What does the future hold for the retail industry?
The challenges faced by the retail sector have been well documented, however the retail 'apocalypse' is likely to be less of a doomsday scenario, but more of a consolidation and evolution of the industry.
In the fourth of our retail series, 'What's in Store', KordaMentha explores the outlook for the retail sector in the lead up to the busiest sales events of the retail calendar: Click Frenzy (commencing 10 November 2020), Black Friday (27 November 2020), Cyber Monday (30 November 2020), the Christmas gift buying surge and Boxing Day, as well as what the future beyond this period holds.
Structural change has been a phenomenon in the retail industry for several years. While COVID-19 was expected to rapidly accelerate changes within the industry, unprecedented Federal Government stimulus packages such as JobKeeper and JobSeeker have slowed this acceleration and kept retail consumption expenditure at higher levels than otherwise anticipated.
As these temporary relief packages are wound back on 31 December 2020 and 31 March 2021 respectively, it is likely to have unavoidable consequences on the level of retail spending.
Many retailers, especially those in Victoria, have been holding out for the November and December sales periods, which include the first major sales events since the onset of the COVID-19 pandemic. Retailers will be relying on the likes of Click Frenzy, Black Friday, Cyber Monday, and Boxing Day to lift businesses out of their COVID-19 hibernations (or to continue their unusually good year to date of record sales).
The key questions on many retailers' minds are: what does the future of retail look like; and how can they utilise this injection of cashflow from the upcoming sales period to deal with an uncertain trading environment in 2021 and best transform their operations for the new dawn of retail?
The shift of consumer preferences towards digital channels is certainly not a new phenomenon and there has been significant challenges in the years leading up to COVID-19 for discretionary retail, with a number of well-known Australian businesses restructuring, such as Harris Scarfe, Bardot and Seafolly.
Many speculated that COVID-19 would be the end of bricks and mortar retail, and while it has placed further pressure on retailers, Federal Government packages such as JobKeeper have allowed retailers, that may have otherwise ceased to exist to hibernate their businesses.
We covered these Federal Government packages and their impact in great detail within the third of our retail series: Retail under pressure: managing workforce and cash flow in a challenging environment.
When announced, the Federal Government expected the JobKeeper and JobSeeker packages to cost circa $130 billion. By way of comparison, the 2008 Rudd stimulus package was circa $10.4 billion. According to the ABS, the colossal package provided in response to COVID-19 resulted in retail spending (excluding food) being only 0.5% down on last year for the period March to September.
However, this level of stimulus spending is not sustainable. The Government wound back the JobKeeper and JobSeeker packages in September 2020, with JobSeeker set to expire on 31 December 2020 and JobKeeper expected to be fully phased out by 31 March 2021.
A storm is coming
The impact of removing these relief packages are twofold for retailers:
- The removal of JobKeeper directly increases the employee costs for retailers, which are currently being subsidised by the Federal Government for many businesses.
- As businesses, economy-wide, are unable to maintain their current employment base without JobKeeper, and with the eventual removal of both JobKeeper and JobSeeker payments, a decline in discretionary household income and discretionary retail expenditure appears inevitable in the short to medium term.
The discretionary retail sector is expected to face a decline in demand previously not seen in Australia since the 1980s. The RBA reported the largest consumption decline in 34 years in the June quarter (12.1%), while the 7% decline in GDP (following a 0.3% decline in the March quarter) signified the first recession in Australia since 1991.
Australia has had the luxury of uninterrupted economic growth for the past 29 years. We rode the iron ore, LNG, and coal mining boom leading to substantial household discretionary income growth. The retail market expanded to accommodate the spending habits of Australians.
However, the retail industry has become saturated with numerous,
mostly homogenous competitors in the same retail sub-market. The
expected reduced level of consumption is insufficient to support an
already overcrowded retail industry.
Many retailers will need to restructure in order to survive, while others will likely be forced to shut their doors permanently.
A ray of sunshine
However, it is not all doom and gloom for retailers. Central to the Federal Government's 2021 Budget are a number of packages to combat the expected economic decline including:
- Acceleration of proposed personal tax rate cuts that will be phased in between FY21 and FY25
- Cash payments of $500 to those on welfare
- $4 billion JobMaker Hiring Credit program for young job seekers
- Extension of the Instant Asset Write Off scheme to June 2022
- Implementation of the Loss Carry Back scheme.
These packages are also expected to provide a boost to the post COVID-19 economy and mitigate some of the decline in discretionary income and expenditure.
Some have speculated the upcoming Christmas period will be the final nail in the coffin for many retailers. The impact of COVID-19 and phasing out of existing Government packages will dampen retail spending meaning sales targets will not be met. However, as Australia's states and territories have reopened, we have witnessed a release of pent up demand.
Critically, we are about to head into the busiest season for retailers with three major retail sales events over a three-week period in November, before we head into the Christmas surge and Boxing Day sales.
With Black Friday being the first major sales event since COVID-19 lockdowns ended nationally, and the growing popularity year-on-year of the event, there is incredible potential for record breaking sales throughout this period.
We expect that many retailers will receive a much-needed cash injection during this time. While this may not be enough for all retailers to survive, this cashflow will provide a lifeline. The onus will be on retailers to utilise the cash generated to undertake radical transformation and position their business for the new dawn.
Retail's new dawn
The biggest question on retailer's mind is what the new dawn will look like? Once the dust settles post Boxing Day sales, which retailers will prosper, and which will become redundant? We predict there will be three key changes to the retail landscape:
- Retail consolidation - The overcrowded retail market cannot be sustained by the reduced level of consumption expenditure expected. The current retail landscape has been built on the foundation of continuous growth, however as that growth has subsided, retailers will be forced to fight for market share. Larger retailers may take the opportunity to absorb brands or smaller operators which they could operate more cost efficiently through acquisition and bolting on to their existing operations and it is possible some retailers may not survive.
- Online insurgency - According to ABS data, online sales now comprise circa 17% to 20% of non-food retail sales, almost double what was recorded in 2019. This significant rise in online prominence has been a product of necessity, with restrictions on bricks and mortar sales forcing customers to shift to online channels. This period has introduced a group of previously reluctant consumers to change their spending habits and embrace the rise of online. A significant portion of this group may not return to bricks and mortar stores as their primary sales channel.
- Omnichannel optimisation - If COVID-19 has taught us anything, it is that pure play bricks and motar retailers are fast becoming a retail artefact. Through necessity, many major retailers have made significant investment in their digital channels and are now focusing on optimising their omnichannel approach to get ready for the new retail world. Bricks and mortar stores are still a pivotal component of a successful omnichannel offering, however digital channels are now equally important and require due attention.
What we do know is that the current landscape of retail is unsustainable. Retailers will need take proactive steps to transform their businesses to thrive in retail's new dawn.
Retailers that embrace the transformation of their business for the new retail world will inevitably be better positioned to thrive in a consolidated retail landscape, where online channels continue their dominant rise, and omnichannel optimisation is critical for retailers with a bricks and mortar presence.
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