Retailers ready to bounce back

Consumer goods have faced a mixed market over the five years through to 2010-11, with sales rising by 1.2% per annum. Increasing demand for consumer goods in the early part of the period was aided by growth in disposable income, low interest rates and declining unemployment.

However, the latter part of this five year period presented a volatile market for industry operators, characterised by fluctuating income, rising unemployment and unstable consumer sentiment levels which affected demand for a range of consumer goods. Continued growth in interest rates coupled with 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, along with fears regarding the possibility of a recession, caused many consumers to restrict expenditure on non-essential goods.

To boost spending and stave off the possibility of a recession, the Federal Government handed out two rounds of stimulus packages. The first package, worth $10.4 billion, drew the required effect, with retail sales being boosted by growth in discretionary spending. By investing back into the economy, consumers aided the performance of department stores (up 8.3%), household goods (up 9.9%) and soft goods (up 5.8%).

Despite receiving proceeds from a second stimulus package worth $42.0 billion, many consumers decided to allocate the proceeds into saving as they faced mounting recessionary conditions along with rising unemployment and falling consumer sentiment.

The consumer goods market is expected to post a steady performance in 2010-11, with sales rising by 2.2% to $128.8 billion. Solid growth in real GDP of 3.7% will set the foundation for positive trading conditions across the consumer goods market during 2010-11. Consumer demand will also be driven by growth in disposable income levels of 3.3% and declines in the unemployment rate.

Retail spending levels will however be hindered by continued declines in the consumer sentiment index, with consumers remaining cautious. Individual results across each of the industries covered by this industry will be varied with department stores and footwear retailers expected to post modest increases in sales, while stronger increases will be experienced by clothing retailers and domestic appliance retailers.

Industry outlook

From clothing to computers, the consumer goods market will post solid growth over the five years through to 2015-16, with industry sales expected to rise by around 2.2% per annum. Demand over this period will be boosted by growth in disposable income, stronger levels of employment and an overall improvement in the trading landscape for operators. In addition, continued advances in technology (albeit at a slower pace compared with the previous five years) will drive demand across a range of tech-based goods. However, the market won’t be without its pit-falls, as department stores and other large ‘category killers’ are expected to continue to affect competition within specialist areas.

The road to recovery

Rising by 3.6% per annum, growth in disposable income will be the backbone of the recovery across the consumer goods market over the period to 2015-16. Income levels will follow an upwards trajectory over this period, supported by solid economic growth. The retirement of baby boomers along with an overall recovery in the domestic economy is expected to provide a solid foundation for national employment over the next five years. As a result, the unemployment rate will trend downwards to reach a low of 4.8% in 2015. Demand for consumer goods will also be aided by a rise in household formation of around 2.0% per annum.

The solid growth within the economy, coupled with a housing shortage, will lead to a rise in housing commencements and hence growth in household formation. The resulting impact will be stronger demand for many household items including domestic appliances, furniture and electrical goods.

Overall demand levels for consumer goods will however be affected by annual trends in the consumer sentiment index. Following a modest decline in 2010-11, consumer sentiment will trend downwards over the three years to 2013-14, before posting an upturn in performance. Sentiment will to a large extent be affected by the anticipation of further interest rate rise and the resulting impact of such measure on disposable income levels. Slower economic growth is also expected to influence sentiment levels over this period.

Upturn in economy drives sales

In dollar terms, sales across the consumer goods market will rise from $131.9 billion in 2011-12 to $143.9 billion in 2015-16. Sales growth of 2.4% in 2011-12 will be driven by a solid increase in disposable income and lower unemployment. Key performers for the year will include clothing retailers (up 3.3%), hardware retailers (up 2.8%) and cosmetic and toiletry retailers (up 3.7%).

However, not all categories will fare well with competition from the digital market expected to affect recorded music sales (down by 3.4%) while leather goods operators will continue to face competition from external players (down 1.3%). Added to this, online shopping and auction websites will continue to affect trading conditions for numerous industries. Demand for consumer goods over the remaining four years to 2015-16 will be driven by further growth in disposable income levels and continued declines in the unemployment rate due to a strengthening labour market.

At the product level, growth will be fuelled by consumer demand for furniture, domestic appliances and pharmaceutical, cosmetic and toiletry goods. Consumer electronics will be a stand-out industry with digital TV take-up increasing and prices for flat screen TVs and other in-demand products continuing to fall. At the same time, technology will continue to result in new products entering the market (such as a greater range of e-book reading platforms), which will drive demand further. Sales will also be boosted by a growth across the housing construction market which will drive demand for a number of household consumer goods such as whitegoods, furniture and fittings.

Profit to tighten

The mature status of most industries within the consumer goods market will make it increasingly difficult for operators to post growth in product margins over the five years to 2015-16. Supplier characteristics will continue to widen, with giant ‘one-stop shops’ catering to vast and diverse groups of clients, niche operators, with tightly focused activities servicing small bases of customers, and shop-from-home operations using telecommunications as a ‘virtual shop-front’. In fact, the continued introduction of new formats and concept stores will increasingly characterise the industry.

Under these circumstances, it will be simpler to buy a competitor than to out-compete one, so mergers and acquisitions will also continue. However it is also important to note that with the continued advances in e-commerce, the barriers to entry that characterised the ‘bricks and mortar’ consumer goods market will no longer be quite so formidable.

A key trend for this division will be the increased focus on lowering the cost of doing business in a bid to increase profit margins. This will be driven by productivity improvements, enhanced technologies such as radio-frequency identification devices (RFID) and better point-of-sale (POS) systems, improved distribution and logistics strategies, and better product sourcing, increasing their economies of scale.

Industry value added is expected to rise by 2.4% per annum over the next five years, compared with growth in overall Australian GDP of 3.8% per annum over the same period. Despite annual fluctuations, gross product as a share of total Australian GDP will decline from 3.7% in 2011-12 to about 3.5% by 2015-16. While the absorption of wholesaling functions by industry operators and growth in a number of service areas within retailing will bode well for the consumer goods market, operators will be affected by rising operational costs. As was the trend in the five years to 2010-11, numerous players will undertake a review of costs in a bid to pass efficiencies onto consumers. However, rising levels of internal and external competition will impact gross margins and profitability.

Key success factors:

• Store presentation: Merchandise should be displayed in a visually pleasing and efficient manner so as to attract the maximum number of consumers (product seekers and impulse buyers).
• Industry competitors: Industry operators should closely monitor the range and pricing of merchandise offered by rival and external players. Products should be competitively priced and offer value-for-money compared to rival stores.
• Stock levels: Industry retailers should have efficient stock control systems in place so as to meet peak demand periods and minimise the shelf and storage space allocated to slow moving goods.
• Good sales staff: Store employees should be knowledgeable about the products they are selling and be in a position to provide consumers with advice on the best products to meet individual consumer needs.
• Products to meet market demand: Industry operators should ensure that their product mix continues to meet the range of goods currently demanded by consumers. Hence, they need to keep abreast of advances in product design, technology and functionality along with changing consumer trends.

Barriers to entry

Barriers to entry in this industry are low and are steady.

Prospective operators planning to enter the consumer goods market have faced low barriers over the past five years. Although substantial in nature, entry costs have remained the single largest barrier to new entrants over this period.

Outside of the initial capital costs, trade consumer goods is regarded as a labour intensive service industry such that in 2010-11, the average ratio of capital to labour costs for retailers will be 1.0:9.0, whereby every $1.0 in capital costs will be balanced by a further $9.0 in labour expenditure.

Along with low barriers to entry, most industry operators have been subject to weak product differentiation due to similar products being available across a number of industries. A key example of this is the product similarities between department stores and clothing retailers, footwear retailers, furniture retailers, toy and game retailers and domestic appliance retailers. New retailers have also struggled to establish a solid relationship with suppliers and gain a reputation among consumers. Added to this, many of the industry covered by the consumer goods market have come under increasing pressure from e-tailing or retailers who operate purely on the Internet. Via their web sites, online operators have been able to offer consumers competitive pricing across a range of consumer products due largely to lower overhead costs.

Although not regarded as a formal barrier to entry, the market dominance held by key players across a range of industries has potentially deterred the entry of new operators. Key examples of this include department stores and recorded music stores. Entry into the remaining retailing industries has been aided by the low level of concentration held by the major players. To this end, entrants have been able to establish new operations without having to compete with players that already dominant a considerable share of industry sales. Establishing operations as a retail trader has also been aided by the low capital expenditure required as part of ongoing daily running costs.

Robert Bryant is the general manager of business information firm IBISWorld. For more on this sector, head here.