Is retail in recession, or are department stores dead?
Friday, August 2, 2019/
Five years ago, South African retail conglomerate Woolworths Holdings signed the dotted line on a deal to purchase David Jones for $2 billion.
By this stage, department store chains across the world were cracking under the pressure of 21st-century retail and questions were being asked about the viability of the category globally.
But Woolworths boss Ian Moir was undeterred.
“The department store isn’t dead — mediocrity is dead,” he said.
Fast-forward to yesterday, when the company booked its second write-down on the value of David Jones in as many years, swiping $437.4 million from its value after lopping off $712 million last year.
There’s now a different story about the David Jones business.
“The retail sector in Australia is currently in recession,” a company spokesperson said yesterday.
There’s little doubt the retail sector is struggling as companies big and small deal with numerous challenges, including legacy lease arrangements, the rise of e-commerce, the internationalisation of the local market and weak consumption growth.
Department stores have copped their fair share. About $2 billion has been wiped off the balance sheets of major brands in the category, including David Jones, Myer and Target, over the last two years.
It’s not just an Australian story either. Talk is swirling in the UK that Debenhams could be in administration by September, while in the United States, players such as Sears have been all but resigned to a slow demise.
This all points to the fact perhaps Moir was wrong and department stores, for all their history, are dead, or at least, dying.
Is retail in recession?
Talk about a retail recession kicked off earlier this year after NAB economists declared retail was “clearly in recession” when publishing its closely watched monthly business survey.
What does the data say? The last two monthly data drops on retail sales growth revealed a 0.1% lift in retail sales for May and a 0.1% drop in April. Figures for June haven’t been published yet.
Across the entire sector, year-on-year sales increased by 2.7% in May, although results vary by category. For department stores, sales declined 0.4% in May, but rose 1.8% in April, seasonally adjusted.
Taking a broader view, department store spending declined 0.39% year-on-year in May, but rose a whopping 5.1% on the same measure in April, according to the ABS.
A recession that does not make, according to retail expert and Queensland University of Technology professor Gary Mortimer.
“There is no retail recession,” Mortimer tells SmartCompany.
Mortimer argues weakness in department stores is a result of the businesses themselves fighting a losing battle against the backdrop of a changing market.
“The big two department stores [Myer and David Jones] have been fighting a losing battle against new competitors, a changing consumer — and themselves,” he says.
“Department stores have failed to respond quickly enough to changes in shopper behaviour, emerging category killers and the growth of online shopping.”
IBISWorld senior industry analyst Liam Harrison agrees the department stores are struggling, but says talk of a retail recession is a bit overblown.
“The Australian retail sector is definitely in a period of weakness, [but] characterising it as a retail recession could be considered a bit of an overstatement,” he tells SmartCompany.
Harrison says the department store model isn’t suited for the modern retail environment, and prominent players face the prospect of trying to transform before they run out of road.
“Department stores really need to consider their current business models and be more transformative about it,” Harrison says.
“Touch and go”
Retail expert and chairman of CrossMark Asia Pacific Kevin Moore argues that while retail as a whole is not in recession, physical retail definitely is.
“There’s a physical retail recession going on,” he tells SmartCompany.
“We see a 50% decline in investment in retail property in Europe, and we’re on track for a 30% decline in investment in retail property in the US.”
“We’re spending roughly the same amount, just not through physical stores.”
Harrison says the prospect of widescale department store death is a possibility, as is a partial recovery.
“At this point, it’s difficult to tell,” Harrison says.
Moore says he’s seeing new shopping centres open in Singapore, the UK and US where department stores aren’t featured at all.
It’s a bad sign for the category, he argues.
“It is touch and go as to how many will survive,” Moore tells SmartCompany.
“The biggest issue they have is: do they have enough capital to allow them the time to change.”
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