Which retail sectors flourished in 2016?
The latest figures published by Statistics New Zealand show that retail experienced another year of strong growth for the 12 months ended 30 June 2016. Core retail (ie., excluding fuel, motor vehicles and parts) grew by 5.2 percent compared to GDP growth of 2.8 percent. The retail sectors that flourished in 2016 were:
- Accommodation and food and beverage services, which grew 8.2 percent and 7.4 percent respectively, reflecting the continued increase in tourism from 2.4 million people in FY09 to a record 3.3 million people in FY16. Global political issues and increasingly low airfares continue to make New Zealand an attractive and affordable travel destination.
- Electrical and electric goods and hardware, building and garden supplies, which grew 11.2 percent and 9.4 percent respectively, reflecting the buoyant housing market and record net migration.
Which retail sectors were hardest hit in 2016, and why?
The Statistics New Zealand figures indicate that the sectors which reflected the lowest growth in 2016 were supermarkets and grocery stores, together with pharmaceutical and other store based retailing. These sectors grew by 1.9 percent and 2.4 percent respectively. In addition the apparel sector continues to struggle against stiff headwinds, despite recording strong growth of 5.1% in 2016. Notable apparel retail failures include Pumpkin Patch, Valleygirl, Wild Pair, Identity, Nicholas Jermyn, Laura Ashley and Shanton. Competition in the apparel sector remains fierce and the recent arrival of mega international retailers in New Zealand such as Zara, H&M, Top Shop and David Jones will only intensify the pressure on apparel retailers.
What are some common mistakes that were made in the retail sector that ultimately led to some companies’ downfalls?
Based on our extensive work throughout many segments of the retail sector, either in an advisory capacity through restructuring and turnaround, or acting as receivers, we see similar themes emerging time and again. These include:
- A lack of basic retail business metrics with which to manage the business (footfall, conversion rates, basket size info etc);
- An inability to compete effectively with overseas based online retailers on price and product range;
- Being locked into unprofitable stores in poor locations with no easy exit from the lease;
- An inability to respond quickly to changes in fashion and consumer demand;
- Mismanagement of the supply chain leading to inventory problems;
- Sacrificing quality to try and improve margins.
What issues should retailers be thinking about going into 2017?
The common themes we have highlighted above are a sensible starting point for retailers to focus on. Dealing with these issues before they become a major problem for the business is essential. In addition, having a thorough understanding of what an integrated omni-channel offering means and being able to implement and manage this effectively, is crucial. For example, a retailer’s online offering should not simply be a means to sell its outlet goods via a website, but it should be a high quality showroom for the brand and products and also ensure that the customer has a seamless mobile and desktop shopping experience which fully complements the in-store offering.
What types of retailers are most at risk, going forward into 2017?
We expect to see apparel retailers continue to struggle to compete with international retailers, both on-line and in-store. The arrival of Amazon in Australia in September 2017 will significantly shake up the retail industry across the Tasman. New Zealand won’t be immune to this and it’s fair to assume that Amazon will almost certainly follow the other international mega retailers in extending its presence into New Zealand, although timing is currently unclear. Amazon dominates in the US, accounting for over 40 percent of the ecommerce market. New Zealand retailers need to be preparing for this imminent change in the landscape.
Are there any predictions you want to make about the future of retail?
It’s interesting to note Wesfarmers group MD, Richard Goyder, repeatedly saying “Amazon will eat all our breakfasts, lunches and dinners”. Analysts are reported as saying Amazon will strip A$4 billion in sales from Australian retailers, which supports Mr Goyder’s comment. If its promise to discount “everything” by 30 percent is correct the retail landscape in Australia (and New Zealand) will change forever.
New Zealand will inevitably experience the Amazon effect. Consumers will benefit hugely, not only with significantly discounted purchases, but also with an annual subscription based free home delivery service. Currently Americans pay US$99 to subscribe to Prime, Amazon’s free two-day home delivery service, and for an extra US$7.99 with Prime Now, Amazon customers can get items delivered within an hour. Amazon founder and CEO, Jeff Bezos, has repeatedly said Prime is “the best bargain in the history of shopping”.
When this offering arrives in Australia and New Zealand while it will no doubt be nirvana for consumers, retailers will bear the brunt of the pain and further failures and restructurings will be inevitable.
Other trends in retail we can see developing over time include:
- Facial recognition software and pre-loaded payment details allowing customers to “shop and walk”, while sophisticated sensors and cameras track and map their store movements.
- Increasing “direct to customer” sales where major brand owners look to bypass middle-men retailers and sell direct to the end customer, vehicle manufacturer Tesla being a good example.
McGrathNicol has undertaken several retail restructurings, including Wild Pair, Shanton, Dick Smith, Pack & Pedal, Central Park Interactive, Nandos, Identity, and Optical Holdings. In addition the firm advises on many other confidential restructurings in the retail sector. The firm has recently published “What’s News in Retail” which is available on its website. The views expressed in this article are those of the authors alone.
McGrathNicol is an independent advisory firm specialising in Advisory, Forensic, Transactions, Restructuring and Insolvency. It is a market leader in New Zealand and Australia, with more than 30 Partners and 250 people across the region.