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Where’s our growth going?

We all know that growing an individual retail business takes graft, inspiration and luck. The industry as a whole isn’t so different. Rachel Helyer Donaldson looks at the facts, figures and factors – including trends, government policies, demographic changes and events – that have helped shape the biggest retail categories’ performances in recent years, and considers what could help all retailers in 2018.

By Rachel Helyer Donaldson | April 3, 2018 | News

A slowing housing market and competition from overseas online retailers were just some of the factors that put pressure on individual retailers in the latter parts of 2017.

The total volume of retail sales rose 1.7 percent in the June 2017 quarter, thanks mostly to an influx in visitors and sports fans here for the World Masters Games and the Lions rugby tour.

But the third quarter of 2017 showed almost no growth: the worst seasonally adjusted result in three years, according to Retail NZ’s Retail Radar. Meanwhile 57 percent of retailers surveyed said they did not meet their sales targets over the quarter.

It remains to be seen whether Christmas, a crucial chance for many smaller retailers to sustain their businesses throughout the year, made up for this.

The New Zealand retail industry saw strong growth in the 2016 financial year measured by Statistics New Zealand’s Annual Enterprise Survey (AES).

The five largest sectors all saw sales rise year on year. Overall, a strong housing market, high migration and increased tourism were some of the main factors that helped boost these.

According to the survey, which measures the financial performance of various industry groups, total income for the retail industry grew from $63.180 billion in the year to March 31 2015, to $66.578 billion in the year to March 31 2016. This is an increase in total income of $3.398 billion or 5.4 percent.

The five biggest categories in the 2016 survey were (1) supermarkets, grocery stores and specialised food retailing; (2) motor vehicle, motor-vehicle parts and fuel retailing; (3) Furniture, electrical and hardware retailing (4) Recreational, clothing, footwear and personal accessory retailing (5) Pharmaceutical and other store-based retailing.

We look at how these sectors have performed, and what factors have affected them, according to the AES results in 2015/16 as well as the most recent quarterly reports from Retail NZ’s Retail Radar and Statistics NZ.

1 Supermarkets, grocery stores and specialised food retailing

Total income AES 2016: $21.136 billion

Total income AES 2015: $20.128 billion

Based on the AES 2016 survey and the latest revised figures for the AES 2015 survey, there was an increase of $1.008 billion, or five percent, in total income in the year ended March 2016 for the supermarket, grocery store, and specialised food retailing industry.

The Food Price Index shows overall food prices were relatively unchanged over this period, suggesting that factors other than price were behind this change. Factors could include population growth over this period, and tourism.

According to a 2017 tourism report published by Visa, overseas visitors using Visa cards spent $187 million on food and grocery in 2016, up 15 percent on 2015. Chinese and South Korean visitors spent more on food and groceries and retail goods, while in New Zealand, than any other category.

An increased demand for premium products and other trends have also helped lift sales values and volume, as well as greater distribution, says First Retail Group managing director Chris Wilkinson. “More supermarkets opening [also help] create new shopping habits and aspirations.”

Retail New Zealand general manager for public affairs Greg Harford says that “some really interesting societal changes” are having an impact on the supermarket and grocery sector.

There is a “small amount of growth”, but, he argues, that increase in total spend between 2015 and 2016 “is not great in percentage terms”.

The supermarket and grocery sector faces strong competition from meal-kit delivery services like My Food Bag, and the fast-growing hospitality sector.

A 2016 US survey found that Americans spent more money eating out at restaurants than they did on groceries.

The trend is beginning to be felt here, says Harford.

“We’re eating out more than we ever did, and that does have an impact on the grocery sector because obviously if you are eating out you don’t need as much food in the home.”

Although retail is earning a larger annual profit than the hospitality industry, hospitality is growing at a faster rate. The June 2017 Retail Trade Survey from Stats NZ showed that the food and beverage industry had the largest increase in the series, up 4.2 percent, while retail sales only rose 2.0 percent. While food and beverage is coming off a smaller base, it’s growing much faster than retail.
 

2 Motor vehicle, motor-vehicle parts and fuel retailing

Total income AES 2016: $16.466 billion

Total income AES 2015: $15.928 billion

This sector rose $538 million, or 3.4 percent, in the above period.

Susan Hollows, the Statistics NZ manager for the Annual Enterprise Survey, says that is likely to have been driven by increases in motor vehicle sales.

Car sales were boosted by demand from New Zealand’s growing population (net migration remained at record levels into 2017) and the relatively low cost of new vehicles.

There was a 4.9 percent increase in licensed vehicles in the year ended March 2016. Meanwhile fuel prices dropped in the year to March 2016.

According to Statistics NZ’s quarterly Retail Trade Survey, results for the March 2017 year showed a continuing increase in total retail trade sales year on year. “Motor vehicle sales are one of the main factors in this increase,” adds Hollows.

After adjusting for seasonal effects, the motor vehicles industry saw a record 5.9 percent increase in the March 2017 quarter and accounted for over half the increase in total retail sales volume for the quarter.

A relatively strong dollar and low interest rates have also helped keep vehicle pricing attractive for consumers, says Wilkinson.

Sales of motor vehicles were “fairly positive” up until the early part of 2017, says Harford. He attributes much of that to the growth in house prices. “As a nation we were tending to feel wealthier because our houses were increasing in value.”

The cooling in the housing market over the last year has affected this sector. “There’s less confidence in the housing market [and] that’s driven a bit of a drop off in consumer spending in both big ticket homeware items and motor vehicles. “

3 Furniture, electrical and hardware retailing

Total income AES 2016: $12.165 billion

Total income AES 2015: $11.288 billion

Total sales of furniture, electrical and hardware went up $877 million (7.8 percent) year on year. This was largely on the back of the housing boom: thanks to the building of new houses and apartment blocks as well as consumers feeling confident enough to invest in their own homes.

Like motor vehicles, this sector continued to perform well up until early 2017 due to the strong growth in house prices.

“There were a lot of people renovating, making changes to their homes and often when people renovate or make changes they will go out and buy some new furniture or something associated with that as well,” says Harford.

Retail Radar observed that DIY was particularly popular in the second quarter of 2016, to the end of June, when ‘hardware, building and garden supplies’ saw a 5.9 percent rise on the first quarter of 2016. The delayed start to winter and low interest rates are credited with helping the solid lift in sales.

There has been “a tail off” in recent months, as house prices have cooled, he says.

Residential building rose 10.6 percent in the year to March 2016, and is likely to have been another major factor for growth, says Hollows. “This building activity will have created demand for furniture, electrical, and hardware.”

A growth in tourism, even, has had a positive knock-on effect on sales in this category, says Wilkinson, such as the amount of property being used for short-term lets through the likes of Airbnb.

4 Recreational, clothing, footwear and personal accessory retailing

Total income AES 2016: $5.675 billion

Total income AES 2015: $5.629 billion

According to initial 2015 AES survey results, which showed a total income of $5.710 billion, it originally appeared that in 2016, total sales in recreational goods, clothing, footwear and personal accessories were down $35 million.

But based on the latest revised data for 2015, Statistics NZ figures show this industry’s total income has actually increased, albeit a small amount, by $46m, or 0.8 percent, in 2016.

This category, which also includes books, toys, watches and jewellery, music, and computer games, “has remained very stable at this level of total income since at least 2008”, says Hollows.

But Retail NZ’s Greg Harford argues that this area is being hardest hit by competition from overseas online retailers.

“The items that people are buying are typically low value, small, and easy and cost effective to transport, so we’re seeing significant proportions of transactions in those categories being done online and offshore.”

According to the BNZ’s monthly online retail sales report, total online spending by New Zealanders in March 2017 was up 17 percent on the previous March.

Annual growth in purchases from offshore online retailers pushed through the 20 percent mark for the second time over the past 12 months, up by 22 percent on March 2016. Computer, clothing and electronic stores accounted for just over half of that year-on-year increase.

Few consumers nowadays would pay full price for clothing or recreational items, thanks to cut-price strategies, says Retail X founder and retail strategy director Juanita Neville-Te Rito.

“Retailers have now got so wound-up in the percentage off and deal space [instead of] defining what makes them better, different and desirable. There are possibly some wonderful winners in this category but they are smaller players who are building committed loyalists.”

Making foreign websites pay GST would be the biggest help for local retailers, says Harford.

But there are things New Zealand retailers can do themselves to compete, he adds. Scale is a big issue; in global terms most local retailers are small, meaning procurement and pricing can be difficult to get right. “The most important thing for retailers is to look closely at their supply chains and see how they can reduce costs there and pass those on to customers.”

Providing a great customer experience also remains key.  “Whether it’s in-store or online, customers want to be treated brilliantly… they want to know they’ll get fantastic service.”

One example is the way in-store experiences, such as cafes and playgrounds, are about “more than just the shopping… it becomes a whole expedition out for families”.

5 Pharmaceutical and other store-based retailing

Total income AES 2016: $5.136 billion

Total income AES 2015: $4.807 billion

Statistics NZ figures show an increase of $329m, or 6.8 percent, from $4.807 billion in the year ended March 2015 to $5.136 billion in March 2016.

This category includes stationery goods, antique and used goods and flower selling as well as any other store-based retailing that is not classified elsewhere.

Pharmaceutical, cosmetic and toiletry goods make up nearly half of this industry, however, and were responsible for two-thirds of the growth in income in 2016, says Hollows.

Personal care products and supplements are growth categories that many of the retail chains have clamoured to participate in, says Wilkinson.

“Wider distribution, [among both] big box and specialty retailers, greater consumer awareness and an increasing appetite for wellness products have helped propel the category.”

But Retail NZ’s Harford argues that growth is minor in the context of an $83 billion industry. “The view really is that customers aren’t getting out and spending as much as retailers would like.”

Boosting growth in 2018: what’s important?

Retailers should not under-estimate the difference between shopping and buying, and how this affects consumer behaviour, particularly in certain categories, says Neville-Te Rito.

Activity-based buying, such as best price, range assortment and maximum convenience, is “fertile ground” for online players and the growth of international brands like Amazon, she says.

By contrast, “shopping is a far more aspirational activity.”

She notes how growth has occurred in categories that are associated with more emotive and engaging pursuits, such as the furniture, electrical and hardware categories, buoyed by home improvements and new home ownership, and pharmaceutical retailing boosted by the desire to be “me at my best, the rise of health and wellness, also an ageing population that is living longer”.

A smaller retail category, department stores, saw 7.2 percent growth in 2016.

Neville-Te Rito credits that with the building of new stores, improved offering and, at long last, the introduction of e-commerce: “They were all way, way too late to market.”

Harford stresses that although there has been a small in increase in total sales values in the past year, “that increase has been relatively small in the context of where we would be.”

“For the September 2017 quarter we saw a 0.1 percent increase in seasonally adjusted sales so that’s almost nothing, no growth, which is why retailers are feeling a bit gloomy.”

Retailers should look at other channels to grow, including going offshore via digital means, says Harford. This represents “huge” opportunities, particularly those who own their products and brands. 

“Obviously in a market of 4.5 million people, you’re going to be challenged in terms of scale and growth, but there are opportunities to look into other markets particularly into Australia because it’s so close.”

SME retailers should use digital expansion as a “relatively low-cost way” to grow their test markets. Harford recommends Amazon or eBay as good fulfillment channels to tap into a market like Australia, and Alibaba for Asia.

 “It’s not the strongest in traditional metrics rather the most adaptive that will flourish,” says Neville-Te Rito. “Our retail eco-system is stretching even further from extreme value offers at one end to highly differentiated, compelling and speciality retailers, and luxury brands, at the other end.

She adds: “The middle ground is vanilla and being in the middle is the place where retailers will continue to contract, suffer and ultimately die.”

Facts and figures

The overall retail industry, which also incorporates accommodation and food and beverage services, rose from $78.76 billion in the year to March 2015 to $82.39 billion in the year to March 2016. It is now worth $87.14 billion (for sales up to March 2017).

For this article, however, we have analysed the following retail sectors as categorised by Statistics New Zealand’s NZSIOC (New Zealand Standard Industrial Output Classification) groupings.

They are: Motor vehicle, motor-vehicle parts and fuel retailing (GH111 and GH112); Supermarkets, grocery stores and specialised food retailing (GH121 and GH122); Furniture, electrical and hardware retailing (GH131), Recreational, clothing, footwear and personal accessory retailing (GH132); Department stories (GH133); Pharmaceutical and other store-based retailing (GH134); Non-store and commission-based retailing (GH135).

The AES survey results represent the activity of 48,386 units involved in the retail trade.

The financial year reported is April 1 to March 31 for all of those categories except for the department stores section, which has a July 31 balance date. 

Statistics New Zealand’s AES survey results are provisional for two years. The AES 2015 results have been revised since they were first released, and the data used by NZ Retail is the latest available. However they will not be final data until the AES 2017 is released in June. Likewise, AES 2016 results will not be finalised until the release of AES 2018.

The AES figures used here are total income figures. Total income is slightly higher than total sales due to the inclusion of items such as interest received and non-operating income.

Susan Hollows, the Statistics NZ manager for the Annual Enterprise Survey (AES), describes the 5.4 percent growth measured by the survey in 2016 as “strong”. In 2015, retailing total income increased by 4.4 percent, and in 2014 it increased by 3.5 percent.

Several factors are likely to have helped boost total retail sales in that period, including population growth and tourism, says Hollows.

The population of New Zealand grew from 4.580m in March 2015 to 4.676m in March 2016, an increase of 96,000 people, or 2.1 percent.

Meanwhile there was also a 7.5 percent increase in international guest nights in that year.

She also notes that price increases in the year ending March 2016 remained relatively stable, with the Consumers Price Index (CPI) increasing only 0.4 percent over the year.

Typically, increases in total income are caused through a combination of volume and price changes. However in the AES 2016 year, overall price changes were low, meaning that it was an increase in sales volume, rather than inflation, which was the more crucial factor in the increased total income of the retail trade.

The AES figures are not adjusted for price changes and the survey is presented in current prices. Statistics New Zealand’s Retail Trade Survey, which reports on retail sales each quarter, does remove price changes. But generally, the trends for both total retail sales volumes and values have been rising since mid-2009.

Changes to levels of households’ disposable income are another factor that can impact on retail sales.

Rising house prices tend to encourage homeowners to spend more as the equity in their homes increase, and they can potentially borrow more against that.

This is a likely reason that the 2016/17 financial year was a relatively buoyant one for retailers. The AES 2017 survey won’t be released until June but quarterly reports from Retail NZ and Statistics NZ show that the skyrocketing housing market - at that time - boosted consumer confidence among those with mortgages in the 2016 and 2017 financial years.

By contrast, in the past year, as the house market has cooled (and as prices have even declined in Auckland and Christchurch), there appears to have also been a slowdown in consumer spending.

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