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Like An Aging Movie Star, It All Looks Good On The Surface.

Retail sales are still growing in Australia.

They may not be growing at more than +7% this year but they will more than likely end up above +3%. If it hadn’t been for the unsustainable growth we’d experienced over the preceding decade we’d probably be saying that was reasonably acceptable. If you were a retailer in the UK or USA right now you’d be jumping for joy at our top-line growth numbers.

But surface appearance can often overshadow what’s really going on under the skin. Our top-line growth numbers as aggregated in the ABS All Retail Data gloss over two important sub-themes.

Firstly, we have entered an era where the cost base of most retailers is about to or is already growing faster than their top-line. While some retailers can offset this with currency gain or margin, many can’t. If the value of the Australian dollar heads south nobody can offset the cost blow-outs. The complications here involve both government policy related cost increases such as those involved with user-pays infrastructure and energy production investment offsets as we migrate to “cleaner” energy and demand based cost increases.

Cost management will become an increasingly important aspect of retail life in the short term at the very least. This will be further magnified by complications in many sectors around continuity of supply – notably in food.

The second sub-theme is the one revolving around shopper behaviour as they shift not the aggregate of what they spend but where and how they spend their household income. From the shopper behaviour aspect we have entered what many are calling “the perfect storm”. This is a period when household costs are rising at the same pace as the average value of household assets (housing prices / superannuation / shares) is falling.

As a consequence shoppers are reviewing the mix of their expenses as needs based shopping eats up a disproportionate percentage of their overall expenditure and their willingness to overspend erodes. Fuel, energy and food are rising at more than double the pace of real household incomes. Something’s got to give. While there is some room to reconsider food consumption patterns and transport, the reality is discretionary expenditure is going to suffer the most.

What this really means is that for everyone outside discount department stores, supermarkets and essential household goods retailers, the days of assuming a base level of sales are over.

Good retailers are thinking right now about profit protection. How do I manage my costs and create merchandising strategies (product architecture) and promotional strategies that allow me to protect my profits.

If you haven’t reviewed your strategy and tactics in the last 6 months now is the time to do it. The good operators won’t just outperform the poor operators at this point in the cycle. They’ll prepare themselves to soar when the cycle turns.