Outside of BHP Billiton and Rio Tinto, the banks and Telstra, investors’ largest direct share portfolio holdings tend to be in retailing, with companies such as JB Hi-Fi, Woolworths, Wesfarmers and Harvey Norman, or through REITs, which may include the securities of Stockland or GPT.
If we extrapolate from the recent past, the future for these businesses looks bright. But is the recent past a reasonable guide to the future? Some emerging threats suggest investors should not be lulled into a false sense of security.
We can place the threats into three categories, and while each will have an impact on retailing in Australia on its own, in combination they will send many more operators to the wall, where they’ll join the likes of Marcs, Rhodes & Beckett, Pumpkin Patch, David Lawrence, Howard’s Storage World, Payless Shoes and Herringbone.
The first threat is cyclical – the inevitable slowdown in renovations, which simply follows a decline in house sales. In 2013, house sales were growing at about 15 per cent a year. More recently, that number has fallen to minus 10 per cent. Housing alterations and additions have a high correlation with the pace of growth in house sales; a decline in house sales will weigh on renovations. This will have consequences for businesses specialising in the sale and distribution of appliances, furnishings and hardware. In turn, landlords renting space to these operators will feel the impact.
The second threat is microeconomic – building approvals, commencements and completions have all begun declining. This will have consequences for those construction jobs that boomed alongside the number of cranes, which hit a record 528 working above apartment blocks in Sydney, Melbourne and Brisbane in the September quarter of 2016 and exceeded those operating in New York, Boston, Chicago, San Francisco, Los Angeles, Toronto and Calgary.
The effects of this change in activity are difficult to forecast with any precision but it is reasonable to expect the impact on retailers to be negative and accentuated by the extent to which individuals who lose their have used leverage to purchase their home or an investment property. Debt as measured against household incomes and GDP is at a record high, as is credit-card debt. An interest rate rise, the loss of a job or the loss of a tenant will rapidly change the levels of financial stress for many. Note that a recent Commonwealth Bank survey revealed that more than a third of people would not be able to find a spare $500 if an emergency eventuated.
History has demonstrated that the toxicity of any activity or asset price contraction is largely a function of the extent to which individuals, corporations and governments have borrowed. Borrowing brings forward retail sales. Record debt suggests a future slump. Any rise in unemployment will have a direct impact on retail sales.
The third threat can be categorised as competitive. Australian apparel retailers face an ongoing challenge from the likes of Zara, Uniqlo, Topshop and H&M, and given apparel makes up about 30 per cent of gross lettable area for mall operators, these international brands will negotiate lower rents – about half those of local operators – pressuring returns for landlords, too.
Amazon is coming
All of this is occurring even before Amazon arrives in Australia, to unleash an offer that overseas consumers have been enjoying for years.
The emergence of Amazon as a player in the Australian retail landscape represents a step-change in the competitive dynamic that has already hollowed out many sectors of the retail industry in the United States. The company represents a power that New Yorker writer George Packer described in February 2014 as, “something radically new in the history of American business”.
Amazon Marketplace, for third-party sellers, is the dominant platform for digital retail commerce, ensuring it sets the terms under which its competitors operate. Amazon receives nearly half of every dollar Americans spend online. Its web services division provides cloud computing for companies like Netflix and US government organisations like the Central Intelligence Agency. It owns warehouses and delivery stations, leases ships and aircraft and owns fleets of truck-trailers. It is rapidly offering an expanded range of services, ultimately controlling critical infrastructure.
What you may not know is that Amazon processes payments for other e-commerce businesses, makes restaurant deliveries, produces television programs and movies, manufactures everything from batteries to baby food and dominates the Kindle bestseller list with its own books. Amazon Handmade competes with Etsy and Amazon Business with stationery giant Staples. It has delivery lockers on college campuses, has launched a music streaming service and has opened hundreds of bookstores and small convenience shops.
The American experience with Amazon is not universally good. A decline in the number of independent retail businesses is damaging upstream industries and innovation, and reports that Amazon is removing books from search results not only harms the authors and publishers but stifles the freedom of expression, ideas and information.
In the US, some commentators have said malls are in a “death spiral” as Amazon’s advance sends bricks-and-mortar retailers to the wall or, at best, reduces margins and, therefore, the rents mall operators can charge. When combined with an end to the decline in interest rates and, conversely, the rise in asset values, it seems retail shopping mall owners may now be facing a structural headwind that ensures the future looks nothing like the past.
From JB Hi-Fi (owner of The Good Guys) to Harvey Norman, to Reece Plumbing and Oldfields Holdings (scaffolding and painting equipment), and from the GPT and Stockland retail property trusts to the supermarkets and hardware retailers, investors will have to tread carefully to avoid disruption to their capital bases over the next few years.
TOPICS: Amazon, house sales, retail sector