As usual, most of the media commentary on Australia's February retail trade results will focus on a pretty abject headline decrease of 1.4% in seasonally adjusted sales. The talking heads from the economics profession will whine and wring their hands about it just as they touted January's 1.1% increase as a triumph of consumer resilience. They always do this.
And as usual, they will add no value by focusing on numbers that are inherently volatile.
All things considered, February was okay. Headline sales are still 3.4% ahead of this time a year ago despite the fact that food inflation is way down. The moderation in food prices accounts in large part for the apparent weakness in supermarket and specialty food sales (up only 1.3% on a year-over-year basis).
Discretionary sales growth was stronger than the headline number -- up 4.6% year over year. That's a good sign.
The one issue that still looks worrying is that the small retailer segment remains far adrift of the chains. While the chains gained 5.1% the indies gained only 0.5%, and then only because of food away from home. Exclude the latter and the small guys suffered a 3.1% sales decline.
Taken all together, the February retail results confirm that the economic recovery is neither as strong as the optimists say it is, nor as bad as the pessimists reckon.
Gap is going to put some licensed stores in Australia but it will make no serious impact on the clothing market by itself. Biggest winners are the centers like Chadstone at which Gap sets up shop, since it will be just one more reason to go to Chadstone.
For the other specialty apparel retailers it will be net neutral. Gap is a big name in clothing retail but it doesn't offer a differentiated product and it is floundering against sharper competition at home. In fact its latest claim to product innovation is denim nostalgia ("Gap 69"). Wow, that's original. It sells the same kind of stuff as retailers like Just Jeans and its price points are slightly higher.
It will be interesting to see what kind of in-store experience the licensees contrive for Gap in Australia. Gap stores in the US are twice as large as the average Australian specialty store and this enables it to offer a clean look and good sightlines. One hopes that Gap doesn't get bundled into the kind of space that prevents it from putting its best foot forward from a branding standpoint.
If Gap turns out to be just the first of a wave of overseas brands to hit Australia as everyone expects then the biggest losers ultimately are going to be department stores, since the bulking up of the specialty sector will give people yet another excuse for avoiding them.
According to new data released by the International Council of Shopping Centers (ICSC), U.S. regional shopping center sales per square foot sank by 7.7% in 2009 following a 4.5% drop in 2008.
What is really impressive about the calamity is the fact that it was so broad-based. ICSC measures productivity change in 29 tenant subcategories and all except one -- toys/educational/hobby -- experienced declines. And one suspects that the only reason toys/educational/hobby enjoyed an increase was the fact that bankruptcies and store closures in the category have driven out some of the worst space.
Productivity should now start to rise in U.S. malls as tenants cycle on abject base-year performance. The big question for many retailers is whether the recovery will be fast enough and strong enough to save a lot of units that are operating right at the margin.
Data by CoStar on regional center vacancy rates have always looked suspect on the low side (about 5 per cent nationally in 3Q09), particularly considering that both Simon and Westfield have declared higher vacancy rates in their mall portfolios. And they have some of the better centers. In all likelihood vacancy is closer to twice what CoStar is saying it is, and still rising. If so, sustainable reuses for the vacant space are going to be difficult to come by even after the economy recovers. The rate at which regional centers are eliminated from the retail inventory will accelerate rather than decline over the next few years. Expect the current mall count of about 1,100 to come down to about 650 by 2020.
Year-over-year sales growth for Australian retailers during the combined December-January period was 2.6%, with the "discretionary" component rising just 1.7%. Discretionary spending excluding food service was down 0.7%.
Household goods and department stores both experienced negative growth (-2.4% and -1.7% respectively).
This is a worse outcome than I had forecast. I had predicted nominal headline growth of 4 per cent (vs. actual 2.6%), but I overshot on both food and department stores. The food sector experienced a sharper decline in inflation than I had anticipated, while the department stores simply found a way to underperform even my low expectations of them. David Jones was the lone exception.
Discretionary spending is still very soft and discount-driven in Australia right now and it is particularly concerning that the low end -- Big W, Kmart and Target -- is not doing better.
Of course, the economists will be copy-and-pasting from their last analysis and talking about how stretched the low-income consumer is, which is the usual way of avoiding the more structural issue of how the discount retailers themselves are not dealing from a full deck. They need to be out of shopping centers and in larger formats. They need wider aisles, clearer signage and better assortments.
Hate to be a pessimist, but that just isn't going to happen any time soon.