Big retailers keep getting bigger as smaller retailers feel the squeeze: Morgan Stanley
Monday, August 6, 2012/
Big retail keeps on getting bigger at the expense of smaller retailers, according to a Morgan Stanley report on the Australian retail sector.
The report found that over the past four years, the market share of small businesses dropped from 39.5% to 36.5% in the $252 billion retail industry.
From 2010 onwards, retail sales growth has slowed from an average of 5.4% a year to 2.5% and this weak retail environment is having a “disproportionately large impact” on smaller retailers, according to the author of the Morgan Stanley report, equities analyst Thomas Kierath.
The report found the largest 500 retailers in Australia have taken 300 basis points of market share over the past four years and Kierath warned it would be difficult for smaller retailers to get that market share back.
“Looking at the retail downturn in the late 1990s shows that small retailers tend not to gain that share back,” Kierath said.
“So, post a downturn, large retailers end up in a better relative position compared with small retailers.”
The report found that categories where large retailers have taken the most share are food, clothing, accessories and household goods.
Kierath said scale was a definite advantage in the food, clothing and accessories sector as products were becoming more commoditised and so retailers with the most efficient distribution methods tend to win.
“Large retailers tend to operate with lower prices, which helps them win on price,” he said.
Large retailers can buy direct from manufacturers, whereas smaller retailers are more likely to rely on locally based wholesalers or middlemen that sell products with a margin and higher price.
Higher volumes also enable large retailers to build their own labels to distribute through wide distribution platforms while smaller retailers don’t have the size or distribution platforms that enable this.
Large retailers can also lever investments in supply chains so that prices received from manufacturers excludes delivery costs, while operating stores nationally, as many large retailers do, enables retailers to conduct national advertising to reach a large proportion of the population.
Kierath cites Coles’ sponsorship of reality TV cooking show Masterchef as an example.
The Morgan Stanley report found the larger food retailers, Woolworths, Coles and large IGA chains have all taken market share since 2008.
“The opportunity for large chains to take share from smaller retailers is diminishing as smaller retailers only command just over 20% of the food retail market,” Kierath said.