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Forensic Cost Analysts

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Is Your Company Prepared For The Darkness Ahead?

The resignation of the latest Myer CEO is a significant event that warrants a discussion around the driving force behind retail consumption, a phenomenon that appears to have hit a growth brick wall recently. Does the real reason signal an impending darkness ahead for all business?

There has been much Hoo-ha around the arrival of Amazon and their likely impact on the Australian retail sector. But this is really just a discussion around who will eventually hold the greatest share of retail sales; on-line or bricks and mortar. The more important question is what will happen to the total retail spend as a share of GDP, the actual driver of our economy. It all starts and ends here. Without retail consumption everything else in the supply chain eventually ceases to exist. A slow down eventually trickles all the way back through the supply chain to minerals exploration.

What drives retail consumption? In the short-term wages, mortgage rates, the cost of essentials and consumer confidence are paramount. In Australia, all of these are currently either rising (essentials and forecast mortgage rates) or falling (wages in real terms and confidence). That signals a continuing short term retail spending problem. Even Myer can’t attract customers with traditional stock take clearance sales it seems. So, are people simply keeping their hands in their pockets? Or is something more fundamental happening? Here at ADEPT we think the former is definitely a problem, but the latter is a more worrying issue going forward.

It’s time for a quick demographics overview. Why is that important? Retail spending comes from people. Over time different demographics spend differently. Each has a different earnings profile and access to assets through inheritance. These are the two fundamentals that drive spending behaviour and hence retail performance. There are three demographic groups of importance in the next decade; Baby Boomers, Gen X and Millenials. When born these groups roughly represented 42%, 41% and 32% of the population at the time. Significant demographic research has demonstrated individual spending, on average, increases from mid-teens (first job) to a peak around age 42 when we have a mortgage, cars, boats, children, education, sport etc to consume pretty much everything we earn. Then, as children mature and our mortgage becomes less significant, spending drops off until we retire, at which time it is significantly less. The entire economic growth till the recent hiccups was driven by Baby Boomers. They had parents who enjoyed the economic growth post WWII and encouraged education. Technology changed at an enormous rate and wages boomed. Many Boomers have seen their parents die and hand over substantial real estate assets. They are now sitting pretty, but have already done their travel, tripped the light fantastic and have a health standard that will see a large proportion last till their 90s. To prepare for this, in their final years of employment, most cash is going into superannuation. The last group of Boomers will retire 2029.

The Gen X are next. Their peak spending period ends around 2020 (last year of the group was 1977). And population growth since their birth has been significant so their spend represents a significantly smaller % of GDP. In any case, their disposable income is offset by falling Boomer spend over the next two years. Then comes the Millenials. This group was 10 percentage points (25%) less in size. Additionally, few of them will inherent from their asset rich Boomer parents until 2030 (remember, they are healthy and 90 is well within their grasp). They have also experienced relatively small real wage increases in their working life. This means for the next 20 years there will be significantly less cash around for retail spend. So much for Donald Trump forecasting 3-4% growth. It is simply demographically impossible. In fact, what is more likely is a significant decline in growth.

There is a brilliant treatise available from Harry Dent that explains this and frames it in socio-political environments and offers significant detail around how this process works. I read the original publication in 1993 called “The Great Boom Ahead”. He has updated this several times since, with editions of similar name, referencing things he predicted and how they came to fruition at the time forecast. He was the only economic forecaster to predict the 2008 GFC accurately.

What this means for retailers is they need to prepare for a fall in total market revenue as a % of GDP. Never mind whether online or bricks and mortar will win the race. This means only those who undertake drastic cost adjustments now will survive the carnage to come. And it doesn’t stop here. Retailers buy from wholesalers who buy from manufacturers who buy from raw material manufacturers who buy from miners. The impact will hit the entire supply chain.

Dent forecasts a massive economic collapse starting in the USA early 2020’s and other countries to follow (Australia 2-3 years behind). Never mind 1000 point falls on the Dow Jones. He is talking 17,000 points. Even if he has the magnitude wrong it is difficult to shoot holes in the fundamentals of the direction of economic change. The lesson is clear. CEO’s and CFO’s, while keeping their foot on the growth accelerator, need to be mindful that in economic decline growth can only come at the expense of competitors. Going forward, the survivors will be those who can see the coming darkness and make significant adjustments to their fixed and variable cost structures so they can capitalise on the evolving negative marketplace.

About the Author

Gary Bigelow is the Managing Director of ADEPT Profit Builders, a Forensic Cost Analysis practice that focuses on helping companies reduce their cost base without committing to cost management staff overheads. There are numerous Case Studies available for those interested in understanding what is possible. Just use the Contact Us form and we will select studies suited to your business.