Review Preview – 2014-2015
Our traditional end-of-year Review Preview feature, which appraises the year just gone and the immediate year ahead, is designed to be a mental pit stop – an audited reflection about the hardware sector’s highlights, lowlights and future directions.
Last year, our introduction to this feature examined some broad overviews of Australia’s and the world’s post-GFC economies, and presented a largely stable outlook for 2014. While it is fair to say this was a fairly accurate prediction, it relied on more than an ounce of guesswork: that Middle Eastern turmoil would remain steady; that China’s economic performance – and totalitarian regulatory frameworks – would not make any sudden U-turns; and that our own retail sector, so notable for its relatively small number of retail giants, would behave in accordance with previous years’ stable models.
This year, mindful of recent pro-democracy protests in Chinese ruled Hong Kong, escalating conflicts throughout the Middle East, as well as ongoing Russian threats to western Europe’s energy supplies in response to Ukrainian unrest, I believe it makes sense to leave macro-economic forecasts to the crystal ball gazers, and instead concentrate on more ‘home grown’ topics affecting next year’s broad outlook for the Australian hardware industry. Specifically, trends relating to property investment, foreign property ownership, and smaller residential property sizes (land and dwelling) all have tangible impacts on the make-up of our local hardware retail scene.
Let’s start with a quick look back at 2014…
The year that was
The $15 billion Australian hardware industry consolidated itself as an industry of international supply chains in 2014, with offshore fabrication now entrenched as an industrial fact of life. Nevertheless, there are plenty of companies willing to bypass conventions and explore new business opportunities in different ways. This was particularly evident at the start of the year when the magazine visited Cologne, Germany, for the biannual eisenwarenmesse hardware fair. While most Australian manufacturers are reluctant to make direct forays into Northern Hemisphere markets, it was pleasing to see a number of Aussie companies treading the Cologne floorboards in active pursuit of local distributors and manufacturing or retail partners. These companies benefit immensely from direct and active involvement in the penetration of overseas markets, forging personal links with distribution and retail partners and ensuring greater long-term control over their own product development and branding. This high level of ‘hands on’ control is fundamental to European business principles, and the reason why so many European companies remain family-owned entities over generations. Not a bad model to emulate.
Over subsequent months the magazine explored a huge range of topical subjects, including:
§ new thinking in merchandising and marketing systems, emphasising the importance of providing in-store information technologies, offered either as stand-alone guides (video loops, electronic catalogues, etc) or as pathways to external multimedia via QR Codes and website links;
§ advances in LED, brushless motor and other building materials technologies;
§ ways to improve garden departments to maximise customer spends and impulse purchases, and encourage repeat visits;
§ paint visualisation tools, and the merits of enhancing customer education prior to purchases; and much, much more.
Clearly, many of the above topics relate to ‘selling’ – the primary objective of any retail business. And it was evident throughout the year that top-end manufacturers and suppliers are doing their utmost to secure market share as a high priority. Volume sales are more critical then ever, as wholesale margins flatten out in response to (a) ongoing subdued residential building activity, and (b) relentless competition from new suppliers. Annual growth of just 0.3% in the hardware wholesale sector from 2009–14 testifies to how tight business is for wholesalers. By contrast, market researcher IbisWorld estimates annual growth of 3.5% between 2010–15 for hardware retailers.1
There are many broad-brush social trends driving retail directions. High real estate prices continue to inspire homeowners to invest confidently in refurbishment and improvement projects. However, a number of social trends are becoming apparent which might influence the ‘nature’ of home improvement spending in coming years. In particular, it is worth highlighting an escalation in the importance of trade sales to supplement obvious consumer markets.
The trade sector has long been recognised as a crucial means of buffering stores against sudden consumer downturns. But the profile of the trade sector in the market is arguably set to rise. We can identify at least two social trends that go hand in hand with higher trade sales, namely increased residential property investment, as well as mounting foreign property ownership.
Residential property investment is escalating in tandem with higher ratios of rental occupancies. Recent ABS statistics2 indicate that the number of rental households rose from 18% to 25% of all dwellings between 1994-95 and 2011-12.
Rental occupancies, of course, are subject to tighter home improvement regulations than freehold owners; essentially, a tenant can only perform minor alternations or improvement with permission from the landlord, and when improvements do take place, a trade professional usually undertakes the work on behalf of the property manager or landlord.
This is an important observation, as it points both to trends away from elaborate ‘discretionary’ purchases across an entire quarter of the residential property sector, as well as a hike in reliance on trade professionals to perform repairs and upgrades. As property investment surges to satisfy growing social needs for rental accommodation, the effects are bound to become clear at retail outlets.
Similarly, foreign ownership represents another pressure in favour of trade business.
Last financial year there were more than 5,000 sales of Australian established homes to foreign investors3, particularly to Chinese nationals. Despite strict regulations restricting the purchase of established properties by foreigners, a thriving industry has developed targeting this precise sector, and there has not been a single prosecution for breaches of the regulations. While numbers might appear small in the context of overall property sales, it is noteworthy that these predominantly ‘top end’ dwellings are likely to be serviced by trade personnel – using materials and products selected by the trade professional, rather than the owner.
As for social trends relating to consumer behaviour, we can identify smaller overall urban properties (i.e. smaller yards) as a rough pointer towards reduced sales of advanced outdoor power equipment and landscaping products, though small-to-medium acreages in regional areas might help offset this urban trend.
A rise in the use of digital media and smart phones is also affecting consumer buying habits, leading to new practices in direct online marketing, as well as more readily available avenues for price comparison – hence the urgency to grab market share, as noted earlier.
For more information about what’s in store for individual companies in 2015, you’ll discover a wealth of knowledge in this month’s Hardware Journal. Happy New Year!
2. Housing Occupancy & Costs 2011-12, #4130.0. Australian Bureau of Statistics, 28 Aug 2013.
3. ‘Real estate boom by foreign buyers escapes regulators’ net’, by Rick Wallace, The Australian Business Review, 11 June 2014.