The Australian Bureau of Statistics (ABS) recently released its estimates for retail sales in December. Nominal retail sales fell 0.5% over the month after seasonal adjustments. This fall mostly reflects the transfer of pre-Christmas sales from the usual shopping peak to November’s sales event. Despite the poor monthly figure for the month of December, the results over the entire December quarter (Q4) of 2019 showed an improvement signalling that households may have loosened their purse strings after interest rate cuts, tax cuts and housing market improvements. There has been a lot of media coverage of high-profile retail closures in Australia. There is no doubt that there are some longer-term structural changes occurring in retail which are providing unique opportunities and challenges. This post charts five ways that Australia’s retail landscape is changing.
1. Long-term changing consumer preferences
Retail sales are a key component of household consumption, typically accounting for one‑third of household consumption and one-fifth of total Australian expenditure. However, retail’s share of household consumption fell steadily from above 50% in 1975 to below 35% by 2007. In contrast, the proportion of household consumption on services, such as health and education, rose from under 50% in 1975 to 65% by 2007. While the share of consumption on retail items has fallen, real consumption has increased on just about everything over recent decades (except for cigarettes and tobacco). This is because of population growth and the average Australian has more spending power. Average household expenditure increased 394% from 1984 to 2015-16 while average gross incomes rose by 459% over the same period.
2. The rise of online shopping
Another highly publicised trend in retail is the rise of online shopping. Australians are spending an increasing amount online. ABS experimental estimates indicate that online sales to Australian retailers have increased from $7.4 billion in 2014 to $20.3 billion in 2019. Online retail sales have grown at a rate ten times faster than total retail sales since 2014.
The ABS estimate of online sales to Australian retailers ($20 billion in 2019) is lower than the NAB Online Retail Sales Index ($30 billion in 2019). This large gap is probably because the NAB Online Retail Sales Index covers businesses that may not remit the ABS business register (such as overseas online retailers). It suggests a large (and possibly growing) share of discretionary online spending is going directly offshore.
3. Online sale events
Another relatively recent retail sales trend is the sharp rise of online spending in the month November (see the pattern of sales ‘spikes’ in November in the chart below). This appears to be related to the growing popularity in Australia of international and online sales promotions such as:
- Black Friday (originally a USA sales promotion for Thanksgiving);
- Singles Day (originally a Chinese promotion for young single people);
- Click Frenzy (a relatively new Australian version); and
- Cyber Monday (originally a USA sales promotion which usually falls in November but fell in December in 2019).
These sales events appear to have brought forward some of the December Christmas sales into November, changing the traditional seasonal pattern of sales for Australian retailers.
According to the ABS, the share of online sales has grown from under 3% of all retail sales to approximately 7% in the last five years. The majority of online sales are through ‘multi-channel’ stores – that is, retailers with both a brick & mortar physical store and an online presence. About two-thirds of online sales with Australian retailers are currently with retailers who also have a physical store, but online sales to retailers with only an online store are growing at a faster rate.
4. Heightened competition
Net margins have declined for both food and non-food retailers over recent years, reflecting a reduction in retailers’ pricing power as they compete for sales and market share. This is consistent with anecdotal information in the Ai Group Australian PSI® that retailers are experiencing heightened competition. Reserve Bank of Australia (RBA) research suggests that firms are seeking to offset the decline in margins through measures such as vertically integrating supply chains and adjusting product mixes.
5. Market concentration
RBA research also demonstrates that an increase in business concentration since the start of this century in Australia was mainly driven by the retail sector. The ABS retail data appears to support this, indicating a long-term divergence in nominal sales growth between smaller and larger retailers. Larger (multi-site) retailers have experienced steady nominal sales growth in recent years. In contrast, smaller (single site) retailers appear to be struggling, with nominal sales going backwards in 2019. As a result, smaller retailers’ share of total retail sales has fallen from over 45% in 1995 to under 30% as of 2019.
Industries are constantly changing, but it appears that retail is changing at a rate faster than most. Technology has shifted consumer buying habits. Most consumers have benefited from increased competition in the Australian market with more choice and lower prices. The rapidly changing retail environment and the impact of technology has had huge impacts on the retail business model, and this will undoubtedly continue going forward. Many retailers are already changing their business models in various ways including through consolidation, investment in customer experiences, cost-cutting, integrating supply chains and adjusting product mixes.
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