Retailers face headwinds from rise of e-commerce

Retailers continue to face headwinds with 2018 already seeing a number of high-profile brands reporting issues. Womenswear brand Maggie T appointed voluntary administrators in early January while shoe retailer Diana Ferrari announced it will close all its branded stores and operate largely online.

Oroton is another casualty while more recently Kangaroo Tent City & BBQs entered into Voluntary Administration with Jirsch Sutherland being appointed administrators. There’s little doubt the rise of e-commerce is affecting the sector, a situation set to escalate with the entry of Amazon into the local market.

Andrew Spring
Andrew Spring

The latest insolvency statistics from ASIC show that retail is one of the industries hardest hit by insolvencies and Jirsch Sutherland Partner Andrew Spring says the recent collapses are fuelled by the growth in online retail and the failure of companies to advance their e-commerce capabilities.

“Well-known brands are surrendering to the mounting pressure faced by traditional bricks and mortar operations,” Andrew says. “As the online retail marketplace expands and traditional geographical barriers to entry are removed, Aussie retailers are dealing with more competition than ever before. Kangaroo Tent City & BBQs is a case in point. It has experienced declining sales over the past year, part of which can be attributed to greater competition, particularly from online retailers that are able to reach their traditional customer base.”

International trends

Data from Fung Global Retail & Technology, which tracks store openings and closings in the US and UK, show trends that are likely be replicated in Australia. In the US, for example, there were 6955 major store closure announcements in 2017 and 3131 major store openings.

In the UK over the same time period, while the numbers are not as dramatic, major store closures still exceeded major store openings: there were 945 closures and 873 openings. In the US, the categories experiencing the most softness were apparel and footwear – a situation mirrored in the UK.

The data shows that e-commerce is having a material effect on both the net growth of the total store base in the US and the UK and that apparel and footwear are the two key categories affected. Electronics stores have also been adversely affected by online retailing.

Andrew says retailers need to understand that the increased prevalence of online shopping has expanded their competitor base. “If retailers are unable to find ways to explore new markets for their products, then they are likely to see their sales base continue to decline as their competitors pitch to their current and potential customers,” Andrew says.

New accounting requirements

Jirsch Sutherland Partner Amanda Young observes another key issue for retailers is the new accounting requirement around lease liabilities, which subject to limited exceptions, requires all leases to be disclosed on a company’s balance sheet.

“The retail industry is likely to be affected the most as it has many operating leases of high value that are material to their balance sheet,” she says. “It means almost all leases will result in a liability on the lessee’s balance sheet and therefore the quantum of a company’s liabilities in this area will not be able to be masked.”

Meanwhile, Andrew says it will be the retailers who are agile that will succeed, especially as online retailing is forecast to reach double-digit proportions of total retail spending this year. To adapt, womenswear brand Cue has announced a three-hour delivery model that will be fulfilled from its network of bricks and mortar stores. Shoe group RCG is set to implement a similar model later this year.

“Other key contributors to retail issues include obsolete stock issues and poor record keeping,” Andrew says. “We predict that we haven’t seen the worst of the retail woes and that 2018 will unfortunately see many more local brands go into insolvency.”