retail.”
Yet, he concludes, many of the retailers have less than one per cent of sales online.
“We estimate growth online, including offshore purchases, is running at 15 per cent to 20 per cent. Given online retail sales penetration of 9.5 per cent in non-food retail, the leakage from online is 1.7 per cent. We expect the drain from online retail sales to continue over the next year, until the listed retailers develop a better offering to participate in the growth online.
“It is more likely that listed retailers will see a boost in 2013,” Woolford concludes.
Deflation is another issue, driven by growing online sales and the stregnth of the Australian dollar. But he says deflation has detracted just 1.3 per cent from retail sales growth in the past 12 months and expects it to run between one per cent and 1.5 per cent in 2012.
Finally, Woolford debunks another frequently-cited cause of retail sales downturn in 2011 - the floods of early last year that devastated parts of Queensland.
“Retailers have consistently used the “easy base” when providing a positive outlook for retail sales. The flood events in Queensland and Victoria during January 2011 were certainly a drain on retail sales and provide a reason for a one-month reprieve on retail sales in January 2012.”
But he argues, if non-food retailers had between nought and a half per cent reduction in comparable store sales for the month of December, there is a strong chance that January 2012 will show a two to three per cent improvement in sales trends for that month alone. “However, the impact will be short-lived.”
Further into the report, Woolford applies the conclusions to assessing the relative appeal of listed retailers’ stocks. He says Citi Investment Research has “few Buys in the sector”.
“Our preferences are stocks with strong cash flow yields such Metcash, Pacific Brands and Specialty Fashion Group and companies with strong earnings momentum, such as Super Retail Group.” |
Sunday, January 29, 2012 by Stuart Bennie - Impact Retailing
Excellent. Only one minor disagreement. Seasoned retailers are only too aware that the 'weather' excuse wore thin years ago. However this summer has definitely been 'cool'. It is not a thing that can be measured with temperature!! It is far more complicated. It depends on how many consecutive days are 'hot', the humidity, the time of day when it is hot - in fact it becomes subjective. I believe most fashion retailers would agree that the weather has been against them this year. Not to detract from a good article though.
Stuart Bennie - Impact Retailing.com.au
Tuesday, January 24, 2012 by Andrew Cassin
Unfortunately for retailers, this all makes a lot of sense. Unfortunately for bricks and mortar stores now is not the item for growth (in general). Unfortunately it is just retailers turn. At the turn of the century it was mining/resources - look at that sector now. Investors - buy retail as stock prices are falling, marketers - invest in customer centric communications and engagement processes to make sure that when the upturn comes - and it will, you will bounce back quickly. (Just as miner who kep investing in exploration will be benfiting now. Consumers - we all seek value for money. Now it is good value to travel overseas but bring some of your money home and spend it here!!!
Tuesday, January 24, 2012 by Scott
I think that there is another thing retailers really, really need to wake up to - demographics.
The "Spending Wave" theory outlined by Harry Dent suggests that peak consumption on consumer goods occurs when the population overall hits age 46 (http://en.wikipedia.org/wiki/Spending_wave). I don't agree with much of what Dent says, but this makes plenty of sense to me, especially if they have seen much of their superannuation vanish in the past 2 or 3 years.
I am one generation younger, and watching the European train wreck unfold. There will be no pension for my generation, and our houses are already clogged with stuff we don't need - so why would anyone spend on goods as opposed to experiences like travel? Even then, it's got to be better value than trying to find somewhere to invest.
If you are a retailer selling mass-produced rubbish, I advise you to sell up and find something better to do. Things are not going to return to the way they were, and have a large chance of resembling the 1930's.
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