Australian retailers have already experienced a significant downturn this year with insolvencies increasing. Amazon’s impending arrival in Australia may be another hit for the sector, adding to the pressure for local retailers who may struggle to compete when it comes to cost, convenience, and range.
Recent research from the ABS showed there has been a 0.1 per cent drop in retail spending and the rest of the year isn’t looking good for the sector. (1) Retail growth has now been negative in three out of the last four months; the sector’s worst results since July to November 2012. (2) This may be due, in part, to dwindling disposable incomes as 22 per cent of Australian households battle mortgage stress. (3)
Mark Hoppe, managing director, Atradius, said, “The arrival of Amazon isn’t likely to help the retail sector. Australian online retailers will need to ensure they have a competitive strategy in place to combat the American giant.
“Amazon’s move to also buy the American grocery chain Whole Foods is also likely to affect Coles and Woolworths as evidenced by share prices when the announcement was made.
“We’ve seen global retailers such as Zara and H&M have a significant impact on the Australian retail landscape, and we’re about to see a similar situation arise from Amazon.
“This year has been a battle for many retailers including the recent demise of David Lawrence, and Marcs. It seems Australians are putting clothes and other luxury items down the list of their spending priorities.”
The cost of inventory is another reason for slow cash flow in retail businesses, and is something smaller businesses need to be prepared for in the build-up to Amazon’s arrival.
Mark Hoppe said, “As much as three-quarters of a retailer’s assets are tied up in inventory, so finding a more efficient way to manage inventory can be an effective way to reduce costs and free up cash flow. Retailers can also face cash flow issues as a result of customers not paying bills on time.
“When retailers pay for inventory up front, they can be left to chase customers who don’t pay on time and can end up significantly out of pocket. Similarly, if suppliers work with retailers who don’t pay for their goods in a timely fashion, they can end up going down with the retailer through bad debts.
“Buyers who don’t pay at the agreed time, or are unable to pay at all, can significantly damage the business’s cash flow, crippling the business and damaging its relationships with other trading partners. Having a credit insurance policy lets suppliers trade confidently, even when consumer demand falls and retailers might struggle to meet payments, as it reduces suppliers’ exposure to risk and can greatly decrease uncollectible account expenses.”
Atradius advises retail businesses to have a strategy in place to ensure they are competing with global businesses coming into Australia. Retailers may need to find new points of differences which set them apart.
1) ABS 2016 - http://www.smartcompany.com.au/industries/retail/analysts-claim-retail-sector-verging-recession-will-tough-times-ease/
2) ABS 2016 - http://www.smartcompany.com.au/industries/retail/analysts-claim-retail-sector-verging-recession-will-tough-times-ease/
3) Digital Finance Analytics - http://www.digitalfinanceanalytics.com/blog/the-definitive-guide-to-our-latest-mortgage-stress-research/