Australian retailers facing a perfect storm
Australian apparel retailers are facing a perfect storm. The country is only now seeing signs of the global economic crisis, the strong Australian dollar is driving shoppers to look at international online retailers - and the world's major fast fashion retailers are plotting their entries. Petah Marian reports on how firms are faring.
Australia was one of the only major western economies to avoid recession in 2009, with the economy boosted by government stimulus payments and mining exports to Asia. But concerns around global economies, combined with rising energy and food costs, are now clouding Australian consumer confidence.
Retailers in Australia are facing "headwinds from subdued domestic household spending and the high exchange rate", according to research released by the Reserve Bank of Australia in September. And Australian households are taking a "more cautious attitude to spending and borrowing", with average savings levels reaching 10.5% of disposable income in the June quarter.
While savings rates have increased, so too has the pace at which Australian consumers have been paying down debt, the research found, with net repayments on credit cards picking up in recent months. Many housing loan borrowers have also "continued to make substantial excess principal payments," even as rising interest rates have increased total repayments.
"Consumer confidence is moderate to low," explains Sean Sands, research fellow at the Australian Centre for Retail Studies. "Research we have done looking at consumer intentions to spend in retail show that intentions are negative for all categories except in supermarkets."
Shielded but not unscathed
While Australia seems to have been shielded from many of the shocks seen by the rest of the world, it has not been completely unscathed.
Target managing director Launa Inman believes the average Australian consumer has been "really battling" and the true state of the Australian economy has been masked by the mining industry. "It's really a two speed economy; those that aren't in the mining industry are finding it tough," Inman says.
She adds that electricity prices have gone up and "all of these other taxes have come in", including carbon tax, flood taxes and proposed gambling taxes.
Additionally, the strong Australian dollar has also led to other changes in the way consumers spend. According to the results of the Household Expenditure Survey taken in 2003/4, the average consumer spent AUD35.26 on clothing each week. In 2010/11 that number had only risen 1.9% to AUD35.96 a week.
While the amount of money people spend on housing has been the biggest contributor, there has also been increasing spending on other recreation services, such as pay TV and the internet, as well as an increase in spending on holidays.
Inman has observed that despite reduced consumer confidence, shoppers are willing to pay for experiences, but are "very value driven in apparel".
Indeed with the global economic crisis leading to lower numbers of tourists heading to Australia, Myer CEO Bernie Brookes says that "for the first time ever we're becoming an exporter of tourists rather than an importer of tourists", another element impacting Australian retailers.
Competition hots up
With Zara and Gap entering the market this year, and Topshop and Unqlo poised to open their first stores, competition is set to hot up in the market. But local retailers have been largely positive about the new entries.
"Competition is good for any market," says Sands. "These brands are creating some excitement in the market, they are engaging shoppers to buy - but in the case of Zara it is because we now have good, relatively cheaper fashion alternatives. We will have to see the long term impacts on behaviour, but for now the market is excited."
Indeed, both Myer and Sportsgirl have seen traffic uplifts on the back of Zara's entry into Melbourne and Sydney.
"They've all moved in next door to our stores, so it's like a bee and a honey pot, and we've increased foot traffic in the doors that are next to Zara, so they're attracting more people into the Melbourne and Sydney central business district, so that's making it very exciting for us," says Brookes.
Australia needs one of a number of "trigger points" to spark consumer spending, including a couple of interest rate declines, a turnaround on carbon taxes, flood or pokie taxes, he adds.
And it seems like there could be some positive news on the horizon, with the reserve bank last week cutting interest rates for the first time in more than two years by 25 basis points to 4.5%.
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