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Strategic overview

The same, but different

Australian retailers face many issues that also face international competitors. Yet, argues Jonathan Wright, it’s also a unique market with distinct strengths and where new thinking is flourishing.

The Australian retail sector is delicately poised. With a turnover in excess of AU$300bn, it’s long been showing year-on-year growth, driven in part by Australia’s rising population. For Australian retailers, this provides an ongoing opportunity and in the 2017-18 financial year, retail sales grew 2.6%. Yet competition is growing too. While Amazon’s launch in Australia has received huge publicity, it’s only one of several incomers.

Further complicating matters, retailers operating in Australia are subject to the same kinds of pressures that assail the sector around the world. Busy customers want retailers to take the friction out of shopping, to offer flexible delivery and pick-up options, and to provide ever-better in-store experiences. But in an age of continuing pressure on wages and price transparency, consumers are reluctant to pay more for such innovations, so that 2.6% growth in sales was achieved with prices being 0.2% lower.

The August 2018 Retail Forecasts report from Deloitte offers a snapshot of this uncertain market. While department stores, for example, did better than expected, the principal author and macro-economist, David Rumbens, noted how Australian consumers were dipping into their savings to fund purchases.

“Consumers opened their wallets at the end of the financial year, with June quarter sales surprising on the upside,” he said when the report was launched. However, he warned, “The growth trend is unlikely to continue in the second half of 2018, as household budgets continue to come under pressure from tepid wage growth, falling house prices, and rising non-discretionary costs.”

Factor in a prediction that spending growth is likely to be focused on the food sector – which it’s projected could outpace non-food spending for the first time since 2012-13, something that hints at consumers having to spend more on non-discretionary items because of downward pressure on wages – and there would seem to be many reasons for Australian retailers to worry about the future.

Further ahead

Look longer term, though, and there are also reasons to be optimistic – and even to suggest that the Australian retail sector may have unique advantages. Consider the influx of incomers into the Australian market. Companies such as Aldi (which has grown steadily since launching its first Australian store as far back as 2001), Zara, a later arrival in 2011, and newcomers Amazon (see overleaf) haven’t expanded into Australia out of the goodness of their hearts. They’ve done so because they see opportunities for expansion and profit. Cut through shorter-term economic noise and the longer-term trajectory of the Australian economy – powered by a well-educated, growing and increasingly cosmopolitan population – is strong.

Yet that’s not the whole story. From a European perspective, Australia is often portrayed as being very European. Yet this is a misreading of Australia’s place in the world – quite literally, in that it’s a vast country surrounded by the Pacific and Indian Oceans. That’s not to deny its strong ties with Europe, and North America too, but the influence of Asia on Australia is strong. To take one example highlighted in our earlier Australia Footprint Report, published when we were at the beginning of our research, the daigou phenomenon, where people overseas act as agents for Chinese shoppers, exerts a powerful influence on the overall Australian retail sector.

A company such as the ASX-listed AuMake is formalising this kind of arrangement at scale as it sells products in four main sectors – healthcare; skin, body care and cosmetics; dairy products and baby food; and wool and leather – and connects Australian suppliers directly with Chinese consumers.

At the luxury end of the market too, Chinese consumers are having a huge impact on the Australian market. In January 2018, the South China Morning Post reported “industry insiders” as estimating that Chinese consumers are responsible for two-thirds of luxury retail sales in the Australian market. Accordingly, brands such as Louis Vuitton, Tiffany and Prada have expanded and revamped their presence in Australia, while other brands have set up shop for the first time.

Change and change again

Take a step back and you can see all this as merely a snapshot of wider cultural and economic changes. To return to those foreign retailers (and, for that matter, consumers) operating in Australia – something that in the digital age doesn’t even need to involve setting up a physical store – this is a two-way process. It’s not just foreign brands that are benefiting here. For evidence, think about the way ugg boots – especially, and confusingly, branded UGG boots as opposed to generic soft and fluffy slipper-boots – became fashionable across the globe in the early 21st century.

The influence of Asia on Australia is strong

Consider such developments within the context of Asian culture exerting a growing influence within Australia – and a picture of a dynamic, culturally diverse Australia comes into focus. We expect the brands and retailers that reflect these unique circumstances will find international markets.

That’s not to underestimate the nuts-and-bolts difficulties of being a retailer in Australia. Distance is an issue for those wanting to offer state-of-the-art delivery services and one that’s hardly going to go away in such a sparsely populated country/continent. Many retailers start from somewhere behind European, American and Asian competitors when it comes to implementing multichannel offerings, something reflected by Bernie Brookes, former Myer CEO, recently – and colourfully – calling Australian department stores “boring as batshit”.

Nonetheless, there are more reasons to be positive than negative, to expect Australian retailers to catch up with and, as is already happening among Leading retailers, surpass international competitors. Combine this with the Asian influence on Australian retail holding out the promise of new hybrids and new ideas, and there are real grounds for believing that the sector will address its short-term problems to emerge even stronger.

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