2017 Retail Reflections

There is no doubt that 2017 has been a tough year for retailers, with sales remaining flat and a number of retailers having to close their doors. All of this while the spectre of Amazon's arrival has loomed large on the horizon, with many analysts and scribes positing on the likely effect of its arrival on the Australian retail market. But it hasn't all been doom and gloom for the sector.

As we approach the end of the year, we reflect on the significant events that have shaped the retail landscape in 2017 and consider what to expect in 2018.

Retail landlords still invested in real estate

While Amazon's impact will take some time to be felt, there is little doubt that with the scale of the investment being made, local retailers will feel an impact on sales. For retail landlords, the question is what impact will this have on rents and ultimately capital values. 2017 has seen a number of significant transactions including GIC's and Vicinity Centres' recent asset swap and AMP's acquisition of an interest in Indooroopilly. Landlords continue to seek value add opportunities and opportunities to meet changing consumer behaviours around retail and destination shopping. Retail real estate will continue to evolve, particularly in the face of the current economic and competitive climate, but for the time being, there continues to be strong demand for bricks and mortar retail.

New technology brought new opportunities

Technology has been the key enabler of the market disruptors, such as Amazon. However, traditional retailers have also continued to make major investments in new platforms to maximise supply chain efficiencies and improve customer engagement. A notable development in 2017 was the increasing integration of retail brands into mobile, web, social, and app interactions. Artificial intelligence-based tools such as chatbots enable seamless marketing, sales and fulfilment through these generic channels.

The collection and use of data to personalise and push direct marketing messages to current and potential customers continued to grow rapidly. Consequently, privacy continued to be an issue and, in a key development, amendments to the Privacy Act were passed to establish a mandatory data breach reporting scheme.

Higher costs for retailers

While sales have remained disappointingly flat, costs have remained high notwithstanding the decision by the Fair Work Commission at the start of the year to reduce Sunday penalty rates. Because of its subsequent decision to phase in these reductions, retailers enjoyed only a 5% drop in the Sunday penalty rate from 1 July 2017, with a more substantial reduction due from 1 July next year.

Against this backdrop, retailers have struggled with what to do with their enterprise bargaining agreements amid considerable debate about the application of the Better off Overall Test and what, if any, productivity gains can be made through the bargaining process.

New Unfair Contract Terms came into effect

2017 also saw the first year of operation of the Unfair Contract Terms legislation, which potentially affects all businesses, including retailers, in their contractual arrangements where one of the parties is a "small business".

As the law only applies to new contracts entered into after 1 November 2016, there were only a few prosecutions commenced by the ACCC during 2017, but it is likely we will see much more activity from the regulator in 2018 as more and more contracts are caught by these changes.

What next for 2018?

Given Amazon has now (finally) arrived, its impact on the local retail market is likely to be the most topical industry issue next year.

The growth of new technology and its effect on the sector will be interesting, as will the response from bricks and mortar retailers, who we expect to invest in more experiential retail.

The politics of penalty rates will also be fascinating as the Fair Work Commission considers the issue of "loaded rates" in enterprise agreements in a specially convened test case.