Consumers are driving change in the retail and consumer goods sector with demands for transparency of environmental impact and the re-emergence of e-retailing. Private equity is the catalyst for change in the sector. The result has been an industry revolution as many investors seek to introduce global best practice and address supply chain and operational issues at a very fast rate.
The 2007 PricewaterhouseCoopers Retail and Consumer Outlook, released today, examines current issues facing the retail and consumer goods sector and sheds light on the drivers of and reasons for these changes.
"There are a number of hot buttons in the retail and consumer goods industry at the moment, with some key ones being private equity, environment and e-retailing, says Mike James, National Leader PricewaterhouseCoopers Retail and Consumer Goods Sector. Private equity is boosting efficiency and competition in the sector, while consumers demand transparency on the environmental impact of operations and begin to embrace online purchasing.”
Private equity: Activity set to continue
The Australian retail and consumer goods sector has seen a dramatic increase in merger and acquisition activity over the past 12 months and the trend looks set to continue for the short to medium term, particularly as this is the preferred growth and/or exit avenue for businesses.
"Private equity investors have been shopping actively in Australia following the maturation of the market in Europe and the US. They are targeting good brands with growth prospects, good management, defensible market positions and strong cashflows,” says Mr James. "At the moment they are paying top dollar, but we expect these valuations to plateau over the next 18-24 months as there are now very few bargains out there.”
"The name of the game now is performance improvement with the objective of driving value for shareholders whether the imperative is to grow or exit. Standing still is not an option. Additionally, customers will also benefit with the provision of better goods and services across the board,” says Mr James.
Many observers are expecting private equity to increase the global competitiveness of the Australian retail and consumer goods industry. "This market is attractive because of its potential for high returns from initiatives such as aggressive store rollouts, operational efficiency and working capital improvements,” says Mr James. "Private equity investors see this as a clear path to rapid growth.”
Environmental impact: Increased demand for transparency
The public focus on the environment is influencing many consumer decisions as well as investment strategies, as they link environmental behaviour to share prices and shopping experiences.
These concerns are likely to quickly impact retail procurement processes as demand for visibility of production continues its momentum. PwC predicts the market will move towards the Walmart and Marks & Spencer models of carbon cost labelling on packaging, zero waste for landfill and sourcing raw materials from sustainable stocks.
Some Australian retailers are responding, by seeking suppliers that develop products which meet these consumer demands, boosting their corporate social responsibility programs and embracing fair trade and organic produce.
"Consumer concern around issues such as water scarcity and climate change are gaining pace and creating significant risks and opportunities for businesses, yet only a handful of Australian companies have moved to capture them,” says Mr James. "Australia is lagging in this space while international retailers such as Marks & Spencer and Walmart lead the way. We predict that the combination of consumer and stakeholder demand along with increased efficiencies from private equity will drag the industry to the next level of performance and competitiveness,” says Mr James.
e-Retailing: It’s back
e-Retailing is re-emerging in Australia. Although e-retail is still in its infancy here, more consumers are becoming comfortable with online shopping and are seeking out retailers who can satisfy their needs to purchase online.
Many Australian retailers were impacted back in 2000 and have been shy about returning to e-retail, however the UK and US are providing successful business models for Australian retailers to learn from, particularly as enablers such as broadband and wireless services continue to improve.
"As e-retail returns, retailers need to learn how to hunt, capture and keep their customers and evolve as their acceptance of the internet as a shopping domain increases,” says Mr James. "They need to provide the services their customers demand, or lose them altogether.”
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E: nina.anderson@au.pwc.com
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