6one5 Retail Consulting Group director Bill Rooney offers his predictions on the year ahead.
Based on our assumption that the majority of malls and stores will have to reopen by July 2020 to survive, the future of Australian retail paints a mixed picture.
Below, we forecast the impact of discretionary retail spend for the period from July 2020 to June 2021.
Australian retail projections 2020/2021
▪ Sales: 30% reduction in sales over 12 months.
▪ Gross Margin: Reduction of 9% over 12 months mainly due to this season excess stock having to be dumped on the market at slightly above cost to clear from June to September.
▪ As a result of lower sales and margin rents will have to reduce by 30% to 50% for retail stores to maintain some profitability and compensate for reduced shopping mall and store traffic.
▪ Up to 50% of stores that in 2019 were marginally profitable will have to shutter permanently. In Hong Kong, a city with a population of 7.5 million, the Hong Kong Retail Management Association study has estimated in 2020, 20,400 stores will shutter permanently out of 67,600 total stores a decline of 25% - 30%.
▪ Head Office costs will have to be drastically pruned by 25% or more to compensate for lower store contribution.
▪ Accelerated restructure focused on reinvesting in eCommerce, data analytics, technology, marketing and customer experience.
These trends have been based on applying our forecasts to customer data for UK, US, EEC, Singapore, Australian and New Zealand style retailers and market. For China, India, Asia and emerging markets where margins, rents and wages can vary from more mature markets forecasts would need to be calibrated.
How Did We Come Up with Our Forecasts?
Our forecast is based on our collective experience in financial modelling for many discretionary retailers over the last 18 years, research and analysis of publicly listed retailers, and discussions with retailers on their current experience with Covid-19.
To some retailers our forecasts seem pessimistic to which my reply is that we are going into a global recession the likes of which no one has experienced before, therefore I recommend caution as opposed to optimism.
As an additional reference point, Boston Consulting Group estimate sales in the luxury retail sector will decline 29.2% in 2020, not dissimilar to our projections.
Summary
Consumer confidence is already at rock bottom levels due to Covid-19's impact on unemployment and economic activity.
We predict this will suppress retail spending especially discretionary spending for at least 18 months.
Share markets and financial institutions in times of uncertainty reserve cash and suppress investment.
While share markets can bounce back quickly, investment, economic activity, under-employment and consumer confidence take much longer to recover.
Stores too can reopen quickly, however we may find consumer traffic into shopping malls and physical stores takes much longer to recover thus prolonging the downturn by many months or years.
The question is how long can retailers survive.
