Consuming passions: The future of Australia’s consumer goods retail sector

Consumer goods retailers have faced a mixed market over the five years through to 2011-12. Increasing demand for consumer goods in the early part of the period was aided by growth in disposable incomes, low interest rates and declining unemployment.

However, the later part of the period has presented a volatile market for the sector’s operators, characterised by fluctuating income, rising unemployment and unstable consumer sentiment levels, which have affected demand for a range of consumer goods.

Growth in interest rates and a downturn in the domestic economy, following the collapse of global financial markets in 2008, led to a tense time for players. Mounting consumer uncertainty surrounding the stability of the domestic economy and fears regarding the possibility of a recession caused many consumers to restrict expenditure on non-essential goods. Overall, sales by the consumer goods retail sector are expected to decline by 0.2% per annum over the five-year period.

The sector is forecast to grow modestly over 2011-12, with sales increasing by 1.5% to $121.1 billion. Along with subdued trading conditions, consumer goods retailers will face a challenging market due to uncertainty surrounding future trends in unemployment and interest rates. Retail spending will also be affected by debate over the full effect of the carbon pricing scheme. Results across each of the consumer goods industries will be varied; department stores and footwear retailers are expected to post modest increases in sales, while stronger growth will be achieved by clothing, toy and game retailers. Growth across the consumer goods market will be negatively affected by a rise in the number of consumers choosing to shop online due to the vast product range, competitive pricing and lack of GST payable on goods purchased from overseas retailers.

Industry at a glance

Sales across the consumer goods market are forecast to grow by 2.1% per annum over the next five years, to total $134.6 billion in 2016-17. Sales growth will be aided by an increase in disposable incomes and a rise in household formation. Consumer goods retailers will continue to face strong competition from online players that stock similar items at competitive prices. The sector will also be influenced by the flow-on effects of the carbon pricing scheme, outcomes of the Productivity Commission’s inquiry into the globalisation of the Australian retail industries and the broader issue of increases in the volume of online purchases made by Australian consumers.

Products and market segmentation

The largest product segment is clothing, footwear and accessories. This segment has contracted by 0.7% per annum in the five years through 2011-12. The relative size of this product segment stems from the expansive range of clothing covered by the sector, including men’s, women’s, children’s and infant goods. Sales growth in the clothing retailing industry is affected by fashion fads and consumer preferences. Sales are also influenced by trends in disposable income and the quality of clothing purchased.

Driven by growth in product technology and functionality, electrical goods have overtaken goods from department stores over the past five years. This category grew strongly in the early part of the five-year period, driven by advances in product design, functionality and technology. Prominent examples of this include the growing popularity of home theatre systems, iPods, digital cameras and plasma and LCD TVs. Despite its strong performance, the electrical goods segment suffered in 2008-09 due to the flow-on effects of the global financial crisis, which caused uncertainty in the domestic economy and reduced consumer spending. Despite retailers in the segment reporting lower revenue, sales volumes actually increased in 2011. However, the soaring Australian dollar and significant price deflation have constrained revenue growth in the segment during 2010-11 and 2011-12. Prices of some computer equipment fell by as much 42% and flat panel TVs by 25% during 2011.

Demand for goods sold by department stores has been driven by the stores’ broad product base, economies of size and scope, and ability to offer competitive prices. Despite its size, sales by the department stores industry have declined over the past five years. This segment has been affected by fluctuating disposable incomes, rising interest rates and competition from retailers of specialist consumer goods. In 2010-11, the department stores industry was one of the worst performing retail industries in Australia, with revenue declining by 6.8%. The major department stores blamed everything from the carbon and mining taxes (which are yet to be introduced) to the internet for their performance, but department stores have been consistently losing market share for 30 years. Since 2000, department store annual revenue has contracted five times, indicating that the challenges faced by department stores are long-term and structural.

Hardware, building and garden supply retailers have experienced a fall in sales over the past five years. Strangled by a bevy of competitors, garden supplies retailers have faced increasing pressure from numerous external operators, including hardware stores with gardening departments, discount department stores, online retailers and local markets. However, the segment has returned to growth as home improvements made from 2000 to 2004 during the last growth phase become dated or need improvement. The segment has also been boosted by the aggressive expansion of large stores. Woolworths opened its first Masters store in September 2011 and plans on opening 150 stores by the end of 2015. In response to the challenge of Woolworths, Bunnings plans to open a further 18 stores in the next couple of years.