Australian retail: officially in recession

Phil Chapman

“GFC-level terrible.”
Those were the words of NAB group chief economist Alan Oster when commenting on the state of the retail sector during an NAB Economics podcast. This was in light of a recent leading business survey declaring that the sector was “clearly in recession.”
The dire situation, however, seems to have actually escalated in just the past few months compared to the last two years. Firms behind popular retail brands like Focus on Furniture are, going into administration while company closures in the sector have become increasingly rampant.
The recent disruptions due to e-commerce, coupled with the slow growth of the Australian economy, were already doing enough damage to the sector but retailers are now officially calling it a crisis.
To better understand how this decline had accelerated, one can also look at how retailers were behaving four years ago. Another retail survey by Macquarie Wealth Management notes a very steep contrast, as evidenced by the radical shift in attitude towards expanding floor space in stores.
“Retailers are far less bullish on their space requirements today than they were five years ago, when we first conducted this survey. Only around 7% of large retailers currently intended on increasing space on a one-year view. This compares to around 61% back in 2014. In fact, 24% expect to decrease space over the next 12 months,’’ the report says.
With recession now on the minds of many business and thought leaders in retail, there has been increasing sentiment that rent reductions need to follow.
Finally, someone is saying the R word about Retail Trade- recession. The other Rs are rent reductions.”
But while rent reductions may ultimately be the only way out, finding the means to enable to those reductions will not be easy with rent rises deeply rooted in the current leasing system. Only time will tell if landlords will cave to the pressure of retail recession woes.
Phil Chapman is the director of retail leasing specialist Lease1.

How to build manufacturing resilience

Australia is currently home to one of the most volatile manufacturing industries in the world. Opportunities for companies to protect themselves against these economic ups and downs is the topic of the Commonwealth-supported Advanced Manufacturing Growth Centre’s most recent report, Building Resilience in Australian Manufacturing.
Resilient firms are defined as those that outperform their industry in a downturn, with higher earnings than average companies. This report identifies three strategies for building resilience and how manufacturing leaders can use these approaches for continuing success.
“The AMGC’s Sector Competitiveness Plan identified ways to drive competitiveness for Australian manufacturers, but there was an ingredient we found that needed to explain long-term performance, namely resilience,” said AMGC’s managing director Dr Jens Goennemann.
“Instead of seeing parts of Australia’s manufacturing base being wiped out in the next downturn, let’s rather learn how some of our manufacturers adapted and survived in such times of contraction.”
From 1996 to 2015, the period examined by the report’s researchers, and even without a recession, the manufacturing sector expanded to above and below 20 per cent of its trend size. This 20 per cent deviation compares to 14 per cent in the UK, 10 per cent in the US, and 8 per cent in Germany.
For one in three Australian manufacturing businesses, the loss of one customer would have a moderate to significant impact on their business. For one in 10 manufacturers, the loss of one customer would force their business to shut down.
Building Resilience in Australian Manufacturing outlines what drives resilience, with 70 per cent of resilient manufacturers exhibiting technical leadership, 64 per cent producing a diverse product range, and 54 per cent having business models that allowed for high flexibility.
The characteristics of resilient manufacturers in this context are highlighted through the report’s case studies. One manufacturer, Sutton Tools, benchmarked itself against the world’s best and decided to bolster its technical leadership through a dogged commitment to research and development.
“We stuck at it, not only for the pride of getting that product to successfully work, but more importantly what it did for all our other products and our manufacturing processes,” explains managing director Peter Sutton on its demanding but rewarding decade-long R&D project.
The report outlines three business factors driving resilience:

  • Superiority: superior firms possess an unassailable competitive advantage by offering technically superior products or services that are unique within the market, and highly valued irrespective of accompanying conditions.
  • Diversity: diversified firms possess a competitive advantage across many product segments, service offerings or geographically diverse export markets. This enables them to respond to shifting consumer tastes or reduced overall demand.
  • Flexibility: flexible firms possess an agile business structure allowing them to manage fluctuations in input costs or change industry focus in the event of a downturn.

The full report can be downloaded here.

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