Home sweet home

From tableware and cooking utensils to kitchen and table linen, retailers in this industry are experts in a wide range of housewares.

Part of the Australian furniture, houseware and appliance retailing sector, the industry faces competition from other stores that sell housewares, such as department stores and supermarkets. IBISWorld estimates that the Houseware Retailing industry accounts for 35% to 45% of all houseware sales in Australia, implying that total houseware sales in 2010-11 will be as high as $3.9 billion.

The houseware retailing industry is influenced by new dwelling commencements, alterations to existing dwellings and the level of discretionary spending in the economy. As the economic downturn hit and consumers tightened their spending, the industry suffered. Job concerns fuelled by a rising unemployment rate and slower GDP growth resulted in a fall in houseware spending. Price substitution became important as households downgraded from premium products. Revenue fell for three consecutive years, resulting in an average decline of 0.2% over the five years through 2010-11. However, industry revenue is expected to return to growth in 2010-11, increasing by 0.7% to $1.4 billion.

IBISWorld estimates that the number of companies in the industry will grow at an average annual rate of 1.3% over the five years through 2010-11, to approximately 1,776. The number of employees is expected to increase by 0.9% on average over this same period, to 8,323. Wages are expected to grow at a similar rate.

Over the next five years, revenue is forecast to return to moderate growth as housing construction activity and household spending increase due to improving consumer confidence. Revenue is forecasted to grow by 2.5% per annum to $1.5 billion in 2015-16, though only marginal growth is expected in 2013-14 as housing construction activity weakens.

Industry outlook

In the five years through 2015-16, the Houseware Retailing industry is expected to benefit from the return of favourable conditions as the economy recovers from the global financial crisis. Demand for housewares will continue to be dependent on economic variables, such as disposable income levels, consumer sentiment and interest rates. In addition, new residential building construction, home renovation activity and household formation rates will drive demand. As the economy strengthens and housing construction activity improves, spending on housewares will increase.

Household consumption expenditure is expected to be constrained late in the coming five-year period by rising household debt levels. However, annual growth is expected to range between 3.1% and 3.8% over the five years. Consumer sentiment will also be an important indicator of future spending patterns. Sentiment is forecast to decline early in the five-year period, partly due to rising interest rates and concerns about the global economic recovery. However, sentiment will improve towards the middle of the period. Overall, these strengthening economic conditions are expected to result in greater demand for new housewares, and thus higher industry revenue, over the next five years.

Long-term factors such as population growth and household formation rates will affect the long-term demand for housewares. Australia's population is expected to grow by an average 2.1% per annum over the next five years. This, combined with higher divorce rates, will drive growth in the formation of new households. IBISWorld forecasts that the number of households in Australia will increase by 1.8% over the next five years. The increasing number of new households will stimulate houseware sales over this period.

The widespread flooding in Queensland, New South Wales and Victoria in early 2011 will drive inflated demand for housewares from late 2010-11 through 2011-12. More 28,000 homes need to be completely rebuilt and many thousands of others have sustained large amounts of damage that will require substantial renovations. The rebuilding efforts will lead to increased demand for household products as victims try to regain a sense of normality with normal household items. This one-off boost to demand will contribute to strong revenue growth of 3.9% in 2011-12, the strongest growth since 2002-03.

Construction activity

An increase in residential building construction and renovation activity will continue to influence demand for new and replacement housewares. New items, such as cutlery and crockery, are needed when a new home is built or renovated. IBISWorld forecasts that capital expenditure on private dwellings will increase in each of the next five years, except 2013-14. This will be due to rising interest rates, which will cause a slowdown in construction in 2012-13 and a contraction in 2013-14. The contraction in capital expenditure in 2013-14 is expected to result in only marginal industry revenue growth in that year. Growth is expected to strengthen in the following years.

Historically, house prices in Australia have followed ten-year trend cycles of increases and decreases. A downward trend in house prices is expected to begin in 2011-12 as the number of new houses built increase the size of the market. This downward trend will result in a greater number of Australian home owners deciding to renovate and improve their existing homes instead of moving. This will help sustain demand for housewares.

Revenue and profit

Competition from large department stores will continue to place downward pressure on industry profit margins, as stores such as Myer, David Jones and Big W increase their store numbers and product lines. However, the overall increase in demand for housewares will benefit houseware retailers. Industry revenue is forecasted to grow by an annualised 2.5% over the next five years, to reach $1.5 billion in 2015-16.

Profit margins are expected to improve through a combination of strong revenue growth, improving household sentiment, income growth, increasing job stability and more favourable economic conditions. In addition, price substitution is expected to increase; Australians are expected to direct houseware purchases to premium items, which often carry a higher mark-up. This will lead to greater profitability for retailers.

Average profit margins are expected to be positively influenced by industry consolidation. Medium sized and major players will consolidate, while small private stores will continue to emerge in shopping centres around the country. IBISWorld forecasts that the number of companies in the industry will increase by an average 1.8% per annum over the five years through 2015-16. This will be matched by a similar growth rate in employment and wages.

Key success factors

• Ability to control stock on hand: Adequate stock controls are needed to reduce inventory costs and increase stock turns.
• Ability to franchise operations: Having franchise operations helps to drive revenue growth, mitigate risk and increase brand development and awareness.
• Attractive product presentation: Products must be presented well to attract customers. Good product presentation helps to sell higher- priced (and higher-margin) products.
• Effective cost controls: With such strong volatility from year to year, operators must have strong cost controls to remain profitable in times of weak consumer sentiment.
• Having a cost effective distribution system: Supply-side efficiency is important for keeping retail costs low. This industry is highly susceptible to changes in consumer tastes and must be able to effectively distribute desired products in line with changes in demand.
• Having a wide and expanding product range: This industry is characterised by a diverse product range; offering a wide range of products helps to attract customers.

Robert Bryant is the general manager of business information firm IBISWorld.