Gerry Harvey shelves plans for new stores as retailers warned to get used to a new kind of normal

Cara WatersJuly 10, 20120 min read

Australian retailers are in for a "retail shakeout" over the next three years, and retailers including Harvey Norman are scaling back plans for new stores in anticipation, according to research by Citigroup.

Citigroup warns that while retail share prices may have halved, the retailers have not yet rationalised floor space.

It highlighted Harvey Norman and JB Hi-Fi as the "most vulnerable" and indeed Gerry Harvey, executive chairman of Harvey Norman, is putting new bulky goods developments on hold.

"We've never stopped like we've stopped at the moment," Harvey toldFairfax.

Harvey Norman opened between five and 15 stores a year in the past but Harvey says now "we're doing very little or nothing."

Citigroup's research found that deflation and online sales will constrain bricks and mortar growth and non-food retailers will need to cut floor space by 10% or more before margins can recover.

It found that many retailers have threatened to close stores, but few have actually done so despite subdued demand, signalling a rocky time ahead for retailers.

"Retail insolvencies were only at a similar level in 2011 as what they were in 2007, before the retail downturn," Citigroup found.

The research is echoed by industry analyst BIS Shrapnel's latest report on the retail property sector which warns that retail turnover growth this decade won't return to the "golden age" that ran from the mid-1990s to the financial crisis.

BIS Shrapnel forecasts that growth over the next five years will average just 2.9% a year, compared to the mid-1990s, which saw turnover growth of almost 5% a year on average in real terms.

Maria Lee, author of the report and senior project manager at BIS Shrapnel, told SmartCompany it was "subdued news for retail."

"It's not a disaster, we are not going back to pre the financial crisis but that was not a normal period, there is a new normal now," she says.

"If you look at total retail spending, we don't think that is going to grow all that fast, as people are saving more than they did pre the financial crisis and they are not spending as much of their household budgets on retail."

Lee says it is "not uncommon" to hear of retailers like Harvey Norman who have put expansion plans on ice.

"There are retailers still expanding but there are certainly some who are putting new stores on hold."

However, Lee says a halt to expansion does not always spell bad news for retailers.

"Quite often it is because they are seeing the internet side of their business growing more strongly so they are investing more in that," she says.

"Internet shopping really has taken hold and all retailers need to be on board, some are still reluctantly coming on and see it more as a defensive move."

Online retailing has a two-pronged impact. There's the obvious effect of taking market share from traditional retailing, but Lee says internet shopping also affects profit margins in store.

"Consumers are using price comparison websites or apps on their mobile phones when in-store, and then demanding a price-match in order for them to buy there and then," says Lee.

"This can have an impact on retailer profit margins."

This article originally appeared on SmartCompany.

Cara Waters

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