Australia: Retail realities

Australian retail was struggling long before COVID-19 arrived. Retail spending slumped to a 28-year low in 2019, with KPMG putting the final tally of companies entering administration at 16. There was little optimism for 2020. Low consumer confidence, rental overheads, discounting by competitors, and labor costs were identified as the biggest concerns.

While economists were still calculating the costs of the catastrophic bushfires at the end of last year, the spread of the coronavirus pandemic into Australia sent spending into a state of flux.

March represented the strongest monthly growth in retail sales on record as consumers stocked up ahead of the lockdown, with a boom in spending on essentials and a decline in discretionary activity. April saw an inevitable slump and then there was evidence of a rebound in May. The situation has normalized, but the economy remains propped up by policy support. Take that away and more pain may come.

As in most other developed markets, a string of retailers have already collapsed, some of them private equity-owned. IFM Investors-backed Colette by Colette Hayman was the first to go in March, with Tigerlily, a Crescent Capital Partners portfolio company, following a month later. Seafolly, which has been controlled by L Catterton since 2014, is the latest casualty.

Administrator KordaMentha blamed the “crippling financial impact” of COVID-19 for Seafolly’s demise, echoing statements issued regarding beleaguered retailers the world over.

However, in some cases, the pandemic might be a convenient scapegoat. A private equity firm, having already marked down an asset to near zero, finally pushes it over the edge alongside and points to macro challenges by way of explanation. In this sense, COVID-19 is the straw that breaks the camel’s back, but all kinds of other issues pushed it to breaking point.

The collapse of a high-profile consumer brand while under the stewardship of a private equity investor inevitably translates into a reputational hit for the asset class. Bain Capital and KKR sought to offset the fallout from the Toys R Us bankruptcy – where the company was shuttered rather than rolled, still operational, through a restructuring – by establishing a fund that covered some of the severance owed to former employees. But set against the scale of the failure and assorted accusations of poor financial management, this only goes so far.

And in some situations, private equity is to blame. Most of the largest US retail chain bankruptcies over the past decade happened under PE ownership.

Critics naturally point to unsustainable debt burdens and argue that these companies might have survived if controlled by groups looking beyond a five-year investment horizon. It is also often claimed that private equity pushes businesses into bankruptcy rather than take on complex turnarounds because resources would be more efficiently deployed elsewhere in the portfolio. Some of these port mortems are accurate; others are too simplistic.

In an Australian context, it is easy to draw a line from Myer to Dick Smith Electronics to Seafolly and denounce private equity as an irresponsible steward. But this analysis doesn’t acknowledge the differences between those three situations and the fact that many retail investments have positive outcomes.

Moreover, while a heavy debt burden may send a company over the brink, failure to execute a development plan puts it there in the first place. Again, accusations that these plans are predicated on ramping up debt to support unrealistically rapid expansion might not capture the whole picture.

KPMG says a brand losing market relevance as the number one reason why retailers fail. It identifies four symptoms of this: a fatigued product mix as consumers lose interest; failing to engage customers, especially through digital channels; a confused brand strategy and execution; and outdated technology, whether it involves back-end supply chains or front-end payment infrastructure.

The key takeaway is that retailers must continually adapt to survive – and not be afraid to invest in these initiatives, provided it is done thoughtfully. About two-thirds of the respondents in KPMG’s survey derive less than 10% of their revenue from e-commerce. Unsurprisingly, the top priorities for 2020 were increasing margins and turnover. E-commerce and omnichannel development came third and fourth.

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• Topics
• Australasia
• Consumer
• Write-off
• Australia