Retail waits for the crunch

There are two very different stories coming out of the retail sector today – one positive and one negative.

On the plus side, big retailers Woolworths and Supercheap Auto have posted strong sales and profit growth for 2008-09, shrugging off fears that the downturn would cut a swathe through the nation’s retailers.

There are a number of reasons for the success of these two companies.

For starters, they hold strong positions in their respective markets.

Secondly, they are extremely well run, with proven management teams and strong processes in place.

Thirdly, they have both been very good at getting cost out of their business, minimising the impact that discounting has had on their margins.

Fourthly, they operate at the “value” end of the market, where downturn shoppers love to spend their money.

Finally, there is little doubt they have been helped along by the Government’s stimulus cash handouts.

The Woolworths and Super Cheap results and yesterday’s Harvey Norman result indicates the retail sector isn’t doing too badly, although margins are under a bit of pressure.

But can their run continue?

Some insolvency experts have their doubts.

Joseph Hayes, partner at McGrathNicol, told a function yesterday that the wave of insolvencies is yet to hit SMEs. He also predicted that retailers, and particularly those backed by private equity firms that borrowed heavily during the boom, would be the next to feel the pain as unemployment rises and the impact of the Government stimulus fades.

According to a report in the Australian Financial Review, Ferrier Hodgson partner Morgan Kelly agrees.

“If unemployment goes up, demand is going to fall and retail is going to get it.”

The corporate undertakers make a pretty good point – the retail sector has actually been very well supported by Government handouts so far.

But the results of Woolies, Supercheap and Harvey Norman show that smart retailers who take proactive steps to improve their cost management, aggressively try to win customers and continue to invest in their business will survive and even thrive.