Topshop joins the growing list of clothing retailers who have gone into administration over the past eight months. Among them are Herringbone, Rhodes & Beckett, Marcs, David Lawrence, kids wear chain Pumpkin Patch and Payless Shoes. Several of these operations continue to perform well in other countries, so what does it say about the climate in Australia for retailing?
In a business of this nature, there are three major expenses in the operation; cost of goods, rent and wages. To really understand the reasons why these retailers have not been able to survive in the Australian market, let’s dive in deeper into these key expenses.
Cost of Goods (COG’s)
The Australia dollar has been weaker against most other currencies for the past two year and with most of what we purchase in retail stores made overseas, it is no surprise that this makes imported goods more expensive. Most companies offset this cost to a degree by playing the currency market, but after two years of low value, at times 30% less than the peak, it begins to affect profitability.
Rent
It is no secret that the rent in many of the Australia shopping centres are considerably high, while anchor tenants enjoy a low per square metre rate. Many of these failed businesses took up prime locations in shopping centres, while those who have survived have moved out of shopping centres, on to the streets and more importantly online considerably reducing overheads. When your landlord is a publicly listed company, it unusually is all about the bottom line profits, and not so much about the sustainability of the businesses.
High rent makes a business’ breakeven point that much harder to achieve, increasing sales targets to a unrealistic level just to pay the rent.
Wages
While real wage growth has been slow, the analysis of Australian minimum wage rates relative to other countries are comparatively much higher. Certainly, any developed nation should ensure its poorest workers can live comfortably on minimum wage, hence why there was so much debate on the subject in the 2016 US elections.
Australian weekend loading is where the real wage issues comes into play for retailers. The weekends are often the time when retailer need the most staff to service the increase in traffic. However, in Australia the cost of these staff double during these periods. Most retailers operate on a small profit margin, a slow day can quickly mean a loss for the business.
Sales
Australian Retail sales fell slightly (0.1%) in March 2017, based on seasonally adjusted figures. This is on the back of weak results in preceding statistical data. Many are attributing this to the low wage growth (Increase of wages comparative to inflation) squeezing discretionary income.
However, tightening of consumer spending can also be attributed to the mounting debt everyday Australians find themselves in. Australians have one of the highest debt to income ratios of the developed world, as more and more Australians borrow to buy their own home. The extra pressure of this debt and the associated repayments forces consumers to tighten their purse strings and only buy essential items.
There are several factors affecting the collapse of these brands, but it doesn’t mean the news is bad for all retailers. We are already seeing the industry turned on its head with the increase of online shopping and major brands quickly adapting to this new channel, reducing overheads while increasing their market and profits.
Mark Jason
LINK Australia, Managing Director
