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According to retailers, 2011 was the toughest year in Australian retail history. Despite the high Australian Dollar subsidising the costs of imported goods for retailers of foreign-made items, many retailers have been vocal in their criticism of the current retail environment. Today, we take a look at the future of major listed retailers and in particular Harvey Norman, which suffered its worst ever year on the share market.
A number of factors point toward another difficult retail environment in 2012. The Australian retail sector has been through a massive structural change and more is on the way. Australian retail will never be the same and if a brand has not adapted by now, it is likely they will never adapt to the changing retail environment.
So what does this mean for investors looking to enter the retail space?
Traditional ‘bricks and mortar’ retailers can kiss the glory days good-bye. For retailers of electronic equipment, the very products they sell will be the downfall of the out-dated retail model. Computers, phones and related technology have revolutionised the way we access the internet and ultimately the way we shop. Take Harvey Norman for example - Founder and CEO Gerry Harvey has widely criticised the growth of online retail, blaming cheap ‘grey imports’ and no shop front as an unfair advantage for those with a web-based business. Sorry Gerry, but the worm has turned – we still remember when Harvey Norman franchises were opening seemingly overnight in nearly every suburb of Australia, forcing out small store owners who couldn’t compete with the chain’s buying power.
Now is the time for the savvy online entrepreneur to come to the fore and compete with the biggest names in the business. Australian online retailers are opening by the thousands, undercutting Australia’s largest retailers. But life is not over for all traditional ‘bricks and mortar’ retailers. Let’s compare a couple:
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JB Hi-Fi continues to outperform its peers, opening new stores and constantly evolving its brand to maintain competitiveness. The retail environment must satisfy a number of criteria and Harvey Norman falls short in many of these.
Similar to the products they sell, a company’s brand must remain appealing. Both the Black and Yellow ‘bargain’ appeal of JB Hi-Fi and the “everything’s negotiable” Bing Lee remain competitive by investing heavily in the image of their brand. Equally as important is online functionality. Many retailers have adapted well to the online environment, creating easy-to-use websites, free delivery and, in many cases, more competitive prices. Harvey Norman’s failure to adapt has clearly been reflected in a flailing share price and could ultimately cost the leading retailer its business. In January 2012, for the first time, Harvey Norman announced they had no plans to open more stores. In the meantime, competitors take advantage of lower costs, grow their online offering and/or maintain brand image.
Should traders and investors avoid investing in the retail sector in 2012? Well, if nothing changes we shouldn’t expect a different result. Retailers will continue to struggle. The highest interest rates in the developed world will continue to limit the spending patterns of Australian consumers. And more importantly, the growth of online retail will continue to leave the ‘dinosaurs’ behind. If you are looking for value in the retail sector in 2012, the answer may well lie offshore. Companies such as Amazon have revolutionised online retail. Traditional obstacles such as product returns and warranty issues have been overcome, even allowing buyers to return products without leaving home. Service and delivery is excellent and prices reflect the lower costs of operating online. Amazon’s share price clearly reflects its evolution, despite a struggling US economy:
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The retail world has changed and unfortunately it appears Harvey Norman is unable or unwilling to change with it.
Stay Ahead Of The Game,
Lachlan McPherson
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