The deep dive on retail

The deep dive on retail

Yesterday, we attended a lunch put on by one of our brokers for a deep-dive into the unlisted retail industry. Here, we gained further insights into the sector, following a raft of negative news flow recently from the likes of Supercheap Auto (ASX: SUL), The Reject Shop (ASX: TRS) and Kathmandu (ASX: KMD).

The Australian retail sector is a highly cyclical industry that ebbs and flows with consumer confidence. It’s clear, however, that many operators are doing it tough. Some of the more notable insights from yesterday’s lunch follow below:

• Overall, the sector continues to be under pressure. Price increases are hard to put through; while costs are increasing, particularly in staffing, rents and inventory management. The long-term implication for consumers? They’ll need to pay more.
• Relationships between factories and more local distributors are paramount. Success for both parties can be achieved by working together to adjust to market demand and cost pressures.
• China is becoming less attractive as an import destination. Chinese wages have gone up significantly over the past few years, and Chinese factories typically require up front payment (or at least a hefty deposit). Once you consider that distributors can often take up to 90-180 days to get paid, you can see how this creates a working capital issue.
• Surprisingly, there are few substitutes for China when factors such as quality, timely deliveries and price are taken into account.
• The arrival of larger global retailers (e.g. Uniqlo) is seen more as an opportunity than a threat. More retailers drive more foot traffic to shopping malls and circuits. In the short term they will take market share, but over the longer term – consumers are expected to revert back to their usual buying patterns.