Winners and losers in retail

There’s a lot of talk in the media at the moment about the soft retail market. Consumer confidence is down[ref]Australian Consumer Confidence, Trading Economics[/ref] and we (as we’re all consumers) are not spending like we used to, or at least we’re not spending like the retailers would like us to, and that when we do spend that we’re running to cheaper online retailers. I’m not sure that this is the whole story though.

With a spare Sunday afternoon on my hands I decided to spend some time trawling through the ABS retail data and take a look beyond the month-on-month trends. Working on an Australian version of the Shift Index[ref]The Shift Index: Measuring the forces of long term change, Deloitte[/ref] has nudged me to wonder about the long term trends that are affecting retail.

Australian retail performance over the last 20 years

Pulling down the latest retail turnover data from the Australian Bureau of Statistics (ABS) we can plot turnover by industry group over the last 20 years[ref]8501.0 – Retail Trade, Australia, Jun 2013, Australian Bureau of Statistics[/ref]. This time period covers the eighties boom, the slow nineties and then the boom from 2000 to now. Note that the only recession in AU in this time period is 1990-1991, though there were slowdowns in 1983, 1986, 1991, 2000, 2006, and 2009.

Note that all figures are in millions of AUD.

This is quite uninteresting, aside from the fact the supermarkets and grocery have out-performed the market by a handy margin.

We, however, are interested in the long term trends, and this means accounting for economic and demographic growth. All boats will rise with the tide, but we’re interested in finding out if some industry groups are growing faster – or slower – than the market around them.

Let’s normalise the data so that we’re sure we’re seeing growth, and not just creep due to a growing market or population.

First we’ll normalise by population. We want to see if an industry group is selling to a larger proportion of the population and not just growing as their addressable market expands organically. We can use population from ABS’s surveys from 1983 to 2006,[ref]3235.0 – Population by Age and Sex, Australia, 2011, Australian Bureau of Statistics[/ref] and their predictions from 2007 to 2013.[ref]3222.0 – Population Projections, Australia, 2006 to 2101, Australian Bureau of Statistics[/ref]

Next we need to account for the decreasing value of money (inflation). Since we’re interested in consumer behaviour we’ll use the Consumer Price Index[ref]6401.0 Consumer Price Index, Australia, Australian Bureau of Statistics[/ref] (CPI) rather than Producer Price Index[ref]6427.0 Producer Price Index, Australia, Australian Bureau of Statistics[/ref] (PPI).

Out of interest though we’ll see how CPI and PPI and growing relative to each other.

You’ll note that the PPI has been creeping above CPI, which backs up the stories we hear about decreasing margins and the need to belt-tightening in retail.

Now we can normalise our previous retail graph so that it represents retail turnover at constant 1983 prices and population. We’ll assume that CPI and population are independent for this exercise.

It’s interesting that supermarkets and grocery started out flat(ish) and then rose with the long boom from just after the 1991 recession until the 2008 crunch, and have flattened out a bit since then.

The graph is still dominated by supermarkets and grocery though, so let’s pull them out to see if anything interesting is happening down at the bottom of the graph.

The bottom of the graph is a mess, so we’ll break them into winners, the losers and ‘the rest’ and see what can be found.

Winners

First we can separate out the obvious winners. These are the industry groups that have outperformed the market, showing consistent growth over the last 20 years.

All these industry groups are increasing their share of the nation’s wallet: they’re selling more stuff to more people and seeing more revenue even when inflation is accounted for. Takeaway is a bit weak in this regard, but we’ll leave it in as there’s an upwards curve toward the end.

The problems that we hear about in the hotel industry[ref]Simon Johanson (August 14, 2013), Straitened times put pubs on block, The Age[/ref] might be true, but they’re not due to a contraction in consumer spending. These are more likely due to rising producer costs and a shift from more traditional drinking holes to licensed cafes and other alternative venues.

Losers

There’s a few obvious losers, all who are seeing long term decline.

None of these industry groups are doing well.

Department stores have been in decline since the mid to late eighties. They perked up a little during the boom, but slide back into rapid decline since roughly 2006.

Clothing has been on a similar journey to department stores, though there appears to be a gentler (but still consistent) long term decline.

Books and news agencies have been consistently sinking since the mid eighties. Recently, from roughly 2011, their decline appears to have sharpened slightly.

Unfortunately, this data does not explicitly include online retail as the ABS has only recently begun highlight online sales,[ref]8501.0.55.007 – Information Paper: Measurement of Online Retail Trade in Macroeconomic Statistics, 2013, Australian Bureau of Statistics[/ref] though the shift in consumer spending habits to online purchases is clearly hurting all three of these industry groups

Another factor to consider is the cost of goods. We might be buying as many clothes and books – we might even be buying more that we have historically – but if the unit price of those goods has dramatically declined then overall value of goods sold may have come down. We’re buying more but paying less.

Low cost fast fashion retailers, such as Zara and H&M, for example, are putting significant pressure on prices as they colonise new markets with their cheap and cheery on-trend offerings. Simple clothes made to a low price point and delivered to the waiting consumer just when they realise that they need them. This might have trapped more traditional retailers in the red queen effect,[ref]The ‘Red Queen hypothesis’, also referred to as the ‘Red Queen’s race’ or ‘The Red Queen Effect’, is an evolutionary hypothesis which proposes that organisms must constantly adapt, evolve, and proliferate not merely to gain reproductive advantage, but also simply to survive while pitted against ever-evolving opposing organisms in an ever-changing environment.[/ref] where they find that the need to work harder and harder just to keep up.

Those in-between

Finally, we have the industry groups that are somewhere in the middle.

Other Recreational Goods might as well be a flat line running along the bottom of the graph. Footware and Other Specialised Goods only did a little better. The share of the population’s wallet is stable for these industry groups. They’re not in decline, but they’re not growing either.

Hardware and Other Retailing floated up with the boom but now appear to have flattened out, though Other Retailing might be in danger of tipping into decline.

Furniture appears to be a loser here. There’s a slight sink during the late eighties, growth during the boom in the nineties, and now appears to have moved into decline. Is lower cost furniture from the likes of IKEA pushing down revenues just as cheaper clothing might be as hurting more traditional clothing retailers? We might be buying more, but we’re spending less.

Electrical was the strong performer in the group but tipped over the edge around 2008–2009 and looks like it has further to come down. This again might be a case of we’re buying more but spending less. I, for example, have always paid roughly $2,500 for my computers. My first was a low end 8060 PC, while my latest is a MacBook Pro that has a strong resemblance to a supercomputer, and I’ve had the usual desktops in-between. I’m keeping my computers longer than I used to, as the impetus to upgrade seems to have faded away.

We can see the retail market shifting

Overall we seem to be seeing a long term shift in consumer behaviour. This shift is driving a reconfiguration of the retail landscape. Globalisation and industrialisation are providing we consumers with more options to source the products we need (especially online). We’re no longer restricted to what we can find locally. If we want the best, or even just the cheapest, then we can search the globe to find what we want.

As I pointed out the other week,[ref]Peter Evans-Greenwood (7 July 2013), The destruction of traditional retail, PEG[/ref] being little more then the last step in someone else’s supply chain is no longer a viable strategy. Department stores, bookshops and clothing retailers are in long term decline as we’re finding it easier and cheaper to find the stuff we need on our own without their help. This doesn’t mean that they will disappear all together; but their addressable market has contracted significantly, and continues to contract.

Anecdotally it appears that malls appear to be escaping this trap by converting themselves into entertainment, rather than shopping, destinations (but that’s a different blog post).

Looking good, eating out and getting smashed are more popular than ever. The three of the biggest winners in this market – cafés, liquor and eating out – seem comfortable as their customers have few other viable options. But are they safe as they seem? I’m hearing that Tesco (in the UK) is making inroads on the takeaway trade by offering ready made meals for two for £9 on a Friday night.[ref]Tesco “Finest” Meal Deal for 2 inc Bottle of Plonk £9.00 Online & INSTORE @ Hot UK Deals[/ref] It’s hard to predict what the future will bring.

In the middle we have a collection of industry groups that either have a stable share of the nation’s wallet or which appear to be in transition. Industry groups such as Electrical, Hardware and Footware have only recently tipped over the edge into decline.

It’s all about the people stupid

Retailers are caught between a globally market and dropping unit prices, and it’s no longer enough to be close to the customer. Consumer behaviour is changing and retail needs to change with it. Zara is a great example of how to leverage this change in behaviour to create low cost, high volume model that is outperforming the market.

I suspect, however, that consumer behaviour is one area where regional culture and economies will have some interesting variations within an overall global trend. The Dutch, for example, buy food much more daily as do the French and so online food shopping has not made too much headway in these countries.

Ultimately retail is ‘all about the people stupid’. Stores and retail have to adapt to how people are changing their behaviours. We’re in the midst of a long term shift in behaviour and the retailers that can’t adapt are being left behind.

It’s an interesting area though, so I’ll try and pull some of these issues apart a bit more in future updates.

Image source: Andrew Michaels