“Retailers are going to suffer significantly, reduce their store footprint and inevitably some will fall into administration.”
Supermarkets such as Coles and Woolworths and massive retailing conglomerates like Wesfarmers are some of biggest forces dominating Australia’s $325 billion retail sector, all of which have flagged major structural change within their businesses in the months ahead.
Economists around the world are warning about a fresh bout of layoffs, retail closures and business distress when stores reopen but there are fewer customers and people have less money to spend. And the sector is expected to be reshaped by the increasing number of people working from home post-pandemic.
In this new world not all retailers will suffer as badly as others. Fashion retailers such as Premier Investments, David Jones and Myer are expected to be hard hit as more people spend time in their leisurewear, while home office suppliers with online networks will benefit from the shift. Officeworks, for example, has recorded a 12 per cent increase in sales during the pandemic.
Already retailers are shifting their plans. Wesfarmers-owned Target announced on Friday it would close 60 to 75 shops as it looks to reduce its store footprint, while travel agent Flight Centre has flagged plans to permanently shut 428 of its stores by the end of July.
And while far from being insolvent businesses, Myer and David Jones are thought to have sought the advice of restructuring experts at KordaMentha in rental negotiations. A theme that will be heard more often, some suggest, as landlords refuse to accept that rent structures need to change.
Mark McInnes, chief executive of fashion behemoth Premier Investments, says September will be a “crunch point” for the Australian economy. “You can name the specialty retailers that have gone out of business in the last six months, and that will continue to go out of business. It’s a serious issue.”
Premier has threatened to stop paying rent on its network of 1200 stores across its range of retail chains including Smiggle, Peter Alexander and Jacqui E.
McInnes and his billionaire rag trader boss Solomon Lew have been pushing for rental deals with landlords based on a percentage of retail sales. “If landlords say ‘do it my way or it won’t work’, then that’s going to lead to hundreds of thousands of job losses, and many retailers just won’t reopen,” McInnes says.
Rag trade blues
Retail in Australia was far from thriving prior to the onset of a global pandemic. Less than 12 months ago shopkeepers were lamenting depressed consumer confidence, fierce international competition, topped off with a sector-wide recession.
In the past five months alone there has been a deluge of high-profile retail collapses. Bardot, Jeanswest, Kikki K, Tigerlily, Harris Scarfe, Colette, Ishka, Curious Planet, Aussie Disposals and G Star have all waved the white flag. Some such as JeansWest and Aussie Disposals have already or are in the process of being reborn as slimmer outfits.
For the veteran Brookes it’s been a terrible time to be a retailer. “We had drought, bushfires and the coronavirus. There’s not a lot of small businesses and retailers that can withstand those impacts over a long period of time,” he said. “Enough’s enough.”
But some businesses will struggle to survive even before September when the government and bank support is expected to run out. This support has included a $750 payment per week for stood down staff through the government’s JobKeeper program and the doubling of welfare payments for job seekers, bank loan repayment holidays of as much as six months and temporary relief from paying rents or rental reductions.
“By the end of June and July I think it’s going to shake out when people go to turn the lights back on, particularly retailers trying to open back up. It’s going to be really difficult to come out of hibernation,” says Craig Shepard, a partner at KordaMentha, who has handled dozens of retailer, hospitality and retail property administrations over the years, most recently George Calombaris-founded restaurant group MAdE Establishment.
Along with travel and retail, Shepard sees stress in a range of sectors including in equipment leasing, insurance, automotive, aged care and education, which relies on international students. There are also problems ahead for agricultural businesses that are reliant on migrant workers. Casual dining in food courts will also take a battering as food courts patronage thins out.
“It’s going to be a long dark economic shadow coming out of this current situation. I can’t see it bouncing back quickly,” he says.
Shepard says groups should be looking now at how to get through the next few months and years. “The sooner you come out of hibernation and plan for all scenarios, the better you will be,” he says.
Another well-versed in business distress, KPMG co-leader restructuring services and retail sector specialist James Stewart, says he expects it will take up to two years to recover from the economic hit caused by coronavirus. “There’s a real prospect that when the support runs off that some organisations will need to go into administration,” says Stewart.
Stewart says he knows of many retailers thinking about drastically reducing their bricks and mortar stores. “You’ve now got a whole lot of retailers saying ‘if I had 150 stores before COVID and I was thinking of closing 30 stores, I’m now thinking of closing 70’.”
But as bricks and mortar retail looks set to be shaken at its foundations, it’s not all gloom for the retail sector. KPMG expects to see a major shift in the range of products bought online.
Online retail penetration in Australia has long been lagging other parts of the world, though that is expected to change due to the shift to working from home and the large numbers of people who have tried (and enjoyed) online shopping for the first time during the pandemic.
National Australia Bank’s online retail index, the trial reference for online shopping habits in Australia, for March surged 5.6 per cent on a month by month seasonally adjusted basis. Compared to the same time last year, the index has jumped 21.8 per cent on a seasonally adjusted basis.
NAB estimates that in the 12 months to March, Australians spent $31.91 billion on online retail, a level that is about 9.7 per cent of the total retail trade estimate.
Stewart says these figures mean those retailers that are already omnichannel businesses with a strong online presence will benefit from the new economy.
One retailer that is confident of being prepared for this shift is Super Retail, which owns the Supercheap Auto, Rebel Sport, Macpac and BCF chains. The $1.5 billion retailer is likely to benefit as Australians plan more local camping holidays and spend big on dumbbells and activewear for their in-home workouts.
After riding through the white-knuckle experience of navigating Super Retail through a “black swan event”, the group’s boss Anthony Heraghty believes there is more unknown territory ahead as companies deal with a downbeat economic outlook, social distancing requirements and pre-COVID pressures.
“That’s quite a tricky piece of calculus to work through,” Heraghty says.
Businesses that have set up strong online channels will be best placed to weather the impending shift in consumer behaviour, he says, retaining little sympathy for those who haven’t. “It was always coming, we’ve been talking about it for years,” he says. “If you weren’t prepared for a digital economy… you were always going to be in trouble.
“Retail is fine. It’s old retail that was always going to be a challenge.”
Sarah Danckert is a business reporter.
Dominic Powell writes about the retail industry for the Sydney Morning Herald and The Age.