The retail year in review: A warning for apparel retailers

  • Opinion
  • November 13, 2015
  • Conor McElhinney & William Black
The retail year in review: A warning for apparel retailers

Figures released by Statistics New Zealand showed growth of 5.7 percent in core retail for the year to 30 June 2015, compared to GDP growth of 2.4 percent (core retail excludes fuel, motor vehicles and parts). This headline growth number masks some interesting underlying trends in specific retail and geographic segments. Winners include the food and beverage, accommodation, hardware and homewares sectors, together with the Auckland and Canterbury regions. Apparel and regional New Zealand continues to struggle.

The big winners in the past year:

·         Food and beverage services and accommodation grew 10.0 percent and 8.9 percent respectively, reflecting the surge in international visitor arrivals, which increased by 9.1 percent  in the June 2015 quarter compared to the same period last year.

·         New Zealand is a very attractive tourism destination and while the post GFC period saw a flattening of inward bound tourists for several years, this trend line has reversed significantly, with a near 30 percent increase in international visitor arrivals between December 2008 and June 2015.  We expect this trend to continue, leading to sustained growth in the food and beverage services and accommodation segments.

·         Hardware, building and garden supplies, together with furniture, floor coverings, housewares and textiles, also grew strongly at 8.4 percent and 6.7 percent respectively in the 12 months to 30 June 2015.  Growth in these categories is a result of the high levels of residential building activity, which shows little sign of slowing up. A lack of housing supply in key areas, such as Auckland, coupled with steady demand, is likely to ensure ongoing growth in these categories, with construction labour capacity constraints acting as a brake and spreading this growth over a longer period.

A less positive story in the apparel sector:

·         Apparel (clothing, footwear and accessories) has not been as successful, with growth of 3.2 percent in the year to 30 June 2015, albeit this is a marked improvement on the prior year decline of 2.1 percent. This period has been notable for many apparel retailer failures, including Postie Plus, Shanton, Identity, Jean Jones and Cooper Watkinson to name just a few. In addition, several listed retailers have issued profit warnings over this period, including both Kathmandu and Kirkcaldie and Stains. 

Based on our experience as receivers of apparel retailers and advising on the restructuring of others, we have observed some common themes in this segment:

·         Being locked into unprofitable stores with no easy exit from the lease.

·         An inability to compete effectively with overseas based online retailers.

·         A lack of basic retail business metrics to manage the business.

·         An inability to respond quickly to the changes in fashion and supply chain mismanagement.

Unfortunately for operators in this particular market segment, conditions are unlikely to get any easier in the short term, for the following reasons:

·         While the outcome of the Government’s current review of GST on online purchases may help to rebalance the competitive landscape somewhat, the emergence of large overseas based retailers establishing a market presence in New Zealand, both physical and online, is a trend that is likely to continue. Over the last 12-18 months UK based Topshop has opened a flagship store in Auckland, South African owned Pepkor has acquired Postie Plus, and most recently Swedish based H&M, one of the largest global retailers with over 3,500 stores worldwide, has announced it will be opening in Sylvia Park. 

·         Not to be outdone, the Australian retailers appear to be on the move too.  Kirkcaldie and Stains was recently acquired by Australian based David Jones.  And in recent months McGrathNicol has run several retail sector sales processes, where in each case Australian retailers have registered an interest in the process, actively looking for an opportunity to establish their presence. 

·         In addition, the pressure from online competition is intensifying with prominent UK retailers, ASOS, Next and Marks and Spencer offering free shipping to New Zealand for online purchases.  We see no immediate let up in this trend.

Looking at regional performance, it is not surprising to note that retail growth is dominated by Auckland and Canterbury, with growth of 9.0 percent and 11.1 percent respectively in the year to June 2015.  This contrasts with growth of only 1.9 percent and 1.2 percent for the rest of the North Island and the South Island respectively.  It is not hard to see why growth is concentrated in Auckland and Canterbury.  In the case of Auckland the buoyant housing market and record levels of immigration are driving growth, while in the case of Canterbury the main driver continues to be the earthquake rebuild.

At a macro level, the outlook for core retail in New Zealand appears positive given the continued strength of the building and tourism sectors, coupled with the high levels of immigration, which shows little sign of easing.  This is tempered by the recent fall in dairy prices impacting consumer confidence outlook and weaknesses in our major trading partners, Australia and China.  Overall, we expect to see continued (but lower) growth in core retail, with some segments, such as apparel, likely to continue to face significant headwinds.  Companies operating in the apparel sector should examine closely the reasons behind recent company failures as well as the well publicised difficulties faced by some operators in the sector and ensure their business model is robust enough to withstand the inevitable challenges that lie ahead. 

McGrathNicol has undertaken several retail restructurings, including Pack and Pedal, Central Park Interactive, Nandos, Identity, Feltex, 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.

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