Grocery price wars and increasing competition from international retailers are among the main concerns for food and beverage and convenience retailers in 2016, according to the findings of the latest Deloitte Retailers’ Christmas Survey.
The Deloitte Retailers’ Christmas Survey 2015, Wrapping up the festive season, conducted in September and October 2015, surveyed a cross section of executives and senior management from Australian retailers about their expectations for the 2015 Christmas period and beyond.
“The majority of respondents operating in the food and beverage and convenience sectors cited the ever increasing levels of competition in the market as their main concern heading into FY16,” David White, Partner and National Leader of Deloitte’s Retail, Wholesale & Distribution Group, told C&I Week.
“In particular, this increase in competition is predominately expected to be focused around price. However, a number of respondents are also focused on increasing the quality of goods being stocked in store as a means of gaining market share. In terms of the greatest source of competition, the majority of food and grocery and convenience respondents believe that foreign-owned bricks and mortar stores will be their greatest threat in 2016.”
Christmas sales expectations
According to the survey, 80 per cent of Australia’s retailers across all categories expect 2015 Christmas sales to exceed those achieved in 2014. Eighteen per cent expect sales growth in excess of 5 per cent, compared to no retailers in 2014, and 35 per cent are expecting 2-5 per cent this Christmas.
But away from the top line, retailers are less optimistic about their profit margins. Forty three per cent of the survey respondents anticipate increased margins over Christmas, but these are expected to be modest at best. Just six per cent of retailers are envisaging margins to grow by greater than two per cent compared to the 2014 festive period. And more than a quarter expect margins to decline, 12 per cent more than last year.
“A key concern is the impact of the falling Australian dollar. Whilst currency hedges have helped shelter the effect of higher import prices to some extent earlier in the year, there is concern higher product costs will no longer be avoidable come Christmas. As competition intensifies, businesses face having to absorb some or all of these cost increases for fear of losing customers,” White said. “So, whilst on the surface the numbers look good, dig just below and there’s a question mark over profitability.”
However, the apparently eternal retailer optimism is set to extend into 2016 as 41 per cent predict sales growth of 5 per cent or more in earnings over the course of the year. The roll out of new stores (31 per cent), the introduction of new products (31 per cent), online offerings (12 per cent) and price increases (12 per cent) have been identified by retailers as the key sources of sales growth in 2016.
The annual waiting game on when to pull the trigger and introduce discounting will have many retailers nervously monitoring early Christmas trading. Some 59 per cent anticipate discounting their products this Christmas.
According to Deloitte, consumers and retailers can expect the discounts to come early with 27 per cent planning to begin discounting in early December, the highest since the survey began four years ago. That said 20 per cent of retailers are still undecided on when to discount and by how much.
“With one in five yet to decide if and when they’ll start discounting, it could be the case of who will blink first,” said White. “This may be both indicative of uncertainty around the strength of consumer sentiment, but also the greater levels of sophistication of retailers. Increasingly, ‘real time’ pricing decisions give retailers the ability to change prices at short notice across specific products in specific locations at specific times of the day. So, based on our survey, the majority of retailers will discount their products at some point over the Christmas period. The question is when and by how much.”
Customer service and product choice back in the spotlight
A third of retailers cite product choice and 23 per cent highlight customer service as the top two key focus areas to boost sales this Christmas.
According to the report, businesses that will really succeed this Christmas are the ones that have clearly segmented the market to define who their customer is and what shopping experience this particular customer best responds to.
Customer service instore, however, isn’t just the availability of staff, the report states, but also ensuring staff and particularly temporary holiday staff, have the appropriate product training as well as knowing how to stay engaged and provide a positive customer experience to the Christmas crowds.
“Getting the product range and mix right is always front of mind for retailers, but never more so than at Christmas. Coupled with customer service, it’s critical for all retailers to be asking what their different customers want and deliver services and products that genuinely meet their expectations. The fact more and more retailers are recognising this can only be positive for retailers and consumers,” White said.
Digital gaining momentum
Four years ago, a staggering two thirds of retailers were expecting their online sales over Christmas to be two per cent or less of their total Christmas sales. Fast forward to 2015 and that figure has halved to, a still not insignificant, 34 per cent of retailers.
Tellingly though, nearly 50 per cent of retailers expect their online sales to make up six per cent or more of their total sales this Christmas, compared to just 18 per cent of retailers in 2012 and 21 per cent last year. While this is still low compared to the likes of the US and UK, Australian retailers are starting to invest in online in response to an ever more demanding consumer.
“The key for retailers is to understand how customers are using digital devices, such as smartphones, tablets and laptops, to make decisions and shop,” said White.
“The recent Deloitte report ‘Navigating the New Digital Divide’ showed 40 per cent of instore visits in Australia are influenced by digital – higher than the UK, Netherlands and Germany – with 65 per cent of customers using a digital device before their shopping trip and nearly 31 per cent while shopping.
“Far from being digital dinosaurs, Australian consumers are actually highly connected when it comes to the use of digital whether it is for researching a product, comparing prices and checking availability or purchasing with click and collect. Australian retailers are potentially underestimating the appetite of consumers for digital engagement through the end-to-end shopping journey.”
Retailers’ global intentions are gaining a foothold as an increasing number (45 per cent versus 31 per cent in 2014) see expanding their operations overseas as an opportunity to grow their business over the next 12 months. Though just six per cent see this as being their most significant driver of sales, there is a gradually increasing number of retailers looking to venture overseas. Any overseas expansion at this stage is likely to be on a relatively small scale to begin with.
“Whilst the risks of overseas expansion are higher, so are the rewards and with the continued growth in the Asian markets in particular, the opportunities remain significant. But a broken business model in Australia is a broken business model overseas too. A key message for retailers to understand is if you can’t be successful on your home turf, then the chances of being successful overseas are even slimmer. The strategy and timing must be right,” said White.