Darkest before dawn for retailers

By Maria Slade

The woes of three well-known chains show the pain isn't over yet, writes Maria Slade.

Hill and Stewart: victim of the recession. Photo / NZ Herald
Hill and Stewart: victim of the recession. Photo / NZ Herald

The recession's over - isn't it? Reading retail sector headlines so far this year you would be hard pressed to see the dark clouds of economic adversity lifting.

New Zealand has now officially had two successive quarters of modest economic growth, with the December period expected to make it three.

The value of retail electronic card transactions was up 0.7 per cent in December, not great but heading in the right direction. Yet with 2010 only a month old, three well-known retail names have hit the wall.

First came the news that Australian company JB HiFi was closing its four remaining Hill and Stewart appliance stores. Next listed home entertainment retailer Eastern HiFi called in the receivers, following several years of losses and a shrinking number of stores. Expensive leases on closed-down outlets was the final straw, the company said.

Hot on its heels, the Staxs women's fashion chain appointed receivers to 10 of its 21 stores. Lengthy discussions with its landlords over rent were a tipping point, receiver Kenneth Brown says.

The sudden rush of retail collapses comes as no surprise to commentators. Ironically this signals the start of the recovery, Westpac economist Dominick Stephens says.

An increase in unemployment and the greatest number of business failures occur after the economy starts to grow again.

Companies may start losing less, but they are still on the back foot.

"Time is the enemy during a recession, so firms can only hold on for so long while they're losing money."

Retailers were hit a lot harder than other industries by the downturn. Per capita real consumption fell 10 per cent between the end of 2007 and mid-2009.

"That's a really big change in spending habits."

Brown, of Tauranga insolvency specialists Rodewald Hart Brown, says the retail names in the headlines are only the ones that got noticed.

His firm has recently been appointed to the receivership of a small lawnmower shop in Te Awamutu. This follows a Whakatane fish and chip shop, a Subway outlet in Papakura, and a specialist cooking oil and liqueur store in Tauranga, among others on the firm's books.

Overall Rodewald Hart Brown is handling about 300 insolvencies, double the level it would see in more buoyant times.

Retailers hit with expenses such as extra holiday pay and a January 15 tax bill are struggling, Brown says.

"They generally stock up in November and December expecting a Christmas rush, and then they've got to pay for it in January.

"That can get a bit tough if you didn't quite get the turnover you were expecting."

He believes it will be a good six to 12 months before the storm passes.

"Just because [Reserve Bank Governor Alan] Bollard says the recession's over doesn't mean the man in the street feels it instantly."

Stephens predicts business failures will tail off around the middle of this year, with the collapses after that being firms that were structurally unsound anyway.

Tim Morris, a retail analyst with Coriolis Research, is not so sure.

"There's a lot of people who've been hanging on by the skin of their teeth or the sufferance of their bankers.

"New Zealand often lags these things, we could have another bad year and we could see another round of this."

Because of the slowing property sector retailers selling products to do with home formation have suffered more than most, such as furniture retailers, hardware stores and flooring specialists, he says.

In contrast food retailing has been strong because people still need to eat. You don't see any supermarkets falling over, he points out.

Peter Stewart, general manager of marketing for DIY chain Mitre 10, says Christmas was "tough". Three of the group's stores in Wellington went into receivership this month but Mitre 10 insists it had less to do with trading conditions than it did with owner Rob Vincent's difficulties in his other businesses.

Competitor Bunnings has been quick to pick up the former Mitre 10 site in Tory St, downtown Wellington.

It's early days but the signs of recovery are there, Stewart says. Homeowners who've held off spending on big ticket items such as new bathrooms or kitchens have begun to realise that they need to invest in their biggest asset.

"It is going to take most companies another six to 12 months to really feel comfortable that things are starting to recover."

Chief executive of appliance retailer Noel Leeming John Journee says there's "certainly no tail wind" of excess consumer demand, and while his stores are now experiencing year-on-year growth, getting shoppers going still requires some kind of a deal.

He raises an eyebrow at the news that large Australian rival The Good Guys is gearing up to cross the Tasman. "I wouldn't have thought it was particularly rich pickings."

A Good Guys spokeswoman declined to comment on the move.

New Zealand has been typically over-shopped in most sectors for many years, Journee says.

"On an international per capita scale New Zealand is one of the highest shopped countries in the world. When you've got higher floor space per capita your productivity per square metre is by definition lower than international benchmarks."

That means that when the pressure comes on those at the lower end of the food chain have little fat in the system. "You naturally see more fragility in the New Zealand scene than you would in more robust climates."

Bright spots are emerging. Listed clothing retailer Hallenstein Glassons said on Friday that its first-half sales were up 6.7 per cent on a year ago, and it expected its interim profit to be up 50 per cent.

But Willi Hill, managing director of Hills Floorings, says while people have to buy food and clothes they can make their stereo, their carpet or their car last another year.

Demand for floor coverings, down around 20 per cent, has not picked up.

"We've certainly had no evidence right up to the end of last year that there was any lift in the market.

"We're getting little lifts, we did have a very successful warehouse promotion a couple of weeks ago. But it was really, really absolute bargain stuff, and the bargain hunters were out."

Middle New Zealand is the largest hunk of the consumer market and it is still sitting on its hands, he says. As Eastern HiFi and Staxs will attest to, one of the biggest millstones around retailers' necks is expensive rent.

Mike Hammer, director of retail leasing specialists Match, says landlords are responding to the economic plight of their retail tenants, particularly those with their finger on the pulse such as mall operators.

"It's a very tenant-friendly market at the moment."

It's not the experience of Barkers men's clothing chain owner Zac de Silva.

He says the shopping centres just laughed at him when he asked for rent reductions on some of his 27 premises. "They're not being particularly accommodating. They make the odd allowance, but they're hard ass."

Damien Grant of Waterstone Insolvency says his firm is talking to a lot of struggling small to medium-sized retailers and high rent is one of the main causes of their woes.

"Rents negotiated in 2004 to 2007 during the boom times are crippling retailers on the current lower margins. Landlords are reluctant to negotiate reductions, often because of their own mortgage obligations on loans taken out at interest rates much higher than now."

Retailers don't typically fold in the months leading up to Christmas, he says. Instead they run down stock, delay IRD payments and employ other stalling tactics to keep the doors open, hoping for a bumper Christmas sales period to revive their fortunes.

For some it's an effective strategy. For others it's not enough to get over the hump. He and his insolvency colleagues expect to be kept busy in the early months of 2010.


Shops shun credit charge

Shoppers will be relieved to know many retailers have no intention of introducing credit card surcharges.

Some retailers have been criticised for beginning to surcharge, following a Commerce Commission settlement last year with financial institutions that it hoped would lead to more transparent and lower charges for the use of credit cards.

One aspect of the deal is that retailers are allowed to pass on credit card charges.

John Journee, chief executive of appliance retail chains Noel Leeming and Bond & Bond, says his stores have no plans to introduce surcharges.

"I'm uncomfortable with making the customer deal with the issues of banking costs.

"I think we need to manage our relationships with our provider in a way that takes the issue away from the customer."

Willi Hill, managing director of Hills Floorings, also says he will not be charging for the use of credit cards. Instead the chain will negotiate harder with its banks.

"We will certainly be looking at starting to put some pressure on our suppliers."

Meanwhile, credit card usage is dropping.

Figures from credit reporting agency Veda Advantage show 26 per cent fewer people applied for a credit card in December 2009 than in December 2008.

- NZ Herald

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