RETAIL INSIGHT PAPER - Harrier...

Quarterly Outlook : June 2016

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RETAIL INSIGHT PAPER

Quarterly Outlook : June 2016 01


This paper provides a high level insight into the current retail markets in Australia and the United Kingdom (UK), with a look at how the upcoming Australian federal election may affect the retail industry.



Snapshot of Retail in Australia

Retail analysts UBS are warning that an all-out price war could be looming for Australia’s $90billion supermarket industry.

The Q3 financial year results from Australia’s biggest supermarkets were announced in May. Woolworths’ sales fell by 0.7% in the 13 weeks to 3rd April, and food and liquor like for like (LFL) store sales dropped by 0.9%.1 There was an increase in customer numbers in the quarter but any growth was impacted by Woolworths’ ongoing investment in price, with average prices dropping by 2.4% compared to last year.

In contrast, Coles’ Q3 results show an increase in total sales by 3.2%, with food and liquor sales growing 5.9%. Record Easter sales will have contributed to Coles’ success, as LFL Easter sales increased by 4.9% despite price deflation of 2%.2 Coles has recently spent $14 million on rebranding three Supabarn stores in ACT, which are due to open in May and June.

In February, Woolworths posted its first half-year bottom line loss in the 23 years since listing on the Australian Stock Exchange: A massive $972.7 million, mainly attributed to “slashing the value of its loss making home improvement business” Masters.3

Perhaps Woolworths’ so-called “failing strategy” can be turned around by new CEO Brad Banducci. His priorities are said to include the improvement of “customer experience, portfolio optimisation, better leadership, board renewal, the embracing of a listening culture and more disciplined capital management”.4 Rebuilding Woolworths will take three to five years according to Banducci, as it faces ‘headwinds’ in its core food business, disposes of Masters and sees sales declining at Big W. Dan Murphy’s continues to perform well and BWS recorded positive LFL growth in Q3.

In a “strategic response”5 to the two main challenges it’s facing, Woolworths is dropping its 32 year

old Homebrand value private label and rebranding all its products under mid-tier own label Essentials, which was launched in 2010. This should allow the retailer to offer customers a stronger price proposition as it combats increased competition from Coles, Aldi and Metcash and rises up against the challenge of “growing quality perception amongst shoppers of Aldi and Coles’ private label products”.6

Retail analysts UBS are warning that an all-out price war could be looming for Australia’s $90billion supermarket industry. They put the probability of a price war in the next two to three years at 25%, a growing risk. UBS predicts that Woolworths

What is a price war?

“AN IRRATIONAL PROMOTIONAL INTENSITY BY RETAILERS IN A BID TO WIN MARKET SHARE AND

COUNTER THE GROWTH OF RIVALS, KICKING OFF A RAPIDLY ACCELERATING BATTLE WHERE

PEERS MATCH OR SHARE LOWER PRICES, DRIVING INDUSTRY PROFITABILITY DOWN, FAST” - UBS

would most likely be the initiator, in an effort to turn around its failing strategy. Metcash would apparently be the worst positioned to face a price war but is unlikely to engage. Discounter Aldi would be the only retailer likely to welcome such turmoil in the market as it can compete so effectively on price. In the meantime, the industry is said to currently be in a state of marketing war instead, where “pricing has been rational and growth benign”.7 According to UBS, Coles and Aldi are currently winning this war, experiencing sales growth.

Aldi has closed its Australian online liquor store, in order to focus on its store expansion into SA and WA.



Snapshot of Retail in Australia

Insight into Fuel2016 marks 20 years since Woolworths opened its first petrol forecourt. Now a mainstay on australia’s roads, the partnerships between forecourts and supermarkets have offered customers the convenience of pumping and shopping ever since. Here we take a brief look at the latest in fuel and convenience.

Coles Express opened a net total of six new stores in Q3 despite convenience sales dropping by 8.9%, mainly due to a decrease in fuel volumes sold. Coles attributes this to a number of factors, namely “new competitor openings, competitor marketing activity and disruption caused by regulatory and environmental compliance work”.14

Much like Coles, Woolworths’ fuel sales also declined by 8.8% due to a 3.2% slip in LFL volumes and an 8.1% drop in fuel prices. Unlike Coles however, Woolworths’ convenience sales for total merchandise grew by just 1.1% on a LFL basis.15 In comparison, Coles Express Q3 results show an 8.1% increase in LFL sales.16

Part of the aforementioned ‘competitor marketing activity’ affecting declining fuels sales at Coles Express and Woolworths could be attributed to the March launch of 7-Eleven’s new fuel app, a global first. The app is designed

to “help drivers lock in the best local fuel price”17 at 7-Eleven’s 434 stores, before redeeming petrol at that amount at any of its stores in the country within seven days, and is a key part of the convenience retailer’s strategy to provide new and exclusive products to customers.

Caltex is to reveal a new format over the coming months, designed to offer better value and more services to its customers. In response to customer demands for greater convenience at the forecourt, there will be a focus on food-to-go, ready meals, dry cleaning services and even haircuts. Taking a lead from 7-Eleven, mobile apps are said to be high on the agenda, as are digital platforms, more joint ventures, partnerships and greater online presence. The Caltex Woolworths Alliance operates over 100 co-branded sites across the country, in addition to the 520 co-branded sites that Woolworths owns and operates with over 3,000 staff.

Launched in 2013, the online store was a world first for Aldi, though it has recently launched a similar service in the UK. The long-awaited arrival of Aldi into WA begins in June, with four stores opening in one day. Joondalup, Kwinana, Mirabooka and Belmont stores will open first, with 16 further planned for the rest of 2016. The discounter is eventually planning to open 70 in the state.

Outside of grocery, research from MasterCard shows that in the last five years, the number of different stores visited by the average Australian shopper has fallen by more than 20%8, suggesting that many shoppers now find the brand(s) they like and stick with them, spending more money at one store.

Myer has reported a 2.1% increase in sales compared to Q3 last year. LFL sales were up 3.4%.9 The execution of the New Myer strategy is reportedly going well, “continuing with the rollout of a significant number of new and wanted brands in conjunction with refurbished brand destinations”.10 The department store is on track to

deliver its third successive year of sales growth.11

Following its strongest sales growth in more than 15 years in 2015, David Jones has this year posted H1 growth of 9.7% in comparable sales.12

The first standalone Reiss store in Australia is due to open in May in the exclusive new retail promenade St Collins Lane in Melbourne. The apparel retailer positions itself at the centre of the ‘masstige’ market, appealing to the masses and the prestige, in between fast fashion high end luxury. A favourite of the Duchess of Cambridge, the label is already experiencing success with its counter in David Jones on the Gold Coast. Stores in Sydney and Adelaide are due to open in the coming months.

Harvey Norman and JB HiFi are trading well due to “strong housing, a favourable product cycle and the exit of Dick Smith from the market”.13 Following the demise of electrical retailer Dick Smith, Kogan. com has acquired its online business and started trading from 1st June.



Snapshot of Retail in the UK

Until the results of the upcoming referendum on whether to leave or remain in the EU are announced, it’s business as usual for UK retailers.

Morrisons has enjoyed its second consecutive quarter of growth, achieving 0.7% in the 13 weeks to 1st May, excluding fuel. This quarter has seen the launch of the Morrisons Makes It range, designed to “better communicate its unique manufacturing capabilities”18 to customers.

Further leveraging its huge manufacturing base, Morrisons has renegotiated its deal with online retailer Ocado and is beginning a wholesale service to Amazon: “Hundreds of own-label ambient, fresh and frozen lines will become available on Amazon Prime Now and Amazon Pantry”19, which gives Amazon “immediate access to a channel that simply didn’t exist a few months ago”.20 Some are calling the deal a Trojan horse scenario, as Morrisons assists a potentially serious new competitor in overcoming huge barriers to entering the market. With the partnership, Amazon will be able to ensure one hour delivery times for groceries outside of the big cities in which it is already operating. Home deliveries for the big four supermarkets have “become permanently loss making”21according

to The Grocer, costing them £20 per delivery when they can only charge £5. In contrast, Amazon charges £79 for the year and seems to have made peace with being loss making indefinitely.22 The Guardian reported in May that Amazon was planning to start delivering fresh food through its Amazon Fresh service, complementing Amazon Pantry and Amazon Prime Now, which started delivering frozen food within one hour in London and Manchester in September.

Despite this disruption to the online sector, Tesco remains the dominant player among the UK’s online grocers. Sainsbury’s is seemingly looking to compete, as it is reportedly hiring 150 more digital and technology experts to improve its online store and prepare for the heightened competition Amazon is bringing to the sector. In the past year, Sainsbury’s has already doubled its digital and technology staff, hiring 480 workers.23 The UK’s second largest supermarket, also announced in April that more than 800 store-based trainer roles could be lost as they are replaced by 280 learning and development managers who will work across a number of stores.

Sainsbury’s has declared the end of its Brand Match Scheme that was launched in 2011. Favouring a pricing strategy to focus on consistently lower prices instead, the close of this and the phase out of all multi buy offers by the British summer, leaves Tesco as the only supermarket of the big four continuing with price matching. Discounters are growing market share without employing such schemes, indicating that price matching no longer has such an important place in the market.

Tesco is preparing a national roll out of Pay Qwiq, a payment app to allow customers to pay for their shopping with their phones. Starbucks is the only retailer thought to have had a real success with a similar app, launched in 2011: At the end of 2015, Starbucks were reporting that 21% of all sales went through this app, bolstered by the free coffee received by every user after 15 purchases.24 Walmart in the US launched its app in 2015 and has experienced a slow uptake, as has Apple Pay, which is not limited to one retailer.

High street bricks and mortar entertainment stores have

experienced something of a revival against online competitors – including Amazon – as HMV reports show a 2% year on year increase in the sales of DVDs, music and games. These are the best sales figures since HMV went into administration in 2013 and show that the more traditional channels still hold appeal for customers. Amazon’s sales fell by 12% in the 12 weeks to 10th April, losing them a percentage point in market share. Although Amazon still holds 22% of the market, HMV has now overtaken Tesco with 16.9%. The supermarket takes 16.1% of the market.25

Marks and Spencer’s new CEO, Steve Rowe, has shared that “turning around our clothing and home business by improving our customer offering is our number one priority”26 following a 2.7% fall in LFL sales in clothing and homewares. The decline in clothing sales is said to be less steep than expected, a small recompense for a division that has only seen one quarter of growth in LFL sales in 21 quarters.26



Movers and shakers

In Australia, Brad Banducci was named as the new CEO of Woolworths in February, on the same day that the supermarket released its H1 sales results. The present MD of Woolworths Food Group, Banducci’s appointment follows an international search for the replacement of Grant O’Brien as referenced in Harrier’s Retail Insights last year. Banducci brings 25 years of experience in retail, including 15 in retail consulting.

Angus McKay has been appointed as CEO at 7-Eleven Australia and started in the role in March. He is the former CEO and MD of labour hire and recruitment company Skilled Group Limited and replaces interim chairman Gordon Cairns following the resignation of Warren Wilmot in 2015.

The deputy CEO of Myer has a new role title: Daniel Bracken is now the Chief Merchandise and Customer Officer as well as second in command to CEO Richard Umbers. Michael Scott has been named as Myer’s new Executive General Manager for Brand and Marketing.

In the UK Doug Gurr will be leading Amazon UK including the new Amazon Fresh venture, moving from Amazon China. He will replace UK Managing Director Chris North.

Jim McCarthy has announced he will be stepping down as CEO of Poundland at the beginning of July after spending just under a decade in the role. His replacement from 1st July has been announced as Kevin O’Byrne, former CFO of Europe’s largest home retailer Kingfisher. O’Byrne joined Poundland’s board from 4th April.



The Impact of Politics on Retail

With the Australian federal election in july fast approaching, as well as the uk’s brexit referendum and the power struggle between trump and clinton in the us, politics is currently at the top of everyone’s agenda. But what is the likely impact on retail?

Retail sales run on regular cycles that can be heavily influenced by external events – the weather, the latest blockbuster movies that tempt customers away from shops and into cinemas, sports (the Euro soccer championship and the Rio Olympics may only add to retailers’ woes this year!) Major political events such as elections are no different as they breed uncertainty and affect consumer confidence, but there is little quantitative evidence, in Australia or beyond, that elections have a negative impact on consumer spending and retail.

Anecdotal experience seems to suggest the opposite however: That consumers are so concerned about the potential of interest rate, inflation and legislative changes that they stop spending on anything that is not a necessity in the run up to an election. Myer CEO Richard Umbers has reported that not only is the warmer-than-usual autumn weather affecting his department store’s sales of more expensive products, the upcoming election is also expected to hit consumer sentiment as they

brace for uncertainty. Similarly, travel retailers are said to be experiencing a slowdown towards the election. Qantas has cut its “capacity growth forecasts after seat demand began to ease after Easter”27, which it has attributed to “some softness in demand related to the upcoming federal election and recent drop in consumer confidence”.28

There has been some research conducted into the effect of politics, specifically elections, on retail: US research over four presidential elections showed little impact on consumer spending but a dramatic impact on consumer outlook.29 In Australia, studies show that retail sales growth in the 11 elections since 1984 was 30 basis points below the average rate of 5.9% per year30. They found that 55% of the time, consumer sentiment fell before, during or after an election. “In other words, elections are bad for retail and confidence just over half the time, but are actually good for retail just under half the time,” say analysts Deutsche Bank.31 A look at the Spanish retail market during

the country's inconclusive election results in December suggests that sales actually grew faster than expected there, with a 3.3% increase year-on-year in January.

Although Umbers expressed concern that the 2016 election will occur during a key trading period for retailers - in the middle of stock take sales - others point out that this will be the first election for 20 years held in winter, therefore not disrupting Christmas trading. Whether they choose to spend or not in the lead up to the election, shoppers have more choice of retailers this year than ever before, with the well-documented arrival of international brands in every Australian city.

Consumer confidence typically affects spending on more expensive items such as cars, high end fashion and electronics, and usually falls as customers adopt a ‘wait and see’ approach during political campaigns. This year, consumer confidence fell heavily in April, with the Westpac MI Consumer Sentiment Index showing a slide to 95.1, which is the lowest since Malcolm Turnbull became prime minister in September 2015 and the largest monthly decline in seven months. A score of 100 in this

index indicates that the number of pessimists outnumbers the number of optimists. Interestingly the survey also showed that respondents were more confident about the outlook for unemployment: Unemployment expectations fell by 1.8% with improvements in the results from NSW and VIC offsetting those from WA, SA and QLD. The Australian Bureau of Statistics’ (ABS) latest published unemployment figures show the rate remains at 5.7% in April 2016.32

Based on anecdotal and previous years’ experience, any negative impact the upcoming election might have on retail should be countered very quickly afterwards as consumers return to normality. In advance of this election in particular, Australian consumers are actually “relatively wealthy, given the recent interest rate cut and the low inflation of non-discretionary household expenses such as petrol, rent and utilities”.33 With their industry generating $290 billion for Australia’s economy and employing 1.25 million people, retailers will be hoping for a minimal and short lived impact and that life will go back to normal as quickly as possible after 2nd July.



1. ‘Woolworths posts challenging Q3’, 3rd May 2016, Retail Analysis IGD2. 'Coles reports another strong quarter’, 21st April 2016, Retail Analysis IGD3. Mitchell S, 'Woolworths appoints Brad Banducci as CEO, announces $973m loss', 26th February 2016, Australian Financial Review4. 'Woolworths: New CEO and H1 results', 26th February 2016, Retail Analysis IGD5. Woolworths to launch new private label’, 29th March, Retail Analysis IGD6. Ibid.7. Burke L, ‘The war no supermarket wants to have’, 5th April 2016, news.com.au

8. Han E, ‘Women driving three-quarters of all retail purchases, going crazy on clothing’, 27th April 2016, Sydney Morning Herald9. 'Myer’s sales lift’, 12th May 2016, Inside Retail10. Ibid.11. Greenblatt E, ‘Myer third quarter sales surge’, 12th May 2016, The Australian12. Ibid.13. Pash C, ‘Australian elections really are bad for retailers, some of the time’, 19th May, Business Insider

14. 'Coles reports another strong quarter', op. cit.15. 'Woolworths posts challenging Q3’, op. cit.16. 'Coles reports another strong quarter', op. cit.17. '7-Eleven gives greater choice to fuel pricing with the launch of a world first app', 3rd March 2016, Press Release, 7-Eleven Media Centre 18. 'Morrisons deliver further LFL growth in Q1’, 5th May 2016, Retail Analysis IGD19. ‘Is Morrisons boxing clever or is Amazon deal suicide?’, 5th March 2016, The Grocer, p.14

20. Ibid.21. Ibid.22. Ibid.23. 'Hundreds of Sainsbury’s jobs at risk as store trainer role is axed’, 9th April 2016, The Grocer, p.8724. Weinbren E, ‘Can Tesco’s PayQwiq make paying by mobile pay?’, 9th April 2016, The Grocer, p.1425. Ruddick G, ‘HMV moves ahead of Tesco as second biggest retailer’, 9th May 2016, The Guardian26. 'M&S boss vows to improve clothing sales’, 7th April 2016, BBC News27. Pash C, ‘Qantas shares are crashing after it sounded a warning bell on the Australian economy’, 18th April 2016, Business Insider28. Ibid.29. Mortimer G, ‘Keep calm and keep shopping – how elections impact retail sales’, 18th May 2016, The Conversation30. 'Australian elections really are bad for retailers, some of the time’, op. cit.31. Ibid.32. Media Release 6202.0 Labour Force Australia, April 2016, Australian Bureau of Statistics, revised 19th May 2016, abs.gov.au33. ‘Australian elections really are bad for retailers, some of the time’, op. cit.34. Baker S, ‘Brexit referendum mystifies UK execs bracing for impact’, 3rd May 2016, Bloomberg

References



Further Sources ‘Aldi Australia closes online store’, 29th February 2016, Retail Analysis IGD

‘Aldi reveals WA expansion plans’, 19th April 2016, Retail Analysis IGD

‘Caltex to roll out new format’, 7th April, Retail Analysis IGD

‘Retail inflation slowdown a red flag for rates’, 5th April 2016, Sydney Morning Herald

‘Sainsbury’s provides new detail on strategic priorities’, 5th May, Retail Analysis IGD

‘Woolworths posts challenging Q3’, 3rd May 2016, Retail Analysis IGDACRS Retail Insights, Monash University, March 2016

Butler S, ‘Amazon Fresh food deliveries ‘to start this month in UK’’, 4th May 2016, The Guardian

Consumers and the EU referendum, Centre for Retail Research, accessed 26th May

Ellery J, ‘Coles Wanniassa officially a Supabarn no more from Wednesday’, 11th May 2016, Sydney Morning Herald

Hatch P, ‘Hospitality hit hard by mining downturn, ABS figures show’, 4th April 2016, Sydney Morning Herald

Scutt D, ‘Australian consumer confidence just took a massive hit’, 13th April 2016, Business Insider

Singer M, ‘Fashion’s “masstige” moment: UK label Reiss to open first Australian stores’, 11th May 2016, Sydney Morning Herald

Weinbren E, ‘Sainsbury’s calls it a day for Brand Match scheme’, 9th April 2016, The Grocer, p.4

White S, ‘Spanish shoppers wave off political impasse, retail sales rise in January’, 10th March 2016, Reuters

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