Retail is on the brink - so let's act

http://smallbusiness.smh.com.au
Michael Baker

Year-over-year sales of food service establishments - that is, cafes, restaurants and fast food outlets have imploded, from a growth rate of almost 10% last year to -1.0% in the past couple of months.

Food service in Australia is dominated by small businesses.

According to Restaurant and Catering Australia, a trade association representing the food service industry, 91% of the industry is comprised of companies with less than 20 employees and 94% have an annual turnover of less than $1 million.

The result of a protracted downturn will be a shakeout of small players and the rationalisation of real estate portfolios among larger ones.

The impact will not be restricted to the food retailers themselves but will flow on to their landlords as well.

For example, food service establishments in regional shopping centres pay out a hefty 17% of their sales in occupancy costs (rent plus a share of operating expenses).

They are extremely valuable contributors to shopping centre operating income.Other retail sectors are headed for trouble as well. Home goods of all kinds are under pressure and a recession would raise the distinct possibility of the bankruptcy of a major department store chain.

What's to be done?

First, retailers need to do the right thing by their customers.

Of course they need to contain inventories and cut costs where it makes sense but they must not cave in to the temptation to decapitate every little expense in the hope that extreme parsimony will somehow keep them alive. This is the way to lose not just your customers but your best employees as well.

Second, there's the government.

Retailers don't need a handout but they do need a strong counter-cyclical fiscal policy.

Canberra should be prepared to do even more in the months ahead on top of the $10.4 billion program already committed.

Practicing fiscal restraint when the global economy is in dire straits and the government has a budget surplus is a throwback to Herbert Hoover in 1928. Look where that got us.

Third, the RBA needs to stay its current course.

With the CPI at 5% and the Australian dollar under siege there is a case for increasing interest rates and not lowering them. But it can't go back now.

It has started down the road of supporting growth and it needs to stick to that policy unequivocally.

Fourth, small independent retailers might need a hand from their landlords on rent.

Except in the very strongest shopping centres and retail strips, this will come to be in the landlords' best interests.

The alternative is to churn tenants and in this economic environment churning is a poor property management policy.

These four things will help small retailers.

As the pragmatic Monsieur Delcour says, we can't escape being in the economy. But we can certainly make it more comfortable for ourselves.

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