Friday, March 28, 2008

Buy local...

Yes, I have already posted today but I subscribe to SMH's Small Business newsletter (highly recommend it for any other small business out there) and just had to post this article. It's so hard for us 'small fry' to compete and this really shows it. So, where possible, buy from your corner store or buy independent! We can all make a difference and there is always a W shopping centre in every second suburb but our local shops are disappearing...

Small retailers must hunker down
Michael Baker | March 28, 2009

January was an interesting month in Australian retail but for smaller retailers it might better be described as chilling.

While overall retail sales increased by 8.1% on a year-over-year basis, sales made by small retailers (i.e. not retail chains) increased by only 4.9%. This compared with a 10.4% gain for the chains. The sales ``wedge'' of 5.5% between small and large retailers was the largest since March 2005, when small retailers collectively suffered an absolute sales decline in
the middle of the last retail slowdown.

The other nasty statistic that surfaced in the ABS's January numbers was that sales for small food retailers increased by a meagre 1.0%, while sales for the food chains (Woolworths, Coles et al.) increased by 10.8%.

These small food retailers are your fruit and vegie shops, bakeries, butchers and sundry other operators that battle it out with supermarkets. They had a huge windfall from rising food prices and a consumer boom last year.

Wholesale food prices rose sharply for much of the year partly because of the drought. Retailers were able for the most part to pass along these increases to consumers. This meant not only higher sales for the retailers but fatter profits as well, since the extra sales could be leveraged over a more or less fixed operating expense base.

January's results suggest that the party could be over. Retailers now have to face a more price-sensitive Australian consumer who has just had his pocket picked both by the Reserve Bank of Australia and by the commercial banks that hold their home mortgages.

Consumer confidence has gone from mindless insouciance to suicidal gloom in the space of six months. The Westpac-Melbourne Institute Index of Consumer Sentiment crashed by almost 10% in March from an already low base, putting it at its lowest level in 15 years.

Needless to say consumers are in no mood for further rises in food prices. Actually, they will probably get price increases anyway whether they like it or not (for reasons I shall presently explain), but retailers that don't absorb some or all of the increase at wholesale will lose market share to those that do.

Large supermarket chains can cushion some of the blow at wholesale because they have more market power and can in any event offset the blow to consumers on the store periphery by keeping prices low in the middle aisles.

Smaller food retailers are at a distinct disadvantage and this disadvantage may be a long-term phenomenon. The reason is not that Australia will necessarily experience an extended dowturn, but that food inflation is becoming structurally entrenched in the world economy and small food retailers are at risk of becoming increasingly uncompetitive.

Only a few days ago the head of Nestle said the diversion of grain crops to produce biofuels would be a catastrophe for world food supplies. Financial incentives for biofuel production are already driving up the prices of corn, wheat and soy beans.

The problem is of course that rising prices for grain crops don't just increase the price of bread and hot cross buns; they drive price inflation for meat and dairy products because they are also used for animal feed.

And it gets worse. Many believe that global climate change is responsible for a growing number of unpredictable climatic "events,'' such as drought and flooding. If so, these will cause random, unforeseeable and devastating damage to crops and livestock, as they have done here in Australia in recent months.

If that's not enough to convince you that food prices are going to rise then consider how Asia's increasingly affluent millions are switching their caloric intake from starch to protein (i.e. eating less rice and more meat), further pressuring world supplies and prices of grain and livestock.

Who wins and who loses in the food business as a result of a structural food inflation? As I've said, small independent food retailers will be under great pressure. So too will sellers of premium branded products and organics.

Supermarket chains with significant market power and with a higher proportion of private label products (house brands) will cope better because the retail prices for these items are generally lower while margins are still good. In an inflationary scenario the supermarket penetration of private label products is likely to increase worldwide.

First things first though. Right now we have a cranky Australian consumer who's just opened another letter from the bank telling him his mortgage payments are going up again. This mugging-by-mail may continue a while yet, so small retailers had better hunker down and tighten their belts.

Michael Baker is a global retail and property analyst and consultant.
He can be contacted at:

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