##{"id":58419,"date":"2011-07-07T14:43:09","date_gmt":"2011-07-07T04:43:09","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2011\/07\/07\/the-demise-of-traditional-retail\/"},"modified":"2011-07-07T14:43:09","modified_gmt":"2011-07-07T04:43:09","slug":"the-demise-of-traditional-retail","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2011\/07\/07\/the-demise-of-traditional-retail\/","title":{"rendered":"The Demise Of Traditional Retail?"},"content":{"rendered":"

\n\t– Brokers are downgrading retail sector forecasts
\n\t– The weak consumer is meeting the rise of on-line
\n\t– The currency is an important factor
\n\t– Is the hype all a bit overdone?<\/strong>
\n\t <\/p>\n

\n\tBy Greg Peel<\/p>\n

\n\tIf you ask three different employees at a Bunnings<\/span> Warehouse ((WES)) which aisle a certain product is in, you'll often get three different answers. If you ask an employee whether a certain product is suitable for a certain application, with great authority he'll read the back of the label to you. My father's rule was always find the oldest employee in the shop because he\/she will have the greatest accumulated knowledge. But Bunnings<\/span> now employs retirees who'd go off looking for a left-handed screwdriver if you asked them to.<\/p>\n

\n\tBut we all still shop there, don't we. We have little choice in most local areas.<\/p>\n

\n\tBunnings<\/span> is nevertheless not really under threat from on-line shopping. More discretionary chain stores clearly are, however, as that's all we seem to hear about lately. Gerry Harvey has campaigned hard to have the sub-$1000 exemption from GST revoked on the basis of unfair competition. Yet any regular on-line shopper will tell you they could pay 10% more and still buy a product from overseas for 50% less, including postage.<\/p>\n

\n\tGerry then warns that the physical retail industry is the biggest employer in the country. The threat is that on-line shopping will mean a substantial loss of jobs. Gosh, next thing you know we'll be losing bus conductors, service station attendants and milkmen.<\/p>\n

\n\tOh wait.<\/p>\n

\n\tDiscussions about the shopping experience have recently become frequent on ABC talk-back radio. (Commercial talk-back obviously can't bite the hand that feeds it.) Examples of price discrepancy are many, but the argument also goes the other way. The common theme is that chain stores are understaffed, and any staff member one can manage to locate is usually indifferent and product-ignorant. Realistically, today's shop attendant is adept at swiping a bar code and little else.<\/p>\n

\n\tRetailers will argue the need to contain costs in the face of high rents and the on-line shopping threat. But which came first? On-line shopping forcing cost cuts at physical stores or cost cuts at physical stores sending shoppers on-line?<\/p>\n

\n\tObviously the strong Aussie dollar is a factor, but then retailers selling imported products enjoy the same advantage. CommSec<\/span> economists calculate an “iPod Index” as a purchasing power parity comparison that suggests the Aussie is significantly overvalued. But CommSec's<\/span> thesis is misguided. Australians have for decades been paying “overs” for imported goods, particularly in the advancing technology space, which once upon a time was based on a low currency and substantial freight costs. Nowadays, the currency is the other way round and airline costs are cheap as chips. But still Australians are paying “overs” at physical stores.<\/p>\n

\n\tThe reason is that retailers have for many years exploited the Australian resignation to the fact we simply pay more for such goods than the Yanks, or the Japanese or Europeans. Remember when we all used to fly off to Hong Kong to buy a “cheap” stereo? Today, retailers still try to get away with higher prices assuming a higher price mentality. On-line shopping has now exposed this ruse for what it is. The CommSec<\/span> iPod index misses this point.<\/p>\n

\n\tOne could even cite high petrol costs, traffic congestion in the cities (Sydney measures now have Saturday traffic from 10am-3pm<\/span> as bad as any weekday am\/pm peak period) and high parking costs as reasons why on-line shopping is becoming more attractive. Free (or free with validation) mall car parks are often running at capacity. All these such money-and-time costs come into play in today's climate.<\/p>\n

\n\tConsumer stock analysts agree that factors including fuel costs, interest rate rise fears, easing house prices and generally weak consumer confidence (watching Greek riots on the tele<\/span> don't help here, for example) are all influencing weaker consumer spending across the whole discretionary sector, on-line or off. It took a while, but eventually analysts came to realise<\/span> that Australians were never going to return to the spend-frenzy retail growth levels of the pre-GFC<\/span> days having taken so much of a hip pocket hit since. But even assumptions of a return to more frugal average spending habits of past decades are now considered optimistic in the near term.<\/p>\n

\n\tOn this recognition, Goldman Sachs last week downgraded its expectations for June quarter discretionary spending. It's an important period for retailers as it includes winter clearance and end-of-year stocktaking sales, as well as mid-year toy clearances ahead of the new Christmas offerings. Goldmans<\/span> has reduced forecast FY11<\/span> earnings on average by 2-4% for Myer ((MYR<\/span>)), David Jones ((DJS)), JB<\/span> Hi-Fi<\/span> ((JBH<\/span>)) and Harvey Norman ((HVN<\/span>)). What's more, the analysts have reduced FY12<\/span> forecasts by 6-9%.<\/p>\n

\n\tGoldmans<\/span> is anticipating weak June quarter sales results from these listings, although the good news is the analysts are still looking for a gradual improvement on a 12-month time horizon. The start of the improvement is simply going to take longer, however. With PE multiples well below historical averages, Goldmans<\/span> notes a certain underpinning of share prices, but this comes with the caveat “notwithstanding structural issues such as foreign entrants and internet retailing”.<\/p>\n

\n\tBA-Merrill Lynch echoes the Goldmans<\/span> view in citing a cautious consumer and a change in consumer spending habits as reasons why mature discretionary retail stocks should now trade at a discount. The change in habits reflects the shunning of traditional retail stores and the breakdown in barriers to entry of on-line and foreign entrants.<\/p>\n

\n\tMerrills<\/span> points to the experience of traditional print media stocks, which now trade at a consistent 20-30% discount to the broad market. The on-line story is much more straightforward here – the “rivers of gold” of classified advertising have left slow-moving Fairfax ((FXJ<\/span>)) and News Corp ((NWS)) and shifted to on-line specialists such as Seek ((SEK<\/span>)), Realestate.com<\/span> ((REA)) and Carsales.com<\/span> ((CRZ<\/span>)). The analysts see a similar structural shift playing out for discretionary retailers.<\/p>\n

\n\tMerrills<\/span> concurs with Goldmans<\/span> in noting current 15-20% discounts to market make retailers look “cheap” on an historical basis, but current consensus is for 15% earnings growth in FY12<\/span> and Merrills<\/span> believes that can only come down. Merrills<\/span> can't see any positive catalysts in the next six months.<\/p>\n

\n\tMorgan Stanley is not beating around the bush. “Retailers are only beginning to feel the impact of internet retailing,” the analysts declare. High labour<\/span> costs and rents are the drivers behind 19-64% lower on-line prices among 99 categories surveyed by the analysts. Books (64%) and cosmetics (44%) showed the biggest discrepancy. <\/p>\n

\n\tMorgans<\/span> is forecasting a fall in the compound annual growth rate of in-store sales to 3.6% over the next four years from the 5.9% level of the last ten years. Food will not be impacted but electrical, clothing & footwear, newspapers & books and department stores will suffer the most. By contrast, Morgans<\/span> sees on-line sales growing by 20% plus over the period.<\/p>\n

\n\tThat seems like a stark contrast but we must consider that the level of on-line sales is still at a low base, just as astronomical growth in on-line classifieds was a feature of previous years from humble beginnings. It's nevertheless not that easy to gauge<\/span> exactly what the current percentage of on-line sales actually is. The Australian Bureau of Statistics calculates retail sales each month but the on-line component is sourced only from local retailers with on-line alternatives. On-line-only retailers and offshore retailers are not counted.<\/p>\n

\n\tMacquarie analysts have, however, come up with a measurement by sourcing other retail sector surveys. Their conclusion is that estimates have Australians spending $29.7bn<\/span> on-line in 2011. Take out service-related spending (financial services, travel and event ticket sales) and that leaves $21.3bn<\/span> which, when added to the ABS numbers comes up with around 7.8% of retail sales.<\/p>\n

\n\tYet the Macquarie analysts are a little more sceptical<\/span> than most when it comes to declaring the demise of bricks and mortar retail. So they decided to do a bit of a survey of their own.<\/p>\n

\n\tMacquarie found, unsurprisingly, that price is the clear motivating factor for 90% of Australians who have shopped on-line, far more so than convenience or product range. More than 70% say the strong Aussie has impacted their decision to buy on-line. More than 70% say the on-line shops they use most do not have a local physical presence, and over 60% expect to increase the amount of their on-line spending in the next twelve months.<\/p>\n

\n\tBut more than one third said they would reduce their on-line spending if the Aussie depreciated by 20%. This question was asked because Macquarie economists expect all of the Aussie, euro and pound to depreciate by this amount over the next 2-4 years against the US dollar.<\/p>\n

\n\t“The consumer is clearly very price focused and the A$ is having a material influence on this,” the analysts conclude, “suggesting that whilst there does appear to be a structural shift away from bricks and mortar retail to on-line, part of the increase is cyclical”.<\/p>\n

\n\tIn other words, while the consumer is cautious, for the various reasons listed herein, and the Aussie is strong, cheaper on-line shopping seems like a sensible household budget alternative to bricks and mortar shopping. But if the climate becomes brighter for the consumer and the Aussie depreciates, then the lure of on-line shopping would diminish, Macquarie suggests.<\/p>\n

\n\tOne can envisage a scenario in which the US economic recovery picks up steam, sending the greenback higher and the Aussie lower, which is no doubt a lot to do with the Macquarie economists' forecast, but a fall in the Aussie based on a hard landing in China, for example, would hardly set the cash registers ablaze. Similarly, the Australian housing bubble is not likely to begin reinflating<\/span> if the RBA<\/span> drops rates due to a Greek default and ensuing European crisis.<\/p>\n

\n\tThere are many moving parts in the machine. And indeed, the Macquarie analysts are not drawing hard and fast conclusions – they are merely attempting to water down the current “sky is falling” hyperbole surrounding today's on-line retail debate. And the analysts do concede various non-cyclical elements within the results of their survey.<\/p>\n

\n\tMore than 70% of those surveyed, for example, list “saves time” as a reason to on-line shop (bearing in mind more than one box can be ticked). Two-thirds list “can shop after hours” and two-thirds list “easy to compare offers”. Just over half list “can take my time”.<\/p>\n

\n\tClearly these are structural, and not cyclical, considerations. I'm slightly surprised, however, that less than a quarter of respondents list “avoid sales assistants” as a reason. Maybe I'm just a Grumpy Old Man. But I would have liked to have seen a box with “find retail shop assistants mostly useless” next to it. Macquarie's question seems more targeted at shoppers who don't like to be coerced.<\/p>\n

\n\tMaybe a good indicator is to compare the more mature on-line markets in the US and UK with the more fledgling Australian market. Here Macquarie finds that the most recent measure in Australia of 7.2% on-line share compares to 8.5% in the UK and 5.3% in the US. On that basis, Gerry Harvey could probably relax. But is it really apples to apples?<\/p>\n

\n\tAs Macquarie points out, there are differences in population size and density which would render bricks and mortar retail costs lower and turnover higher in the other centres<\/span>. And if a strong Aussie is a driving force locally, then a weak greenback must be having the opposite impact. Realistically, the comparison is not that robust.<\/p>\n

\n\tSo what is the ultimate conclusion?<\/p>\n

\n\tI suggest that there are a number of reasons why Australians are shifting on-line, and as more shoppers lose their on-line virginity the rate of growth of on-line shoppers will accelerate. The main reason for shopping on-line is price, although that may temper with a fall in the currency. Yet I still believe the currency is only one factor, given the iPod argument. While a pick-up in consumer confidence will no doubt float all boats, the household budgetary need to shop on-line may ease. But then if the turnaround takes too long, Australians may become too enamoured<\/span> with their on-line versus bricks and mortar experiences to go back.<\/p>\n

\n\tConsider that you never see record shops, video shops or picture theatres<\/span> opening<\/em>. <\/p>\n

\n\tThere have already been suggestions that our future retail sector will not involve shops as we know them now, but merely showrooms. There we will try on clothes, sit in sofas, wonder at TV picture quality and fiddle with stereo knobs. Then we may leave to seek feedback from on-line chat rooms before making a decision and placing an order for delivery. Or, with the help of the one showroom attendant, we will order on the spot.<\/p>\n

\n\tSo rather than think about whether or not it's a good idea to buy large discretionary names, why not think about how those goods will get to you, and what listed stocks one might acquire in the the storage and logistics space.<\/p>\n

\n\tPlease also note that I am not a licenced<\/span> financial adviser and any information contained herein is to be considered general in nature. Before making any investment decision FNArena<\/span> strongly advises contacting your own stock broker or investment adviser. <\/strong><\/p>\n

\n\tFind out why FNArena<\/span> subscribers like the service so much: "Your Feedback (Thank You)<\/a>" – Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"