The retail caterpillar

I often refer to Australia as having a caterpillar relationship with Europe and the US in respect to parts of our retail sector.

Sometimes we are the head of the caterpillar, stretching out innovatively two or three years ahead of other parts of the world. However, most often we are the tail of the caterpillar, with new trends happening ahead of us before we play catch up.

The best part of being the tail is that we can catch up fast. Why? Because as the middle bit hunches up we are lifted and placed at the head without having to go through the painful learning of the early adopters.

Most of the time, the head moves ahead three years and we catch up in one year. We are renowned as fast adopters, and usually overtake adoption rates once we have observed what the rest of the world does with a new trend or innovation. It’s true in smart phones and energy drinks, as well as high-end Dyson fans and online media consumption. My pick is that between now and the end of January 2013 we will see our retail sector and sharemarket rise quickly as the Australian market catches up.

Why?

Well, the head of the caterpillar at the moment is US retail sales and at the end of July they were up 4% year-on-year in revenue terms. The important thing is that this growth was revenue growth.

Just like Australia and New Zealand, prices have been dropping in the US for the past three years. So growing revenue reflects an even higher sales increase in volume: shoppers are buying more across all sectors of retail. In fact, $US409 billion went through store tills and online shopping payment engines in July. Sporting goods, music stores and furniture all showed close to double digit growth. Even more important was just exactly where that spend went: it was spread across far fewer stores than previously.

To date this year, stores in the US are closing at a rate 35% higher than in 2011. If this trend continues there will be about 10,000 fewer store fronts by December 2012 (the clothing sector is closing more stores than most). And not only are stores closing, but all the major retailers have backed off on store expansion, preferring instead to invest capital expenditure in refurbishing existing stores that have a historically strong performance.

So if we add together these three factors; higher sales revenue going through fewer stores with investment only in high performing stores, we are looking at a resurgence in the profitability of the retail sector. Some store networks may be in the very unusual position of having no loss-making stores. That only ever happens on the turn of a market, when several years of painful lease renegotiation and downsizing has happened. I don’t think it will be the case for most.

Look back to the caterpillar’s tail and in Australia we may be about to see that pattern taking place in the US played out here, but in a shorter period of time.

The $7 jeans, $1 milk, and now vastly cheaper consumer durables we have just started to enjoy were seen in Europe and the US two or three years ago. The suppliers and retailers that are selling these items in Australia are now doing so profitably. Retail sales are rising, albeit more moderately than the US, and we have seen many store closures, as well as landlords renewing leases at lower rates.

It may be time to call your broker and ask them to look at Australian retail shares again.

As CROSSMARK CEO, Kevin Moore looks at the world of retailing from grocery to pharmacy, bottle shops to car dealers, corner store to department stores. In this insightful blog, Kevin covers retail news, ideas, companies and emerging opportunities in Australia and across the world. His international career in sales and marketing has seen him responsible for businesses in over 40 countries, which has earned him grey hair and a wealth of expertise in international retailers and brands.

CROSSMARK Asia Pacific is Australasia’s largest provider of retail marketing services, consulting to and servicing some of Australasia’s biggest retailers and manufacturers.

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