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Retail health check: Surviving the retail rollercoaster

Retail health check: Surviving the retail rollercoaster

Over the past 12 months we have witnessed numerous retailers’ financial performance deteriorate rapidly, and often with seemingly little warning.

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People riding a roller coaster

There are many examples in which well-established brands have gone from trading with no visible problems to severe financial distress in less than 6 months. Companies are simply running out of cash as lenders and other providers of finance shy away from retail.

However, other organisations have survived and thrived despite today’s complex environment.

The common theme from successful retailers is proactive engagement, and addressing challenges head on.

Underestimating the challenges when they emerge, and believing that a recovery will happen on its own, is a high risk strategy, fraught with uncertainty and unlikely to deliver.

The haves and have nots

There is no doubt retailing is getting harder. Retailers are expected to be customer-focused but the cheapest; on-trend but different; socially responsible, digital and online while providing great in-store experiences. The list goes on.

In KPMG's 2018 Distance to Default (D2D) report, the consumer and discretionary sector remained relatively unchanged at a score of 2.34 (greater than 3 being strong financial health, less than 1 poor financial health). 

However, if you breakdown the 67 companies that make up the Consumer and Discretionary sector it is clearly a case of the ‘haves’ and ‘have nots’: 32 companies (or 47 percent of companies) had a D2D score below 2. The low market capital of this sector ($5bn) suggests the market has also priced-in this risk accordingly. Volume 2 of the D2D series provides deeper analysis and insights into the Retail sector trends.

Clear warning signs to watch

Warning signs can arise in differing forms between retailers, however the underlying trend throughout the sector is that the sooner organisations take action, the more options they have to maintain a sustainable future.

Triggers include:

  • deteriorating sales
  • endless discounting
  • declining margins
  • poor working capital performance
  • changing regulatory environment.

Key challenges for Australian retailers

  • Increasing online sales.
  • Shifting consumer habits and expectations.
  • Oversupply of physical space.
  • High levels of household debt.
  • International competitors entering the Australian market.

 

Download the report to find case studies on how KPMG have helped retailers take a proactive approach to address issues.

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