Forecasts point to a Christmas like few others

Retailers need to offer some form of entertainment to maintain shopping momentum.

For Australian retailers, the 2016 Christmas will be like few others we have seen in recent decades.

Yes, there will be another rise in online spending and the rise in food and apparel sales will exceed the current low inflation rate.

But there is nothing special ahead for the mass of conventional goods retailers.

The Christmas growth will come in hospitality, which is set to rise at at least twice the clip of most retail sectors. This morning I breakfasted at the Roy Morgan Research state of the nation presentation, which concentrated on the retail sector.

Four events really grabbed my attention — the expenditure swing to eating out and leisure experiences rather than buying “things”; the fact that retailers are more confident than the rest of the business community; the looming threat of Amazon which in the second half of 2017 will shake up the Australian retail scene; and the massive task faced by Woolworths’ new management.

The table below tells the story of retail trends better than any other. Morgan has undertaken a detailed survey of where Australians will spend their Christmas dollars. Here is the table:

Remember we are assuming an inflation rate at or below 1.5 per cent and a population growth rate of say 1.5 per cent. The volume of food sales on a per capita basis is going backwards and apparel is not that much better.

But hospitality, which includes a vast array of cafes, coffee shops and restaurants, is sucking in the dollars.

There is no doubt that two-income families and the rise in casual employment are closely linked to this trend.

Morgan believes that the Australian Bureau of Statistics has not realised that family incomes have risen above 5 per cent in the last year, even though salaries in the private sector are not rising. Incomes in the public sector are rising strongly, as is the commercial building sector. In addition the rise in hospitality is attracting big sums to an area where the cash economy dominates.

Meanwhile, for years we have predicted the end of bricks and mortar retailing. Morgan says that in food, online purchases are steady at around 3 per cent but they are growing fast in certain sectors led by babywear, where the online growth is staggering.

We find that despite the massive change in the industry, retailers are more confident than the rest of the business community and over the next five years and they are looking to invest.

Why?

Morgan has produced a staggering table which shows that visits to bricks and mortar stores is actually rising. Here is the table:

People are leaving their homes to dine out and entering shops as an “experience”. At this stage they are not buying, so the task of the retailers is first to offer some form of entertainment to maintain momentum. If they are clever, that leads to purchases — perhaps online purchases.

But they will need to be very clever because clearly leisure spending is rising much faster than buying “things”.

One of the great challenges facing Australian retailers is the entry of Amazon, likely late next year. Amazon thrives in markets where there are high margins. It sees Australia as a ripe plum. Amazon will link refrigerator food stocks to online ordering and undertake many other innovations which makes online ordering seamless.

Woolworths is vulnerable. The graph below shows its market share loss and customer approval ratings are also falling. Big W looks a basket case.

Woolworths will need a complete revamp in a very short time to cope with Amazon. It’s not impossible but the challenge is big.