The major theme last week was the impact of the weakening Australian dollar on the domestic retail environment and whether or not it has a positive impact on domestic retailers. Although the weaker dollar should enable domestic retailers to be more competitive against international online retailers, those that source their stock from overseas (not a lot of manufacturing done in Aust – so ultimately everyone) will pay more for goods, which will lower margins unless the higher costs can be passed on to customers, which is getting harder and harder as customers become more savvy. The impact of this will be seen on winter catalogues for those retailers who have not hedged their positions.

Pop-up shops, this continues to be very topical and of growing importance for landlords. It seems that as the number of traditional retailers vacate shopping centres and the waiting lists held by these centres shrink, pop-ups seem to be filling the void. The article below (#6) spells out a number of advantages that these tenants can deliver but lets not forget that these short-term occupants fill a vacant store to protect the appearance of the shopping centre (lets not kid ourselves.. get enough vacant stores in centre and the place quickly feels like a ghost-town)

The article on the The Reject Shop highlights something we see in a lot and an issue we have helped a lot of companies with, be it insolvency or from a restructuring / turnaround perspective. What is the business model, what is the profitable core of your business – what happens when you stray from this or where your market has changed and you have not been quick enough to adapt. The cost and impact on the business of its foray into the high end shopping centres can quickly spell the end for a retailer, typically due to high cost, long-term leases which can’t easlily be backed away from should the store fail to deliver

1. Australian dollar
Headline: Lower Aussie gets mixed reception
Source: AFR
Date: 21 January 2014

 Retailers and growing online businesses are welcoming weaker dollar but other retailers (particularly those that are vertically integrated and have a domestic focus) are facing squeezes on margins that could wipe out benefits from Christmas.
 Weaker dollar could push cost of goods up by 10 to 15% but some retailers may be unable to pass on higher costs because of intense competition or reluctance of consumers to pay more.
 Vertically integrated retailers (e.g. Premier Investments, Myer) are more exposed to currency volatility than branded goods retailers – CLSA believes dollar’s decline could increase cost of Myer’s private label products by 11% ($21m) and given lack of brand equity, Myer could struggle to raise prices to recoup costs.

Takeaway: Retailers celebrating after best Christmas trading in three years facing reality check as weaker dollar threatens margins.

2. Online retail
Headline: Online retailers can’t rely on weakening $A
Source: AFR
Date: 23 January 2014

 HSBC said it is unlikely RBA will cut interest rates further given recent inflation growth and dollar will weaken.
 While weaker dollar causes higher import costs for domestically-focused retailers, domestic shoppers were becoming refocused on more competitive local goods as opposed to international offerings.
 CatchOfTheDay.com.au (domestic online discounter) said if the dollar remained stable at the current level, domestic online discounters like it would benefit against offshore businesses in allowing it to predictably undercut retailers and making it costlier for consumers purchasing from international retailers – when purchase prices fluctuate rapidly (as occurred in past 18 months) and retail prices remain stable, it is hard to show value.

Takeaway: Weakening dollar has improved competitiveness of online retailers but are hoping for relative stability to lock in gains at present level.

3. Petrol cycle
Headline: Cheap Tuesday petrol a thing of the past
Source: The Australian
Date: 24 January 2014

 Compare The Market says the rise of vouchers bundles petrol purchases with what you buy in supermarkets so petrol prices are impacted on by grocery prices.
 Royal Automobile Club of Victoria said seven day cycle had effectively ceased in about 2011 and last year in Victoria the cycles went from anywhere between nine and 28 days (average was 17 days).

Takeaway: Intrusion of Woolworths/Coles into market, greater fluctuations in global fuel prices and level of Australian dollar has turned seven day petrol cycle into 20 day cycle.

4. Structural adjustments in retail (comment)
Headline: We must get real as retailers face structural adjustment
Source: The Australian
Date: 25 January 2014

 Peter Switzer referred to “tsunami of store closings expected to hit retail” in the US but it will hit the “old world” of retail – US December jobs report showed only 74K jobs being created as opposed to the expected amount of 200K and online retail growth was partly to blame for the deficit.
 Gerry Harvey said how he needed barriers to structural adjustment lowered – gave example of hotel employee washing dishes on a Sunday being paid $48/hour and would have to raise room rates to cope with Sunday wages but risked being uncompetitive.
 Warwick McKibbin (ex-RBA board member and ANU economist) said Joe Hockey needs to prioritise policy initiatives to expedite changes to cope with structural change and argued that wages needed to be flexible to the “fortunes of industry”.

Takeaway: Greater wage flexibility needed in Australia to face structural adjustment driven by online retail.

5. The Reject Shop
Headline: Investors reject Reject Shop after sales drop
Source: AFR
Date: 25 January 2014

 Reject Shop will review leases of stores in major shopping centres as they approach expiration and hasn’t ruled out leaving major shopping centres altogether – performance of these stores offset relatively strong performance of stores in neighbourhood and regional centres where it will push ahead in opening further stores.
 Gross margins were below its expectations due to higher than expected discounting and poor returns on higher-margin products.
 Moelis & Co said minimal growth in profits, despite higher store numbers open for Christmas trading is a worrying sign given it is a business that makes a disproportionate amount of revenues at Christmas.
 Reject Shop said second half could be challenging as weakening dollar will impact on margins.

Takeaway: Poor pre-Christmas trading, heavier than expected discounting for flat sales in first half of year and high rent blamed for 30% drop in share price.

6. Pop-up stores
Headline: ‘Pop-up’ stores back with a bang
Source: SMH
Date: 27 January 2014

 GPT has engaged Pop Up Brands (online leasing company) to list and book short-term space by hour/day/month and other landlords are engaging website leasing group to cater for short-term contracts – Pop Up Brands website allows small retailers to enquire about flexible or kiosk-style space in malls.
 GPT says engagement will help it connect with short-term space seekers and deliver savings for tenants on traditional expenses such as print advertising.
 Big names and land owners were starting to embrace concept of short-term leasing after already being established in neighbourhood precincts.
 International brands using idea to build awareness and promote specific products (as opposed to offloading previous season’s stock) with the latest being Uniqlo in Melbourne’s Swanston Street – Nokia used same concept in Sydney last year.

Takeaway: Shopping centre landlords offering larger range of pop-up stores to keep offerings relevant to customers.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s