We hear a lot about the Australian two speed economy, with mining-related businesses in the fast lane and the rest of the business world labouring behind. But underlying this it is becoming apparent that some fundamental shifts are occurring in the structure of our economy, with significant implications for SMEs.
This is evidenced by the ANZ Bank’s economic report for May 2011 showing that, while sales growth over the previous 12 months for businesses with annual turnovers of under $5m averaged 3.1%, retail related businesses had growth of just .2% and non-retail and services businesses had growth of 5%. The highest sales growth (11.6%) was in business services (eg accountants, legal, advertising, office supplies) while sales for trades (eg construction materials, tradespeople, landscaping) was up by 8.5% followed closely by restaurants with 7.9%. Retail sales for clothing and homewares actually fell, although not as dramatically as in 2010.
While it seems that consumers are increasingly opting to allocate their discretionary spending on dining out rather than buying goods, online retail is, no doubt, also playing a part in the decline in the retail sector. Spurred by the strong Australian dollar, consumers are rejecting the prices charged by traditional retailers in favour of overseas online suppliers with lower overheads, and, for goods less than $1,000, no GST.
A survey conducted in March this year by the Australia Institute found that consumers saved between 50% and 75% on many items by purchasing from online overseas stores. The same survey found that 85% of respondents shop online to save money, 54% to save time, around a third to avoid travel and shopping centres and 23% to avoid salespeople. The main items bought online are DVDs and music, books, electrical and electronic goods, clothes and shoes.
Traditional book and music retailers have had to contend not only with virtual shopping but also with ‘e’ products.
The Productivity Commission is currently conducting an enquiry into the structure and performance of the Australian Retail Industry, including the issues contributing to the increase in online purchasing and the appropriateness of the current GST arrangements.
It certainly looks as though the outlook for traditional retailers, particularly of those products favoured by online shoppers, is far from rosy. It is almost impossible for bricks and mortar retailers to compete on price when they have to bear much higher overheads, particularly with high retail rents. And, apart from lowest price, other major attractions of online shopping - saving time and avoiding shopping centres - also have to be recognised as meeting the needs of a significant population of consumers.
Currently online spending is a small proportion of total retail spending but it is increasing quickly. While the strong Australian dollar is contributing to the increase in offshore online purchasing there is no doubt that the trend is away from bricks-and-mortar retail, with domestic retailers establishing their own online stores in order to compete. A report released earlier this year by Southern Cross Equities found that Australian online retailers doubled their market share to 4% between 2005 and 2010.
Not only are we seeing the trend away from traditional retailing but also other traditional industry sectors, particularly manufacturing, are also in decline as a result of international competition.
These fundamental shifts are reflected in the ANZ Bank’s report that the small businesses with the highest rate of growth are in service industries. Increasingly we are seeing an SME sector composed of businesses with minimal inventory and low investment in equipment and premises.
Someone buying a typical business today will be more likely to be paying for domain names, websites, trademarks, copyrights and goodwill than real estate, inventory and equipment.
In contrast we have a banking sector that, since the global financial crisis, has moved away from cash flow lending, back to requiring hard assets, preferably real estate, to secure lending to the SME market.
The move by businesses away from hard assets was recognised years ago and, as a result, invoice financing became a mainstream offering by the retail banks. It helped many businesses grow that would otherwise have struggled to find funding. Indeed many successful businesses owners acknowledge that invoice financing in their early years gave them their kick start. However, since the GFC there has been a reduction in available invoice financing facilities from the major banks - just at the time when they are most needed - and the banks have reverted to traditional security requirements.
These security requirements are not compatible with the changing profile of the SME sector. It is no wonder that banks are finding it difficult to lend and businesses are finding it difficult to borrow. The product the banks want to sell just doesn’t fit the new market. The end result is that everyone is marking time and business activity is stifled from lack of funding. It’s like trying to sell size 8 dresses to a population of size 16 women. No matter how good the marketing is, they just won’t fit.
Traditional lending practices suit traditional businesses. The fast lane aside, our economy is moving away from traditional businesses and, if this new economy is to thrive, we have to have a finance sector that is willing to adapt to it.