ODT senior business reporter Simon Hartley talks with Westpac industry economist David Norman on the retail sector and its tough outlook.
New Zealand's retail sector faces a raft of increasing pressures which are chomping through profit margins mercilessly, and putting up the price is not an option.
Whether the retailer is a small, family-owned outlet in the suburbs or a high-flying listed company with multiple outlets, the issues are similar.
Consumers have become particularly savvy to increasing their purchasing power at sale times and retailers now offer much anticipated sales programmes throughout the year, even leading into Christmas now, as opposed to more traditional Boxing Day sales.
Westpac's industry economist David Norman said the retail sector was arguably one of the most challenged in the country.
There was increasing online competition, a squeeze on profit margins and the risk of low-cost bulk competitors challenging how traditional retailers operated.
‘‘We expect to see retail spending slow over the next year as GDP [gross domestic product] growth moderates, unemployment rises, and wage inflation remains low,'' Mr Norman said.
‘‘Factors over which retailers have little control will create winners and losers.''
Examples included recent house price gains and the trend for retirees to cash up and move out of Auckland, buying more affordable housing in the regions, which left them with plenty of cash in hand.
There was now a DIY-er generation, created by cooking, renovation and gardening TV shows. Fears over terrorism could mean consumers buy cars or boats, rather than travelling overseas.
One of the more obvious risks for retailers was competition from offshore online retail sites.‘‘This will continue to hurt retailers selling books, electronics, cheaper undifferentiated or generic clothing, hardware and homeware the most,'' he said.
In 2000, when ‘‘non-store retail'' was driven by catalogues and direct mail, the sub-sector employed 3000 people and was worth $180million, but by 2014 it was predominantly online-only stores employing 4000 and generating $289million.
‘‘These businesses accounted for two-thirds of the $1.06billion of value added by ‘other retail,'' Mr Norman said.
However, online would have less of an effect on businesses which developed and sold differentiated independent brands, bulk or fresh/live products.
‘‘Government action to collect tax on online services is not expected to extend to goods, which means this problem is not going away soon.''
Mr Norman said bigger profits for retailers would come from cutting costs, not raising prices. Retailers were already getting the customer to do more of the work with self-service checkouts and electronic labelling.
They were also transferring risk to the supplier through sale or return agreements on products, and reducing their supplier lists, Mr Norman said.
Consumers should expect more discounting, which has increased across homeware and electronics, hardware and garden, and the recreation retail sectors.
‘‘We expect this to continue, with evidence suggesting the trend is growing in food and grocery retail as well,'' he said.
During the past two years, large recreational stores did not - for reasons such as weather - hit seasonal sales targets, leaving them with unsold stock. That stock must be sold discounted, often slashing an already thin profit margin.
‘‘The everyday discounts at full-price stores will make survival a challenge for outlet stores,'' Mr Norman said.
Most listed retailers whose end-of-year stock inventories increase - and are worth tens of millions of dollars - are punished in the markets.
Mr Norman said larger retailers in most sub-sectors were expected to expand their shop footprints, either through larger format stores, which allowed customers to get everything required under one roof, or through greater geographic reach, Mr Norman said.
‘‘Smaller retailers will need to offer something no-one else does to remain competitive.''The last main issue was ‘‘product and service differentiation'', he said.
Differentiated products which consumers could not buy from an offshore or local online competitor would be most viable, such as developing a house-brand for food and groceries, or hardware products.
‘‘[However] consumers are unlikely to buy a brand that they have never heard of from a retailer they don't know or trust,'' Mr Norman said.
‘‘In a lowest-price-wins environment, retailers will need to ‘wow' on service and product knowledge to create loyalty.''
Mr Norman said that by retail standards, the recreation sub-sector had one of the more challenging few years.
‘‘Growth was strong in the years to 2008, although the increase in the number of businesses was far weaker than for employment and value added,'' he said.
Since 2008, however, both employment and the number of businesses had steadily fallen. By 2014, there were fewer recreation businesses than in 2000, making this sub-sector unique within retail.
‘‘Recreation has struggled to recover from the 2008 recession and changes in technology, including e-readers and offshore online traders.''
The recreation sub-sector includes sports and camping equipment, entertainment media, toy and game, book and newspaper, marine equipment retailing, stationery, antique goods and flower retailing.
While sport, camping and marine were on the rise, bookstores and entertainment product stores were having to reinvent themselves.
‘‘We expect bookstores to continue to become gift, toy and stationery stores, competing directly with stores that have traditionally been in that space,'' he said.
‘‘The sale of big-ticket items such as boats, a luxury good, is relatively dependent on the economic cycle.''
Industry sources spoken to by Westpac suggested a strong order book during the next few months, but Mr Norman noted these were orders placed during the past year, when, for example, Auckland house prices were growing strongly, giving people equity to make large purchases.
‘‘As house price growth falls, we expect sales of these luxury items to slow,'' Mr Norman said.
For New Zealand overall, Mr Norman expected retail spending to slow over the next year as GDP growth moderated, unemployment rose, and wage inflation remained low.
He said while population growth was currently an important positive, it would weaken from late next year.
‘‘Longer term, we expect a more substantial dip in consumption spending with less population growth, a weaker exchange rate and a slowing housing market.''
Retail
• Is largest sector in New Zealand.
• 2014 employed nearly 186,000 full-time equivalent workers.
• Generated $12.7b in value.
• Contributed 5.5% of New Zealand's GDP.
2014 retail spending
$3.17b Food and grocery.
$3.33b Clothing, cosmetics, toiletries, pharmaceuticals.
$1.71b Vehicles and parts.
$1.18b Hardware and garden.
$1.14b Homeware and electronics.
$1.06b Recreation (sports, camping, entertainment media, toy, game, book, newspaper, marine equipment, antique, floristry)
$1.06b Other retailing (pet stores, duty free, craft goods and online only traders).
Source: Westpac
Trends and risks
• Competition from offshore online retail.
• Bigger presence - larger retailers in most sub-sectors expected to expand their store footprint, or through greater geographic reach. Discounting has increased across homeware and electronics, hardware and garden and recreation retail.
• Bigger profits will come from cutting costs, not raising prices.
• Product and service differentiation - products consumers can't buy from offshore or local online competitor.
• External factors - spending from increased house prices and cashed-up retirees, reality TV DIYers and reaction to terrorism threats.
Source: Westpac
