The Retail Downturn

There is a lot of talk about the drop in retail sales in Australia.  Everyone has a view on the retail downturn, but in my opinion there are a range of things happening.  Here are the main ones:

  • Credit Cards.  I am old enough to remember Bankcard which was the first credit card readily available to most people.  It changed the way we bought things in many ways, but the most relevant was that we no longer saved the money before we made a purchase.  With the exception of the family home, and possibly a car, the generation brought up during the depression only bought things they had the money to buy.  The availability of credit, and increasing credit limits over the last few decades, meant we could buy more than we could afford if we had to pay cash.  A bonus to retailers.  Then there was the GFC.  Over the last ten years, people have realised the amount they owe, and are ratcheting back their use of cards – a negative for retail.
  • Enough Stuff.  There is only so much you can cram into a house.  Houses are getting smaller anyway.  The days of the McMansion are gone.  People are finding they really don’t need that third TV or extra lounge chair.  The incentive to buy is not there.  A friend once said to me, in the 1700’s the average person had only 50 to 100 possessions.  I have that in one kitchen drawer.
  • Second Hand Goods.  Twenty years ago, if you wanted a second hand widget, you might look through the classified section of your local newspaper and not find it.  Maybe then you went a bought a new one.  Today, you can go on eBay and find the exact same widget anywhere in the world and buy it second hand.  Instead of buying new from retail, you buy second hand online.
  • Online pricing.  You can buy almost anything online, and have it delivered in a few days.  It also makes you conscious of the price of a product in other markets.  In Australia, Apple, Microsoft and others are complaining that they are being targeted by consumer groups because their goods are significantly more expensive in Australia than in other markets.  Get used to world pricing.  Australian consumers don’t like being ripped off and will shy away from retail if they see a big difference.
  • Casual Approach to Fashion.  Imagine you arrived from another planet.  Retailers explain to you that you buy winter clothes that have to be replaced next winter.  Not because they are worn out, but because they no longer project an image that is determined by the people who design the clothes.  The alien might ask why we have to change image if the only reason is to make more money for the clothing manufacturer?  What would your answer be?
    “Yes I want to give more money to a clothing designer because he tells me last year’s style is no longer fashionable.”
    Would the alien jump back in his spaceship and declare the planet a place to which he would never return?
    People are waking up to the fashion industry.  Fashion is an excuse to make clothing manufacturers richer and waste resources.  People are not slavishly following the dictates of what is in fashion this season.  They are keeping their clothes and not supporting the retail industry.
  • Traffic.  There are lots of people – predominantly female for some reason – who love wandering around shopping centres.  There are also lots of people finding it a tedious exercise.  Struggle with the traffic, then drive around looking for a parking spot before negotiating the crowds.  For many people it is becoming less enticing to visit a retail outlet.
  • Fragmentation and Specialisation.  Mass marketed items – from can openers, to socks, to calculators – are being mass produced by third world, and sometimes second world countries.  Prices have bottomed out and margins are slim.  The big retailers cannot make the margins they once could from smaller local manufacturers who made these goods.  They have all closed down.
    They look at the area they have for a store, and want to maximise revenue per square meter.  Slow moving items will not do.  Enter the small specialist outlet that sells items with a low demand, at a higher margin.  The market is fragmenting.  Big retailers have little to differentiate them from their equal size competitors so margins are slashed.  Price is the only weapon left.

All of these are pointing to a bleak future for retail.  The decline is probably going to continue and one of the major retailers in Australia has just forecast a continuing downturn over the next few years.  The implications spread beyond the share price.  In the next article we will look at what some of those implications may be.

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