The Biggest Issue Facing Retail.

Retail growth is outperforming the economy. Year on year growth as measured by the Australian Bureau of statistics is consistently above four per cent in an economy that is growing at two per cent. In other words – double the rate of GDP growth. Far from celebrating, the industry mood is one of survival. As margins decline and costs escalate the profit crunch is hitting hard in the majority of retail businesses.

The consensus amongst leading economists is that world growth – including Australia – will experience low, steady growth for an extended period of time. Many believe for more than a decade. But that is not the bad news as even within that economic context – one that has continued since 2009 – we have still seen retail grow at its average fifty-year growth rate.

The bad news is that, just like retail businesses themselves, our consumers are themselves experiencing a reduction in disposable household income. The recent ABS numbers suggest that disposable household income is currently shrinking by one point two per cent per annum. While interest rates are low and they feel the value of their primary assets (most notably the value of their homes) is high, consumers continue to spend and are open to fund their retail expenditure through debt.

But just like running a company or for that matter a country, we all know that when the interest rate cycle turns and asset backing drops the crunch on disposable income really bites our ability not only to increase our purchasing but on simply servicing accumulated debt.

Right now the retail industry has the paradox of wanting low interest rates to fuel consumer purchase growth but is suffering margin losses from the Australian dollar. Depending on whether you are an exporter or importer you will have a different view of the current position. But roll the picture forward and the point in time where interest rates are raised becomes the fulcrum for retail sales decline.

In the context of rising costs and lower margins, any decline in sales will be terminal for a great many retail businesses. Faced with this issue – the biggest issue facing retail today – retail businesses in Australia have no choice but to develop plans to increase margin, contain costs and create competitive leverage through differentiation.

There is no time left to mess around.

Starting now, every retail leadership team in the country should be addressing the three levers that they can pull to put themselves in the best position to handle external shocks that they have no control over. Build and execute plans which make your products and services stand out as genuine alternatives based on uniqueness, quality and style. Ruthlessly review costs and reduce them or at least contain them wherever possible – in particular where they do not touch the customer or staff motivation. And begin the migration to higher margin more through pricing than supplier cost cutting.

It may be an intellectual issue now. But the reality will bite soon. Be ready.