The retail apocalypse has arrived in Australia and it’s only going to get worse as e-commerce thrives on the back Amazon’s recent arrival in the country.
Only two months in and 2018 is already showing signs of being a tough year for brick and mortar retailers. One of the most prominent retailers to struggle in recent years has been Myer. After re-listing in 2009 the retailers sales (and share price) have largely trending in one direction.
The decline for Myer accelerated in September 2017 with the company announcing an 80% drop in full year profit. By December Myer further warned that their first half profit would be “materially weaker” than the same period in the year prior.
That wasn’t to be the end of it and in February Myer downgraded their profit guidance yet again. With increasing pressure being placed on the company by retailer and substantial shareholder Solomon Lew, CEO Richard Umbers was forced to resign.
The decline in sales and profitability isn’t the only issue facing Myer. Like comparable businesses in the United States, such as Sears, Myer may faced increase pressure for shopping centre owner Scentre with a recent News.com.au article quoting Daniel Mueller from Vertium Asset Management as saying:
“An anchor tenant enjoying favourable rents with a poor retail proposition is not what a retail landlord wants. If Scentre can reposition Myer’s floorspace, especially in its Westfield Sydney location, the valuation uplift would be significant”
“Based on the rental income Scentre receives from specialty retailers versus Myer, it would be in Scentre’s interest to replace Myer with more profitable tenants. And why not? Its business model for the last 50 years is based on replacing weaker retailers with stronger ones.”
Also facing increased pressure is discount department store Target. In six years the company has seen their sales decrease from $3.8 billion to $2.95 billion. A result which has seen ongoing speculation that partner company Wesfarmers will merge the brand with Kmart to reduce store numbers and increase performance of underperforming stores that have suffered questions over their product mix and brand strategy for a number of years.
At the smaller end of the retail scale, Retail Food Group, the parent company behind Donut King, Michel’s Patisserie and Gloria Jeans has reported that it will close up to 200 stores after posting an $87.3 million dollar loss. The company is pointing to unsustainable rents and decreasing performance in shopping centres as the primary reason for the closures.
All of this comes at a time when a research from Morgan Stanley shows the price discount between Amazon and major Australian retailers is getting larger for many goods. Based on Morgan Stanley’s analysis, the average price discount for sports, electronics and apparel on Amazon now stands at 16%, 11% and 17% respectively, according to a Business Insider article which quoted the report.
In addition to Amazon other home grown e-commerce players are continuing to encroach to traditional brick and mortar retailers. Kogan.com recently announced that its revenue had passed $200 million for the first time in a six month period. Even more impressive was the growth rates however. Revenue up 46% and EDITA up 93%, so which the likes of Kogan still have some way to go before they catch up to the revenue flowing through the likes of Myer and Targets registers the trend is clearly in their favour.
With all this taking place it should come as no surprise that online spending increased 10.2% in 2016, with the increase in purchases happening on mobile devices growing a whopping 52%.
Consumer preferences have swung sharply in recent years and traditional retailers and shopping centres don’t appear to have a strategy to combat this decline. So while retailers argue about losing sales amongst themselves the real threat is the ongoing growth of e-commerce and emergency of technology-centric players like Amazon on our shores.
If retailers don’t adapt and adapt fast then Australia will face it’s own retail apocalypse.