Independent retail growing again

Sales for the Australian Bureau of Statistics’ “sample sector” – a rough proxy for the independent retail sector - rose by 4.0% in March on a year-over-year basis, following gains of 5.2% in February and 4.5% in January.

In the aggregate, if you are prepared to make the leap of faith that the ABS data is roughly correct, the independent sector is now doing as well as the chains.  Admittedly that isn’t saying much considering that just about everyone’s sales growth is coming at a cost to profit margins, but at least it’s something.

While the headline results suggest a little more stability and some reason to believe the corner is being turned, the same worrying trends persist in key discretionary sectors.

The household goods segment is in poor shape and only heavy discounting by consumer electronics retailers is holding up sales to any significant degree at all.  The discounting is partly the result of liquidation sales at the demised WOW Sight and Sound chain, partly due to store closures at the still-kicking Dick Smith chain, and partly due to a general panic-stricken free-for-all among all the big electronics chains for whatever market share is out there.

Given trends overseas in the consumer electronics sector and its susceptibility to internet-driven deflation, we are almost certainly only at the beginning of the consolidation process.

The clothing & accessories sector is also still very weak with average sales levels among the independent approximately on a par with 2004.

This means that most of the gains for small retailers have been attributable to three sectors: food, health & beauty, and food service.

Year-over-year sales growth for the cafe/restaurant sector was north of 13 per cent in March, with both chains and independents chugging along nicely.  This suggests once again that consumers are not so much “cautious” – the preferred excuse of executives at Australia’s biggest retail chains – as distracted by other things.

Generating studies in support of this conclusion is growing into a cottage industry.

Last week it was the turn of the fetchingly named National Centre for Social and Economic Modelling (NATSEM) to produce a report debunking the “myth” that Australians were too cautious, too poor or too anxious about the carbon tax to go shopping.

Instead, NATSEM suggested that scarfing restaurant meals, holidaying overseas, and sending the nation’s youth to expensive private schools were among the key areas to which spending is being diverted.

The study’s authors cheerily proclaimed that Australians were by and large doing very well thank you very much, with incomes rising materially faster than the cost of living. Moreover, the improvement in living standards was trickling down to lower-income consumers.

The part about rising expenditures on overseas holidays is particularly damaging to domestic retailers for several reasons. First and most obviously is the airfare not spent on domestic goods and services.  But people do a lot of shopping when they travel. Worse in the long term is the “reputational” effect - the more people travel the more they realise how expensive it is to shop in Australia and the more negative their attitudes become to Australian retail names.

For domestic retailers in the business of selling merchandise, some relief may yet come from the interest rate cuts announced in recent days, which will leave more money in borrowers’ pockets, buoy consumer sentiment and depress the value of the Australian dollar.

However, should these measures prove helpful and temporarily raise general trading levels at the nation’s retailers (a plausible outcome), it would still be a huge waste of a downturn if retailers were to declare victory and fail to act on the monumental challenges facing every single one of them.

Technology, social shopping, price deflation, rising labour costs, declining service standards and merchandising missteps are all issues that need serious attention. And as if that isn’t enough, in many cases retailer real estate portfolios are misaligned with future needs with respect to quantity, configuration and location.

The independent sector is showing some resilience, but there’s a lot still to do.

Michael Baker is principal of Baker Consulting and can be reached at michael@mbaker-retail.com and www.mbaker-retail.com.