Retail enjoyed another strong year of growth for the 12 months ended 30 June 2016, with figures released by Statistics New Zealand showing growth of 5.2 per cent in core retail, compared to GDP growth of 2.8 per cent (core retail excludes fuel, motor vehicles and parts). This is despite consumer confidence falling in seven of the last nine quarters.
The big winners in retail for 2016 are:
- Accommodation and food and beverage services, which grew 8.2 percent and 7.4 percent respectively, reflecting the continued increase in international visitor arrivals (tourism), from 2.4 million people in FY09 to 3.3 million in FY16. Global political turmoil and low oil prices continue to make New Zealand an attractive and affordable holiday destination, with hotel vacancy rates at all-time lows.
- Electrical and electronic goods, hardware, building and garden supplies, and furniture, floor coverings, houseware and textiles, which grew 11.2 percent, 9.4 percent and 4.6 percent respectively, primarily due to record net migration, rampant house price appreciation and consequently increased residential building activity. Residential building consents are at their highest level since 2004 and are forecast to remain at elevated levels, picking up the slack from the wind-down of the Canterbury earthquake residential rebuild.
However, a property market correction could severely impact sales in these sectors. We have already seen Woolworths Group announce the closure of Masters in Australia, due to its inability to compete with Bunnings in a slowing market (household goods grew only 1.1 percent in Australia in FY16, down from 11.9 percent in FY15).
Strong growth in electrical and electronic goods was also insufficient to prevent the failure of Dick Smith, which collapsed following significant inventory and supply chain management issues.
The apparel sector continues to struggle, despite strong growth of 5.1 percent. There were a number of failures in FY16, including Valleygirl/ TEMT, Wild Pair, Identity, Nicholas Jermyn, Jean Jones and Laura Ashley. Competition remains intense, in particular with online retail, and is set to increase further with the recent arrivals of the mega international retailers Top Shop, H&M and Zara; the latter two opening in Auckland’s Sylvia Park mall in October 2016.
Based on our experience as receivers of apparel retailers and advising on the turnaround of others, we continue to observe the same themes in this segment:
- A lack of basic retail business metrics to manage the business.
- Being locked into unprofitable stores with no easy exit from leases.
- An inability to compete effectively on price and range with overseas based online retailers.
- An inability to respond quickly to the changes in fashion and supply chain mismanagement.
On a regional level, Retail growth is still driven by Auckland (8.1 percent), which continues to enjoy record net migration and house price appreciation. Christchurch growth has stalled as the post-earthquake residential rebuild tapers off, with growth falling from 9.4 percent in FY15 to just 0.5 percent in FY16. Wellington continues to be flat, whilst the rest of the North Island and the South Island showed much better growth in FY16 (3.7 percent) than FY15 (1.5 percent and 0.2 percent respectively), despite low dairy prices, perhaps evidencing the impact of strong performance in other agricultural sectors and tourism.
Strong retail and GDP growth is out of step with consumer confidence though, which declined in seven of the last nine quarters, leaving it below historical average levels. The one year and five year outlooks are also much worse than a year ago: this degree of nervousness is normally only seen when the economy is in recession.
Are Kiwis being unusually pessimistic, perhaps due to low dairy prices and potential geopolitical threats such as Brexit and Trump/Clinton? Or does our low confidence reflect our concerns that growth has been fuelled by record net migration, rampant house price inflation and household debt, and the Canterbury rebuild, all of which could come to an abrupt halt with little warning? Per capita GDP growth was static after all, so as individuals, we have not seen the benefit of this growth.
Overall, we expect to see continued growth driven by tourism, a strong agri sector, recovering dairy sector and a reasonable level of immigration. But we also expect to see apparel retailers continue to struggle to compete with international retailers both online and now in store. Household products are also likely to slow down as the Canterbury rebuild tapers off and could plummet in the event of a housing market correction. Retailers need to examine closely the reasons behind recent failures and ensure their business model is robust enough to withstand the challenges ahead.
McGrathNicol is a leading Retail advisory and restructuring firm, having recently acted as Administrators of Dick Smith and Receivers of Valleygirl/TEMT, Wild Pair, Identity, Nandos, and assisting many other retailers on a confidential basis with successful turnarounds. The views expressed in this article are those of the author’s alone.
McGrathNicol is an independent advisory firm. Conor McElhinney is a Partner at McGrathNicol. The views expressed in this article are the authors’ alone.