2014 was a tough year to be invested in many of Australia's top retail brands, and life could be about to get a whole lot tougher in 2015.
Already in late 2014 and early 2015 we have seen Specialty Fashion Group Ltd. (ASX: SFH), OrotonGroup Limited (ASX: ORL), and Kathmandu Holdings Ltd (ASX: KMD) report that earnings would be lower than expected this financial year. The share price response has varied but it paints a grim picture for the coming 12 months.
- Discounting will impact profitability
Shareholders in OrotonGroup saw this in action last week when the company announced that because it had stopped discounting its flagship Oroton brand, sales had dropped off significantly. The fall in sales would impact earnings, but the tradeoff – of increasing discounting – actually hadn't helped some of the company's other brands grow earnings either.
These Australian brands are competing with new entrants to the market that are content to lower margins to boost market share, and more are coming!
- Overseas companies will increase competition
This has been happening for some time, but 2014 appeared to be a turning point. Major brands, including H&M, Uniqlo, Forever 21 and Sephora all launched flagship stores in Sydney and Melbourne over the year. 2015 is expected to be the same with British retail giants Marks & Spencer set to enter the market among other recognisable names.
- Competitive advantages are key
The problem facing many of Australia's largest retailers is that there is very little separating them from rivals. For example, almost all of the companies listed above compete for the same customers as Myer Holdings Ltd (ASX: MYR) and Premier Investments Limited (ASX: PMV).
Conversely, retailers like the Reject Shop Ltd (ASX: TRS) and Woolworths Limited (ASX: WOW) have fewer direct competitors, already have dominant market shares, and are less impacted by a downturn in consumer spending.
