In Retail (New Zealand): COVID-19 special edition #1

The COVID-19 crisis is undeniably changing the retail landscape in New Zealand and across the globe.

While the crisis is ongoing and the full extent and length of any impact remains unknown, retailers, landlords and financiers are being forced to react to a situation that will not only have short and medium term impacts, but will likely permanently change consumer behaviour and supply chains, leaving an indelible mark on the industry.

Initially the market focused on the impact on supply chains and sourcing from China as a result of factory and transport hub closures. This quickly moved to panic buying and stockpiling, physical distancing and quarantine measures, and finally total lockdown in New Zealand, restricting the ability for sectors to continue to trade and threatening business viability.

We have monitored several real time consumer behaviour and sales measures including the Kepler Retail Index and MarketView’s Paymark data to consider the impact by sector to date, which shows dramatic differences between categories.

As we head into the unknown, we will reflect on the performance of the retail industry and consider potential implications going forward. This report is the first instalment in a series we will develop over the coming weeks to help retailers, landlords and stakeholders consider the implications for their businesses and identify strategies to support longer term survival. This first report looks at trading immediately prior to the lockdown and recaps 2019.

Footfall was falling before lockdown

As shown in the chart below, in the three months running up to the New Zealand Government’s COVID-19 Alert Level-4 lockdown, Kepler Analytics’ traffic and consumer behaviour data showed North Island stores had been experiencing an average of c.10% decline on outside foot traffic compared to the same period in the previous year, likely due to consumer confidence falling and conservatism rising. We have spoken with many discretionary retailers who were experiencing sales declines of 30-50%, rising to 70-80% in the weekend of 21/22 March 2020.

South Island retailers were less affected until the week prior to the lockdown, when both North and South Island stores experienced a 21% and 13% decline respectively, as consumers became significantly more aware of the threat of COVID-19. Following the Government’s announcement on Monday 23 March, 24% of New Zealand stores tracked by Kepler Analytics closed on Tuesday 24 March, 65% on Wednesday 26 March and 82% by the first day of lockdown. This level of closures is consistent with the c.80% decline in footfall experienced throughout the country during the week ending Saturday 28 March.

Outside foot traffic (YoY % Change)

Source: Kepler Analytics – Kepler Retail Index

Consumers’ fear and the lockdown appeared to occur almost simultaneously in New Zealand. In Australia, where there is no lockdown, Kepler Analytics’ data shows consumers going out less and limiting outings to specific purchasing reasons, with footfall down 24% and 51% in the weeks ended Saturday 21 March and 28 March respectively, compared with the same period in 2019. As a result, 55% of Australian retail stores had closed by the end of March 2020 due to it being uneconomic to continue trading and to support physical distancing.

Kepler Analytics is currently offering:

• 4 x free shopping centre analysis at no charge to support retailers in conversations with landlords around rental rebates during this time; and

• free daily analytical updates on the retail environment throughout New Zealand and Australia.

Requests for either offering can be directed to info@kepleranalytics.com, quoting “McGrathNicol” as a reference.

In-store retail sales varied significantly by sector

COVID-19 has had a polarising impact on different retail segments. As shown in the chart below, in the six weeks running up to the Alert Level-4 announcement, notable in-store winners included supermarkets and pharmacies, which experienced increasing waves of panic/preparation purchasing (6.7% YoY rise in the four weeks ending 8 March, 14.9% and 57.4% in the weeks ending 15 and 22 March respectively). This was closely followed by fresh meat, fruit and vegetables and other specialised food stores (3.1%, 7.8% and 47.9% respectively).

In the first three days of the week of the Alert Level-4 announcement, before lockdown commenced, New Zealand stocked up for a month of drinking, with Liquor stores sales up almost 500% year on year, while also preparing for a month of working from home, renovating or entertaining the household with:

• homeware, building and garden supply retailers experiencing a 261.3% year on year rise;

• appliance, computer and other recreational supply retailers experiencing a 101.7% year on year rise; and

• other core retailers (which includes stationery stores) experiencing a 67.8% rise.

The sectors suffering the most were discretionary retailers (in particular footwear, clothing and apparel, department stores), which were already struggling in the run up to the announcement with a 29% year on year decline in the week ending 22 March and 54% in the three days ending 25 March. Hospitality and accommodation providers and other non-core retailers have also been significantly impacted.

It is important to note that many discretionary retailers and hospitality providers were being hit in the weeks and months before the lockdown, with footfall and sales down throughout 2020. These retailers may therefore require concessions from stakeholders that extend beyond the lockdown period. A number of retailers were already considering, or had enacted, country-wide closures as a result of declining consumer spending making brick-and-mortar retailing untenable.

Total Paymark spend (YoY % change)

Source: MarketView – Paymark transactions, in-store only

Panic/preparation spending on food, liquor & pharmacies and home & recreational retailing was less extreme in Australia due to no enforced lockdown. However, hospitality and discretionary retailers in Australia experienced similar declines in sales as New Zealand, resulting in many closing their stores voluntarily due to it being uneconomic to continue trading.

MarketView has made available to McGrathNicol this high-level information for the purpose of this insight. Retailers who would like more granular data on their specific category and region can purchase information from MarketView. Requests for such information can be directed to Michael.Stechman@verisk.com, quoting “McGrathNicol” for a 10% discount.

Falling NZD increases costs for importers

With the recent exception of AUD, over the past few years the NZD has fallen against our major trading currencies.  Foreign monetary easing policies resulting from the US-China trade wars and European downturn had been assisting New Zealand in reversing this trend. However, with all economies now bracing for worldwide recession, the NZ government and Reserve Bank of New Zealand are also trying to bolster asset prices by joining the worldwide race to the bottom.

Global economic turmoil typically leads money markets to return to safe-haven assets, being USD and gold, which depresses the NZD, and on 22 March the NZD/USD pair fell to 0.56, the lowest it has been since 2009.

The falling NZD will increase the cost of goods sold for all retailers without FX hedging in place, or for retailers who have cashed in their hedging positions to boost immediate cash reserves. With consumers likely to be conservative in spending post-lockdown, raising prices to cover this increased cost could further limit consumer spending.

The NZD/AUD pair has differed however and recently rose as high as 0.99. This is good news for Australian businesses with New Zealand operations, but will add to the pain for New Zealand businesses with Australian operations as repatriation of cash is impacted.

Foreign exchange movement (indexed to Sep-16)

Source: RBNZ

2019 retail sales were improving

2019 real retail sales grew 2.8% (nominal 4.5%), outpacing GDP growth of 2.3% and contributing 7.3% of New Zealand’s GDP.  This followed declining retail growth in 2018 and is contrary to the extended slump in GDP, which fell to a six-year low.

Real retail and GDP growth

Source: Stats NZ

The longer-term impacts of COVID-19 are likely to impact non-essential retail most significantly. GDP will also have experienced a significant and immediate drop as the impact of many non-essential businesses being unable to trade during the nationwide lockdown is felt.

Consumer confidence briefly improved

While there has been limited correlation between consumer confidence and retail sales in recent times, it provides an insight into the consumer psyche.

Consumer confidence during mid-2019 settled at lows not observed since September 2012 and usually reserved for times of recession, rather than the record low unemployment, low underemployment and high average pay increases New Zealand was then experiencing. Without any external shocks, it was therefore not surprising that consumer confidence was back on the rise by December 2019, alongside other economic indicators such as the Auckland housing market.

COVID-19 reversed the consumer confidence recovery in March 2020, and is likely to fall to unprecedented levels when the true economic impact of this crisis is felt.

Retail growth and consumer confidence (quarterly)

Data source: Stats NZ and Westpac McDermott Miller Consumer Confidence Index

New Zealand retailers are taking back online market share

While growth slowed compared with previous years, largely due to falling international online retail sales, online continued to outperform broader retail sales, growing at 3.6% in 2019. Online retail sales are now equivalent to approximately 6.5% of traditional core retail sales, still well behind Australia at approximately 9% and other more mature online markets such as the USA, China and United Kingdom with online market penetration of over 15%.

The trend of online growth being predominantly international rather than domestic had also reversed by 2019, with domestic online sales growing 7.8% and international sales falling 1.9%. This is good news for New Zealand retailers. From our experiences working with several New Zealand retailers over the last few years, we expect the shift to domestic retailers is the result of New Zealand retailers finally developing online store presences, as well as the long over-due import GST changes.

Consumers’ switch to online buying is likely to be accelerated by COVID-19, providing opportunities for those with strong ecommerce offerings, whilst also presenting a threat to those without such platforms.

LTM online sales (area LHS axis) and LTM domestic online sales as a percentage of total (RHS axis) (monthly)

Source: BNZ/MarketView

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

Future reports

In future reports, we will be considering how retail stakeholders might respond to COVID-19 and will provide regular reporting of footfall and sales once the lockdown ends to help retailers contemplate store re-openings.

McGrathNicol New Zealand would like to thank MarketView and Kepler Analytics for making the data in this report available without charge, to support New Zealand retailers during this extraordinarily challenging time.

If you would like to discuss specific impacts on your business, please feel free to contact McGrathNicol New Zealand’s retail specialists.