In Retail: COVID-19 special edition #1

The COVID-19 crisis is undeniably changing the retail landscape, not only in Australia but across the globe.

While the crisis is ongoing and the extent and length of any impact remains unknown, both retailers and consumers (as well as landlords and financiers) are being forced to respond and react to the situation that will not only have short and medium term impacts, but will permanently change behaviour and the landscape, leaving an indelible mark on the industry.

This report is the first instalment of our analysis on the industry, looking at how the crisis will reshape it, and identifying strategies that retailers can look to adopt to support their longer term survival.

Initially the attention was on the impact the virus would have on supply chains of our retailers sourcing from China as a result of factory and transport hub closures. That focus quickly moved to panic buying and stockpiling, and more recently social distancing and quarantine measures restricting the ability for sectors to trade and threatening business viability.

We have monitored a number of real time sales measures including the Kepler Retail Index and CBA DailyIQ to determine the impact by sector to date and note dramatic differences in the fortunes and performance of various categories. Here is a look at winners and losers based on data to the end of March 2020.

Winners

• Supermarkets, food and liquor retailers

• Pharmaceutical retailers

• Hardware, building supplies and garden retailers

• Computers and electrical appliances

• Toy and game, sporting goods retailers (over the last week)

Losers

• Discretionary retailers (in particular footwear, clothing and apparel, department stores)

• Cafes, restaurants and takeaway food service

• Personal care and health related service

• Travel related retailers (travel agencies, fuel)

We looked into the impact on each major category in the retail industry in our earlier blog here.

The other observations impacting retailers that can be made include:

Footfall is down materially
In the first three months of 2020, Kepler Analytics customer traffic and consumer behavior data showed Australian stores had been experiencing an average of c.12% decline on outside foot traffic compared to the same period in the previous year, which is likely linked (in part) to bushfires, falling consumer confidence and increasing conservatism. This fall continues to accelerate.

Many retailers unviable in the current market
Many discretionary retailers have experienced sales declines of well over 50% since the start of the crisis, making many businesses unviable. This is evidenced by the many national chain retailers voluntarily electing to close their entire networks. Kepler Analytics has reported that of the 3,000+ Australian stores it tracks 55% have closed as at the end of March 2020. This is in turn impacting footfall.

Landlords discussions to commence
The landlords we have been speaking to have received a range of approaches from tenants; from refusing to pay rent, seeking rent holidays or abatements, proposing to pay rent based on a percentage of turnover, to converting stores to distribution hubs for online orders. Metro and regional centres have suffered the greatest impact with neighbourhood centres (largely anchored by supermarkets) have been somewhat protected.

Until now landlords have not yet made any “drastic” decisions. In light of the government direction on how tenants and landlords should negotiate, we expect this will need to be dealt with in the coming weeks.

Flow on impact to manufacturers
A number of retailers with wholesale operations have also noted that orders from both physical and online wholesale customers have been withdrawn. This adds a further challenge for those operators around forecasting and production, and creates potential inventory and working capital issues that will need to be managed going forward.

FX a challenge
The AUD:USD exchange rate has fallen 13% from 0.70 to 0.61 in the first three months of 2020. This may pose a challenge for retailers sourcing offshore and those who have USD denominated debt.

As we head into the unknown, we reflect in the rest of this paper on the performance of the retail industry in the lead up to COVID-19, an industry already under a level of pressure amongst talk of the retail apocalypse, as a basis for looking at the potential implications going forward.

Retail sales

The Australian Bureau of Statistics reported retail sales growth of 2.7% (+$8.8 billion) to $329.6 billion in 2019, which was below the 5-year average of 3.3% for the third consecutive year, despite the stimulus through tax reform and multiple reductions in the interest rate cut during the year.

Retail sales growth by year

Despite this slowing of growth, the fact the retail sales have consistently outpaced GDP growth (GDP growth was 1.7% in 2019) means consumers continued spending at a greater rate than the relative growth of their incomes (and disposable incomes).

As a result, Australia has seen a steady reduction in household savings over the past 10 years, from over 10% in 2009 to only 3% in 2019. This erosion of household savings may present an issue for the post COVID-19 world if consumers seek to increase savings, presenting a headwind for retail in coming years.

Retail sales growth by month – 2019

Despite retail sales experiencing some growth, the monthly results showed a greater volatility than in prior years, with a decline recorded in two of the twelve months.

Looking at the data there are two clear trends in 2019 – a pull forward of Christmas spending and dominance of experiential categories.

Pull forward of Christmas spending
The data provides evidence of a change in consumer behaviour with a pull forward of spending from December (-0.6%) to November (+1.0%), attributable to increased promotional activity and flash sale events in November with “Singles Day”, “Black Friday”, “Cyber Monday” and “Click Frenzy” growing in popularity.

It is worth remembering that while the December seasonally adjusted results were down in relative terms compared to November, absolute spending was up in December 2019 compared to December 2018 by 2.7%.

Growth by category
Whilst some retail categories recorded growth rates outperforming the broader industry, including ‘clothing, footwear and personal accessory’ (+3.7%) and ‘food retailing’ (+3.6%), ‘department stores’ are trailing with modest growth.

Retail sales growth by category –  2019

Above industry growth in the experiential categories and discretionary spending of ‘other retailing’, which incorporates sub-categories such as ‘pharmaceutical, cosmetic and toiletry goods’. The categories aligned with immediate consumption and lifestyle also experienced moderate growth throughout 2019, with ‘café, restaurants and takeaway food services’ also recording an improvement through the second half of the year.

‘Household goods’ was the worst performing category, appearing to have been impacted by lower turnover in residential property sales, lower residential property values and major bushfires towards the end of the year suggesting consumers were hesitant to spend on home improvements.

Latest data
Retail sales in 2020 have been mixed with a decline of 0.3% in January 2020 and 0.5% growth in February 2020 following two consecutive months of contraction. We anticipate COVID-19 will have a material impact on retail sales from March 2020 onwards.

Consumer confidence

The Westpac-Melbourne Institute recorded consumer confidence falling significantly by 8.7 points during 2019, with deteriorating levels of sentiment coinciding with slowing economic growth and increased media coverage of domestic and global concerns.

Westpac Melbourne Institute Consumer Confidence Index

While there has been limited correlation between consumer confidence and retail sales in recent times, it provides an insight into the consumer psyche and remains an interesting data point. We have seen further falls in consumer confidence in 2020 as a result of COVID-19.

Online retail sales

Online retail sales as reported by NAB experienced another year of significant growth in 2019, with an increase of 10.6% (seasonally adjusted) recorded. This year saw a perpetuation of the growth trend in online sales, continually outpacing broader traditional retail sales. Online retail sales is now equivalent to approximately 9% of traditional retail sales as Australians catch up with other more mature online markets such as the USA, China and United Kingdom with online retails sales market penetration of greater than 15% of total retail sales.

As consumers continue to make the transition to online retailing, it provides retailers an opportunity to invest in ecommerce and continue the online growth journey, whilst also presenting a severe threat to those left behind. This has become increasingly more important in the COVID-19 world.

Online retail sales growth by year

The positive shift in growth over the last two years has coincided with the launch of a number of new major online merchants in Australia (including Amazon in December 2017), the resultant increased adoption of online and mobile shopping, the response of domestic merchants to the increased competition, and the anticipated removal of the $1,000 GST exemptions for purchases from overseas merchants.

Online retail sales reduced by 0.3% in January 2020 followed by an increase of +1.6% in February 2020, we anticipate there will be a marked further shift towards online sales post March 2020 with the social distancing measures in place and many retailers moving to online only with the close of their physical stores.

To see what is happening to the retail environment in New Zealand click here for McGrathNicol New Zealand’s comparable report.