The 'Retail Apocalypse' Is Here. Expect More Casualties.
If one car crashes while negotiating a sharp corner, investigators will likely blame driver error.
But if 20 cars crash on the same corner, sooner or later we will realise there’s a problem with the road.
The same thought process applies in understanding the growing number of bankrupt corporate carcasses now littering Australia’s retail landscape. When any individual retailer goes under, analysts can always point to management mistakes and problems in the business model. But as the list of retail casualties gets longer, it’s clear that deeper problems are dragging the whole sector down.
This week’s collapse into administration of Jeanswest, affecting 146 stores and almost 1000 workers, is just the latest obituary. Other chains that have closed, liquidated or downsized in recent weeks include the Harris Scarfe department store chain, fashion retailer Bardot, EB Games, and Bose.
And there are dozens more walking wounded barely staggering through the mayhem -- including some of Australia’s largest and best-known retailers. Traditional department stores like Myer and David Jones face particularly acute challenges. Past restructurings haven’t turned the tide for them; future actions will be more severe, perhaps even fatal.
Traditional retailers around the world are grappling with the existential threat posed by explosive growth of online and mail-order shopping. Here in Australia, that is compounded by several unique problems of our own making.
These are the forces combining in a perfect storm that will likely sink still more retailers in the months ahead:
New ways to shop
About 10 percent of total retail spending (excluding groceries and restaurants) now happens online, and that share is growing fast. Other changes in shopping habits -- like the rise of big box shops to replace traditional malls -- are compounding the damage. Of course, one retailer’s crisis is another’s opportunity: these new ways of selling underpin new profits and jobs that offset some of the losses in traditional retail. But that doesn’t make the disruption any less painful for those on the short end of the retail stick.
No money to spend
Growth in overall consumer spending last year was already the weakest since the global financial crisis -- and that was before the bushfires. An obvious reason for sluggish spending is record-low wage growth in Australia’s economy. For more than six years now, annual wage increases have averaged just over two percent per year. That’s barely enough to offset price inflation, let alone pay for increased purchases.
As horrified Australians watched the grim news about spreading wildfires, mass evacuations, and poisonous smoke conditions, about the last thing most felt like doing was shopping. The hard numbers won’t come in for a few weeks, but there’s little doubt retail spending will be hit hard this summer (except, of course, for stores selling gas masks and air purifiers). For some chains, the bushfires will be the straw that breaks the camel’s back: expect the recent streak of retail bankruptcies to continue.
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Some long-standing retail chains are now worth more for the property under their stores, than for their actual trading business. The debt-fueled surge in Australian property prices over the last decade has reverberated through retail: driving up land costs and rents, and whetting the appetite of speculators who see condos where shopping malls currently exist. Recent interest rate cuts by the Reserve Bank, trying to stave off a recession, have re-ignited property prices. That could entice some retailers to throw in the towel and simply cash in the value of their properties.
A flood of cheap stuff:
Fashion retailers have been among the hardest-hit by the financial fallout. And the advent of import-focused “fast fashion” has definitely contributed to their crisis. Clothes and other imported consumer goods have become ridiculously cheap, thanks to globalisation and near-slave-labour in developing countries. That stimulates new sales -- but with prices so low, retailer margins are also squeezed. It’s hard to imagine a successful national retail industry based on a “dollar store” business model.
Not all retailers are in crisis. Groceries are still highly profitable; a few electronic retailers are doing well; and some specialty and niche stores can succeed, if they develop a quality reputation and a loyal customer base.
And retail as a whole will never disappear: so long as people have money to spend, retailers will always develop new strategies to capture a bigger slice of the overall market. After all, retailing has traversed other epochal shifts in the past: once upon a time, for example, the department store was seen as an exciting new innovation, far more efficient (and profitable) than door-to-door sales or very small neighbourhood stores. Now it’s considered a dinosaur.
But this inevitable disruption has been made needlessly more painful, in Australia’s case, by erroneous economic policies in other areas of our lives. If Australian workers could get a decent raise; if property was treated as a social necessity rather than a speculative asset; and above all, if Australians could be confident that this continent will remain inhabitable for generations to come -- well, then just maybe they’d go out and spend a little more money.