Categories

Filter by:

  • Personal Finance
  • Your Business
  • Property
  • Life Stages
  • Local Community
  • Diversity & Culture
  • Economic Update

Economic and Financial Market Update: Gone Shopping

retail

12/07/17

Summary

  • Consumer spending appears to be picking up;
  • This should be good news for the retail sector;
  • But department stores have been facing long-term strategic challenges

Whoever said money can’t buy happiness simply didn’t know where to go shopping

Bo Derek

The economic soft spot over the past year, or so, has been the consumer. Weak jobs growth, modest pay rises and rising household debt dragged consumer confidence down, keeping a lid on spending in the shops. Unsurprisingly,  retailers confidence sunk to a low level. But business confidence across other industries is high. This is resulting in more jobs, putting extra money in consumer pockets. The recent data indicates this is generating extra activity in the shops, with the retail spending numbers for the past two months picking up strongly (although this did follow weak numbers in Q1).

But while consumers have become happier to flash about their cards, not all retailers are seeing the benefit. Spending is happening at a good clip in cafes and restaurants, and shops selling household goods are doing Ok. But the department store sector is doing it tougher, where spending has declined over the past year.

The question of the future of department stores has been a discussion point in recent times, particularly given the rise of e-commerce. There have been reports of the closure of a number of department store branches in the US. Concerns about the looming increased presence of Amazon has made some worried about the future of Department Stores locally.

It is certainly true that consumers are now doing more of their retail spending sitting at home in front of their computer than wearing out their shoe leather visiting the shops. The proportion of retail sales online in the US has more than doubled in the past ten years. Amazingly, the official data suggests that the impact of e-commerce has been even bigger in the UK.

In Australia, the ABS data indicates that online sales have also become a larger part of the retail landscape. Although the total proportion of retail sales from e-commerce is still modest, the proportion of sales made online has more than doubled in the past five years. But the ABS data certainly understates the amount of spending being done online in Australia. The statistics only take account of spending to firms that employ people in Australia (ie, it excludes offshore retailers). Firms that are categorised in a different industry (such as Wholesalers) but sell goods or services online to consumers are also excluded. And because the survey is based on figures from known retailers, it is possible that survey under represents e-commerce firms given that many are likely to have only been trading for a relatively short period of time.

But it is not clear that all the blame for the struggles of department stores can be laid at the rise of e-commerce. While much as been made of the recent fall in the number of workers in US department stores, this has been a trend since 2001. Indeed, the largest decline in the number of US department store employees happened pre-GFC, a period before e-commerce became mainstream (the big reduction in 2012 occurred at a time when the US economy was struggling and the unemployment rate was high). A similar trend is evident in Australia, where the proportion of retail sales made at department stores has more than halved since the mid-1980s. This decline is particularly notable when compared to the shift in spending share to other retail sectors.

The relatively better performance of other retail segments indicates that the long-trend away from department stores reflects a range of factors. It has been a long-term trend for consumers to devote a greater share of their wallet to services, or experiences such as going out to cafes and restaurants. Perhaps an even bigger issue is that the pricing power of department stores has been weak. The decline in the proportion in the volume of retail goods sold through department stores has been less than the value of goods sold. So the combination of narrow margins, weak pricing power and a significant fixed cost base has been a long-term strategic challenge facing department stores.

It is this strategic challenge that meant department stores was vulnerable to the rise of the internet. Not only has it meant that department stores are now facing more competitors, but e-commerce firms have the advantage of a lower cost base given they do not need to maintain a physical store presence. And the internet challenge will likely only grow as more consumers get used to shopping online, the experience improves through faster internet and the offerings online continues to improve.

For department stores it is not all bad news. The cyclical pickup of consumer spending that looks to be taking place should be a plus for all retail firms. And department stores themselves are bulking up their online presence to match the e-commerce firms. Indeed, the ABS data suggests that ‘multi-channel’ firms (companies that use e-commerce and distribute through other channels, such as their own physical stores) have done better in Australia in recent months than the pure online firms. As a US Senator from the 1920’s (James Watson) said, “If you can’t beat them, join them.”

We live in interesting times.

This blog post is for general information purposes only and is not intended as financial or professional advice. It has not been prepared with reference to the financial circumstances of any particular person or business and should not be relied on as such. You should seek your own independent financial, legal and taxation advice before making any decision about any action in relation to the material in this article.

Bookmark

Leave a Reply