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The Future Of Retail Is Emerging Quickly

Risks continue to mount for Australia's retail sector. High levels of competition, digital disruption and weak household income growth are limiting expenditure. While population gains are one of the positive aspects, this continues to be outweighed by slower wealth accumulation and high household debt.

In the light of such conditions, Deloitte Access Economics looks at the benefits that can be obtained from the online disruption. Online expenditure is rising rapidly and provides an opportunity for retailers to expand market share.

2018 started slowly for consumers and after a stellar performance in 2017, the outlook for the labour market is more subdued. Employment growth over the year has decelerated to 2.7% in April from a peak of 3.6% in January.

Inflation continues to fall below the Reserve Bank's 2-3% target range, and the report notes the story is worse on the retail front, with prices falling over that period.

The housing market has also cooled, with a -3.4% decline in Sydney house prices noted to April. The main positive news is that the federal budget provides some prospective relief via income tax cuts, which means retailers are likely to be a major beneficiary of any improvement in consumer hip pockets.

While retail prices outpaced volumes over the March quarter for the first time since September 2016, Deloitte Access Economics suggests this is unlikely to continue. A highly competitive retail environment is expected to keep price growth subdued going forward.

Category Outlook

Spending on catered food continues to grow strongly and this is being led by the increased availability of online platforms such as UberEats and Deliveroo. The sector is also experiencing a move away to healthy food dining and takeaway outlets from shopping-centre food courts.

The report suggests future sales growth is still more likely to be linked to population growth, tourism expenditure and improvements in the consumer budget.

Meanwhile, the entry of international brands to Australia's retail environment is supporting demand for floor space and providing a curb to vacancy rates, underpinning rental returns. Yet the report indicates the growth of online expenditure poses a risk to “bricks & mortar” outlets the future.

Department stores are the main victims of this development. Over the next five years, department store volumes are expected to grow at an average of 0.8%. The advantage as a one-stop shop has now all but been removed, as online stores offer more options and greater variety.

Deloitte Access Economics suggests that the non-food retailing sector will continue to struggle with price deflation, particularly in clothing and footwear.

Rising competition from overseas fashion houses combined with a growing online presence has meant retailers are under pressure to increase volumes or reduce costs to maintain margins. This has resulted in a number of well-known brands exiting the market.

The value of retail building approvals fell in the first quarter of 2018, which the analysis suggests is a pullback after a very strong performance in the December quarter.

Nevertheless, this also indicates some caution should prevail in looking at the trends because the move to online spending will limit the demand for floor space in the future.

Who Benefits From Online?

Deloitte Access Economics suggests consumers are the primary beneficiaries of online retailing, which comes with better service, more accessible products and lower prices. The technology creates opportunities for domestic retailers that can expand service offerings outside traditional channels.

The value of online spending has risen to 8.1% of total retail expenditure in 2018, from 4.9% in 2011. The main drivers of online expenditure growth over recent years has been wealth-driven, large consumer items, an area where retail sales have been relatively stronger.

There is also evidence that the footprint is broadening into staples such as groceries and hospitality. Groceries, the third-largest category by online share, recorded annual growth of 14% to March 2018 as a major supermarkets expanded services.

Homewares as a category, despite a loss of momentum as housing cooled, is expected to continue to account for a large share of online spending.

The analysis also finds branding is starting to play a larger role. New technology such as voice-enabled ordering creates a new path to purchase but also a problem for retailers in ensuring customers ask for their brand(s).

The introduction of GST on low-value goods will have a negative outcome for consumers in the short term, the report points out, as this will raise prices for overseas goods and may cause supply disruptions.

Despite the likely challenges, a GST should gradually erode the existing competitive advantage held by some low-cost overseas online retailers. Here domestic retailers have the opportunity to re-take market share.

The report also finds that, unlike traditional retailing, the geographic spread of online is not based on the location of operators but rather the location of consumers that purchase goods online.

Hence, internet connectivity, availability of traditional alternatives and population density are decisive factors. Statewide, NSW, Victoria and Queensland account for almost 78% of online spending over the past year.

The ACT is the strongest performer relative to population growth. The reason ACT performs the strongest on a per capita basis is likely because of a higher-than-average disposable income enjoyed by residents.

Yet, residents of Northern Territory and Western Australia have recorded above-average per capita online expenditure, which in turn suggests that isolation from traditional alternatives can also play a role.

While older generations have been slower to embrace the digital options, a reversal of this trend may be on the cards, too. An increasing presence of over-65s on the net provide opportunities for major food retailers in particular. Mobility restrictions entice many of these consumers to opt for home delivery.

For real estate the many advantages of certain physical locations should ensure demand for premium retail space remains robust over the short to medium term as distribution centres emerge and provide opportunities for retailers to leverage their online marketplace.

Conversely, the report suggests, demand for sub-prime retail space is likely to come under increasing pressure at the same time.

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The content of this information does in no way reflect the opinions of FN Arena, or of its journalists. In fact we don't have any opinion about the stock market, its value, future direction or individual shares. FN Arena solely reports about what the main experts in the market note, believe and comment on. By doing so we believe we provide intelligent investors with a valuable tool that helps them in making up their own minds, reading market trends and getting a feel for what is happening beneath the surface. This document is provided for informational purposes only. It does not constitute an offer to sell or a solicitation to buy any security or other financial instrument. FN Arena employs very experienced journalists who base their work on information believed to be reliable and accurate, though no guarantee is given that the daily report is accurate or complete. Investors should contact their personal adviser before making any investment decision.



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