State of the Independent
Retail Sector 2010
SECTOR SNAPSHOT OF
• Independent fashion retailers
• Independent service stations
• Convenience stores
• Newsagencies
Contributors:
Contents
Executive Summary
4
Introduction
6
1.1 Scope of the study
6
1.2 Approach
6
1.3 Retail environment
7
2
Key themes and trends
8
3
Independent fashion retail sector
10
3.1 Characteristics of the sector
10
3.2 Market trends
13
3.3 Key challenges
13
3.4 Key opportunities
15
Independent service station sector
16
4.1 Characteristics of the sector
16
4.2 Market trends
19
4.3 Key challenges
20
4.4 Key opportunities
22
Convenience store sector
23
5.1 Characteristicsof the sector
23
5.2 Market trends
25
5.3 Key challenges
26
5.4 Key opportunities
27
Newsagency sector
28
6.1 Characteristics of the sector
28
6.2 Market trends
31
6.3 Key challenges
32
6.4 Key opportunities
34
1
4
5
6
2
Statement of Responsibility
This report was prepared for the Australian Retailers Association for the purpose of
developing a State of the Independent Retail Sector Report on independent fashion retailers,
independent service stations, convenience stores and newsagencies.
In preparing this Report we have relied on the accuracy and completeness of the information
provided to us by the Australian Retailers Association and from publicly available sources.
We have not audited or otherwise verified the accuracy or completeness of the information.
We have not contemplated the requirements or circumstances of anyone other than the
Australian Retailers Association.
The information contained in this Report is general in nature and is not intended to be applied
to anyone’s particular circumstances. This Report may not be sufficient or appropriate for
your purposes. It may not address or reflect matters in which you may be interested or which
may be material to you.
Events may have occurred since we prepared this Report which may impact on it and its
conclusions.
No one else, apart from the Australian Retailers Association, is entitled to rely on this Report
for any purpose. We do not accept or assume any responsibility to anyone other than the
Australian Retailers Association in respect of our work or this Report.
Liability limited by a scheme approved under Professional Standards Legislation
© Deloitte Touche Tohmatsu (2010). All rights reserved.
About the Australian Retailers Association
For over 105 years, the Australian Retailers Association (ARA) has been the peak industry body
in Australia’s $292 billion retail sector which employs over 1.2 million people. As an
incorporated employer body registered under the Fair Work (Registered Organisations) Act 2009
and with a range of member services including business consulting, policy development,
advocacy and education, the ARA promotes and protects over 5000 independent and national
retailers throughout Australia.
The ARA’s mission is to continue to be Australia’s leading retail body, promoting and protecting
the sector by creating value for members and the retail industry through advocacy, advice,
education and member services. Visit www.retail.org.au or call 1300 368 041.
3
Executive Summary
Deloitte has been engaged by the Australian Retailers Association (ARA) to provide an industry snapshot of
independent fashion retailers, independent service stations, convenience stores and newsagencies in the context
of the current retail environment. These four sectors were highlighted in order to develop a deeper
understanding of the complex issues facing operators. In particular, these sectors have experienced significant
changes in the way they conduct business, their customer base and the regulatory environment they face.
The approach we have adopted has been based on highlighting key characteristics, trends, challenges and
opportunities relevant to the four sectors. The qualitative and quantitative information contained in this report
has been gathered through a four stage process:
1. Desktop research was undertaken to provide a basis for determining the overall themes for each sector
2. Workshops with industry representatives were held to test the conclusions of the desktop research and to
receive further input on emerging trends and challenges
3. Interviews with a sample of operators in New South Wales and Victoria were conducted to provide
illustrative material for the report
4. A survey across the four sectors was undertaken to provide qualitative material for the report.
To assist with scoping the economic contribution of the four sectors, we have also provided estimates of the
number of people employed by independent fashion retailers, independent service stations, convenience stores
and newsagencies. These estimates are drawn from an Acxiom database of retailers. The database was
segmented by sector and grouped by state. The outputs for each state were validated with information provided
during workshops and interviews with operators.
Operators face a challenging retail environment
In the wake of the Global Financial Crisis, the Australian retail environment has presented challenges for
operators in the independent fashion retailer, independent service station, convenience store and newsagency
sectors. Across all sectors, operators have estimated that consumer confidence is variable and that individuals
have relatively lower levels of disposable income. The flow-on effect to retailers has been an increased pressure
to drive sales volume and remain profitable. Operators from these sectors also express concerns over inadequate
support from the federal government. Small to medium-sized retailers have suggested that there is a need for the
Federal Government to develop a deeper understanding of the complex issues impacting the businesses in these
four sectors.
Complex and dynamic businesses
The businesses operating in these the four sectors are evolving from their traditional concepts, becoming more
complex and often comprised of different retail components. For example, independent service station retail fuel
but may also offer a car wash service, convenience stores are beginning to supply a fast food option,
newsagencies are stocking small grocery or gift items and some independent fashion retailers are attaching a
tailor or dry-cleaning element. Operators stress the importance of maintaining strong relationships with
suppliers, focusing on training employees and having a thorough understanding of the products required by their
customers. In order to remain profitable in a challenging retail environment, businesses across the four sectors
need to be highly efficient, strategic and forward looking in their engagement of the retail channel.
In light of this context, the key trends, challenges and opportunities across these four sectors are illustrated in
Table 1.
4
The sectors
Table 1 represents an overview of the independent fashion retailer, independent service station, convenience store and newsagency sectors.
Table 1: Overview of the four sectors
Sector
Independent
fashion retailer
Independent
service station
Employment
(nationally)
48 430
Trends
Continuous discounting
Ability to provide quality and service
Strong price competition – especially on high
volume, commodity products
Capacity to compete
Fair Work system
Sell into niche markets – stock lines that are not
available at department stores/major
competitors
Cash flow and access to finance
Establish online presence
Decrease in number of sites
Competition from major groups
Increase in supermarket-owned service stations
Legislation for environmental standards
Differentiate business based on non-fuel
offering – extending products and services to
customers
Price - key motivator for fuel purchases
Tobacco legislation
Negative correlation between the price of fuel
and amount spent on non-fuel goods
Security issues
Decrease in newspaper/magazine sales
Channel blurring between service stations,
supermarkets and newsagencies
Delivering targeted service, based on customer
needs e.g. ATMs, Wi-Fi
Sales Volume - maintaining high sales volume
on low margin products
Developing an understanding of customers that
are not serviced by other retailers e.g. ‘timepoor’ customers, commuters
Increase in beverage sales
Convenience
store
14 820
Key Opportunities
Increase in franchise and chain stores
Less disposable income spent on fashion items
25 625
Key Challenges
More operators being established in QLD and
WA due to economic and population growth
Fair Work system
Tobacco legislation
Fair Work system
Decrease in newspaper/magazine sales
Steady slow growth in greeting card sales
Newsagency
18 290
Increased reliance on confectionery, beverages
and small grocery items
Cash flow management and administrative
burden – specifically in relation to circulation
Fair Work system
Incorporating the convenience store model
Strategically stocking products based on
community demographics
Sales Volume - maintaining high sales volume
on low margin products
Supply chain dynamics – highly contractual
relationship with publishers
Administrative burdens
Source: Deloitte consultations with operators & ARA Survey
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1 Introduction
1.1 Scope of the study
Deloitte has been engaged by the Australian Retailers Association (ARA) and provides an industry snapshot for
four sectors; independent fashion retailers, independent service stations, convenience stores and newsagencies in
Australia. The four sectors were highlighted in order to develop a deeper understanding of the complex issues
facing operators.
For each of the four sectors, this report has canvassed the following issues:
Characteristics – ownership, size, operations, employment
Market trends
Key challenges and opportunities.
The quantitative and qualitative information presented draws upon independent primary research from close
engagement with the ARA, industry representatives and operators across the four sectors.
1.2 Approach
The approach we have adopted to undertake this industry snapshot has followed a four stage process; desktop
review, workshop with industry representatives, consultations with sector operators and a survey of industry
members
Desktop research was undertaken to provide a basis for determining the overall themes for each sector.
Information was sourced from available industry reports, media and analyst commentary.
Workshops with industry representatives were then held to test the conclusions of the desktop research and to
receive further input on emerging trends and challenges. Stakeholders that participated in the workshop stage
included the ARA, the Service Station Association (SSA), the Australian Association of Convenience Stores
(AACS) and the Australian Newsagency Federation (ANF).
Consultations with sector operators were held to validate the key findings from the desktop review and
workshop. Consultations were conducted through face-to-face interviews and some telephone interviews, with a
sample of sector operators in New South Wales and Victoria. Operators were interviewed from both metro and
regional areas, ranging from small to large in size and under different ownership models. The sample was drawn
from a population of operators who are members of the ARA, SSA, AACS and/or ANF (see Figure 1).
Figure 1:
Sample
Sector
Independent fashion retailer
Independent service station
Convenience store
Newsagency
Population
State
Location
Industry Body
VIC
1 metro, 1 rural
Australian Retailers
NSW
2 metro, 1 rural
Association
VIC
1 metro, 1 rural
NSW
1 metro, 1 rural
Service Station
Association
VIC
1 metro, 1 rural
Australian Association of
NSW
2 metro, 1 rural
Convenience Stores
VIC
1 metro, 1 rural
Australian Newsagency
NSW
1 metro, 1 rural
Federation
Source: Deloitte
6
The interview format required interviewees to explain the ownership types, size of operations, employment
trends and merchandise categories relevant to their sector. Additionally, interviewees were asked to identify the
most significant challenges and opportunities affecting their businesses.
An estimate of the number of employees in individual sectors was developed using an Acxiom database of
retailers. The process for deriving employee figures was developed by:
Segmenting the database into the four sectors
Grouping the operators in each sector by postcode
Allocating postcodes across Commonwealth Electorate Boundaries – reflecting the population share of each
postcode in each electorate
Totalling the number of stores for each electorate
Multiplying the number of stores by an estimated number of employees per store (derived from
consultations with operators) to provide an approximation of employment by electorate
Validating the employment outputs for each state with the information provided by operators during
workshops and interviews
To quantify the response from the consultation process, the ARA produced a survey, which was completed by
members of the ARA, SSA, AACS and/or ANF. The survey was open for approximately four weeks (21 June
2010 to 21 July 2010) and had 166 survey respondents. Survey respondents were asked to answer questions
specifically concerning employment and key challenges.
1.3 Retail environment
The economic climate over the past 24 months has had a significant impact on the performance of small and
medium-sized retailers in Australia. While some retailers have noted positive effects on their businesses, such as
increased spending resulting from the Federal Government‟s stimulus package, the overall perception of the
current retail environment is uneasy.
Retailers operating in the independent fashion retail, independent service station, convenience store and
newsagency sectors have noted a decline in consumer confidence. Over the last two months the WestpacMelbourne Institute Consumer Sentiment Index has recorded the largest two month fall since March 2008.
Following the seven per cent fall in May, the Index fell a further 5.7 per cent in June from 108.0 to 101.9.1 In
July, the Index jumped by 11.1 per cent the positive sentiment is considered to be influenced by a strong
Australian jobs market and the resilience of the economy in the face of a downturn for the world‟s economy. 2
Operators maintain that despite the increase in the Index the current retail conditions are challenging.
Operators across the four sectors collectively believe that consumers have lower levels of disposable income. As
a consequence, the major concerns expressed by retailers include:
Declining sales
Diminishing cash flow and profitability
Difficulties hiring and retaining staff difficulties
Rising wage costs.
In addition, retailers surveyed do not believe that the federal government provides enough support to small and
medium-sized businesses. Some retailers are concerned that policies and initiatives made by the Australian
Government assist large businesses over the interests of small to medium businesses. Operators expressed the
need for policy makers to be more active in understanding the needs and complexities faced by businesses in the
independent fashion retail, independent service station, convenience store and newsagency sectors.
In this context, the report examines each of the sectors independently to identify the key characteristics, trends,
challenges and opportunities businesses experience. The report then examines the challenges faced by operators
across the four sectors.
1
Westpac-Melbourne Institute Consumer Sentiment Index, 9 June 2010 available at http://www.westpac.com.au/docs/pdf/aw/economicsresearch/er20100609BullConsumerSentiment.pdf accessed on 11 May 2010
2
C Zappone, ‘Consumer confidence posts best jump in 13 months’, The Age, July 14 2010 available at http://www.theage.com.au/business/consumer-confidence-postsbest-jump-in-13-months-20100714-10a06.html accessed on 14 July 2010.
7
2 Key themes and trends
Despite individual dynamics and business differences, there are some common themes and trends across the
four sectors covered in this report.
In terms of characteristics, the business operations of these four sectors are conducted in both metro and
regional areas. A sole proprietor or partnership typically manages these businesses, while a significant number
are family run operations. The average independent retailer in these sectors employs five to ten employees with
the majority of these employees maintained on a part-time or casual basis.
Independent service station, independent fashion retail, convenience store and newsagency operators offer a
diverse mix of products. Operators emphasise the importance of tailoring merchandise categories to reflect the
direct needs of the community. For example, newsagency operators in areas of high migrant populations may
provide money transfer and phone card services while a convenience store with early morning commuter traffic
may offer a self-service coffee facility. A key opportunity for retailers is their ability to offer new services and
products, such as Wi-Fi and ATM facilities, to attract a wider customer base.
In addition to the comparisons in business structure and operations, retailers in these four sectors experience
similar challenges. Table 2 illustrates the common challenges faced by retailers across the four sectors.
Table 2: Common challenges for operators
Common Theme
Independent
Fashion Retail
Sector
Independent
Service Station
Sector
Convenience
Store Sector
Newsagency
Sector
Capacity to compete













Tobacco Legislation
Fair Work system
Working capital &
cash flow
management
Sales volume




Source: Deloitte
Capacity to compete
Independent fashion retailer, independent service station, convenience store and newsagency operators suggest
their capacity to compete is mostly affected by competition from major groups and/or major suppliers.
Operators believe that the strong market position of the major group or major supplier affects the type of
products, their price and their customer base. Independent service station and convenience store operators
suggest that competition from supermarket-owned service stations, which leverage business from a wider large
network, impacts their business. Newsagency operators suggest that their highly contractual relationship with
publishers affects their profitability. Independent fashion retailers contend that they feel pressured to follow the
continuous discounting trends of the department and chain stores.
Legislation
Each of the four sectors has been, or will be, impacted by legislative changes. Operators cite cost of compliance
as the most challenging aspect of legislative change. Compliance costs range from the re-design of shop fittings
to the time and administrative burden of understanding new regulation. In some instances, the relatively short
time frame to implement or comply with legislative changes puts additional pressure on operators. Operators
suggest that this is particularly the case with tobacco retail display ban.
8
Operators are specifically concerned that recent changes to the Fair Work system and award modernisations
mean they will need to reduce employee hours or reduce the number of existing and new hire staff. Many
employees who find jobs with independent fashion retailers, independent service stations, convenience stores
and newsagencies require the flexible working times these businesses offer.
Working capital & cash flow management
Operators across the four sectors highlight their need to maintain large stock volumes. Independent service
station operators can hold between 100,000 to 500,000 litres of fuel per month. Convenience stores hold
numerous merchandise categories. Newsagency operators stock various volumes of circulation, which are
associated with strict return deadlines when replaced by new editions. Independent fashion retailers purchase
clothing, footwear and accessories up to six months before the required selling season. In this way, businesses in
these sectors express that they require high levels of working capital to cover their holding costs and an efficient
strategy for cash flow management to ensure shrinkage is minimised. Operators cited the need for working
capital and cash flow management as a significant barrier to entry.
Sales volume
The core products for independent fashion retailer, independent service station, convenience store and
newsagency operators are often associated with low margins and high volumes. In order to maintain a viable
turnover, businesses believe that they must set higher sales targets for these products to account for their
relatively lower margins. Where these higher volumes cannot be met, operators in these sectors stock and
promote new products on which they can turn a profit.
Employment
Operators across the four sectors predominately employ workers on a part-time or casual basis. It is estimated
that employment (both full-time and part-time) in the four sectors is approximately nine per cent of total
employment in the Australian retail sector (see Figure 2).
Figure 2: Share of people employed in each sector by State/Territory
Source: Deloitte
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3 Independent fashion retail sector
Independent fashion retailers rely on the uniqueness of their businesses. By offering customers time
and product knowledge they aim to secure repeat business and customer loyalty.
3.1 Characteristics of the sector
Ownership
Independent fashion retailers typically operate as family-owned businesses or as a partnership.
Size
The size of independent fashion retailers can be categorised by shop size and/or store numbers. Table 3
illustrates the average size of independent fashion retailers.
Table 3: Size of independent fashion retailers
2
Size of business
Shop size (m )
Small
>50m
Medium
100-200m
Large
+200m
Number of shops
2
>4 stores
2
6-8 stores
2
10+ stores
Source: Deloitte consultations with independent fashion retail operators
Independent fashion retailers owning more than 10 stores are considered as a retail chain. Beyond the ownership
of three stores, independent fashion retailers have cited diseconomies of scale where the cost advantages of
expansion are eroded by smaller profit margins.
Employment
The independent fashion retail sector employs approximately 48 430 employees nationally (see Figure 3).
Figure 3: Independent fashion retail employees
270
8 060
3 220
3 110
17 250
15 530
990
Source: Deloitte
10
Independent fashion retailers employ an average of eight employees per store. Approximately 40 per cent of
employees maintain their jobs on a casual basis (see Figure 4). The average hourly wage is $19 excluding late
night or weekend penalties. Independent fashion retailers also employ additional staff for cleaning, stocktake
and ironing on an ad hoc basis.
Figure 4: Independent fashion retail employment mix
36%
42%
Full-time
Part-time
Casual
22%
Souce: ARA survey
Operations
Independent fashion retailers are located in major shopping centre complexes (e.g. Westfield, QIC, Centro) and
along shopping strips.
The typical operating costs of an independent fashion retailer are illustrated in Figure 5. Wages (48 per cent) and
rent (39 per cent) represent the highest proportion of operating costs.
Figure 5: Operating cost for independent fashion retailer (as % of total operating costs)
1%
4%
4%
2%
39%
Rent
Wages
Insurance
Rates
Utilities
Accounting Charges
48%
Source: Deloitte consultations with independent fashion retail operators
Independent fashion retailers sell items in the following three merchandise categories:
Clothing
Footwear
Accessories – jewellery, hats, bags, etc.
The clothing and footwear merchandise categories can be further deconstructed by demographic groupings.
Figure 6 and Figure 7 illustrates the product segmentation for clothing and footwear. Women‟s merchandise
accounts for the majority of products sold in both the clothing and footwear merchandise categories.
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Figure 6: Clothing product segmentation
8%
9%
Women's Clothing
4%
Men's Clothing
Girl's Clothing
48%
6%
Boy's Clothing
Infant Clothing
Accessories
24%
Source: IBISWorld, August 2009, Retail Trade in Australia
Figure 7: Footwear product segmentation
7%
18%
Women's Footwear
50%
Men's Footwear
Children/Infant Footwear
Other
25%
Source: IBISWorld, August 2009, Retail Trade in Australia
Fashion retailers deal in terms of mark-up when defining the profitability of their products. Table 4 illustrates
the minimum mark-up independent fashion retailers assign to their merchandise categories.
Table 4: Product mark-up for independent fashion retailers
Merchandise Categories
Minimum mark-up (%)
Clothing
100%
Footwear
100%
Accessories
300%
Source: Deloitte consultations with independent fashion retail operators
Minimum mark-ups on clothing, footwear and accessories are relatively higher when compared to the margins
on products in the other sectors due to the retailing trends independent fashion retailers‟ experience. High
mark-ups coincide with higher markdowns when retailers go into sales periods. The current retail environment
of continuous discounting (see subsection 3.3) places further pressures on the minimum
mark-ups independent fashion retailers assign to their products in order to remain profitable.
Independent fashion retailers primarily focus on mid-market purchases. The cost of a single item of clothing for
an independent fashion retailer ranges between $80 and $250 and between $100 and $300 for footwear.
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3.2 Market trends
Independent fashion retailers are experiencing the following market trends:
An increase in franchisee and chain stores – successful operators are looking to strengthen their brands in
new cities and/or states. Franchisees also benefit from support including human resources, operations and
financial systems and regular company wide marketing campaigns making it an attractive model for
individuals looking to operate a retail business
Price competition is strong and the major basis for differentiating high volume, commodity products – in
the current market, consumers are more sensitive to price changes and price is often the bottom line for
purchasing decisions
Customers are less likely to spend their disposable income on fashion items due to current consumer
behaviour and economic conditions.
3.3 Key challenges
Independent fashion retailers are experiencing largely unprecedented changes in the way
businesses operate in the retail environment (see Figure 8).
Figure 8: Key challenges for independent fashion retailers
Continuous discounting/sales
45%
Rent & tenancy costs
40%
25%
Fair work system
40%
23%
Cash flow & access to finance
20%
Most significant challenge
20%
30%
Major challenge
40%
Minor challenge
50%
60%
Least signfificant challenge
8%
13%
20%
70%
80%
5%
13%
13%
60%
10%
5%
28%
40%
8%
0%
18%
30%
18%
Capacity to compete
10%
10%
5%
90%
8%
100%
Not a challenge
Source: ARA survey
Legislation
Independent fashion retailers suggest that a significant regulatory burden on their business is the Fair Work
system and award modernisation process. Approximately 50 per cent of independent fashion retailers suggest
that the Fair Work system is the most, or a major, significant challenge that they face.
Text box 1: Fair Work System
On 1 July 2009, Australia’s workplace relations system changed under the Fair Work System. Part of the new
Fair Work System is the award modernisation process and the introduction of the new retail award on 1 January
2010. The first of five transitional phases for the new retail award’s wages, loadings and penalty rates began on
July 2010.
The operational nature of independent fashion retailers means that the new workplace relations could place these
businesses under considerable pressure. For many independent fashion retailers, Sunday and late night trading is
not a high volume or profitable business day. Independent fashion retailers suggest that increases in the penalty
rates may necessitate the reducing of the number of staff working during these times. Further staff reductions
are expected to be made as a result of the minimum hour work requirements. While most sales assistants work
an average shift of five to seven hours, independent fashion retailers also employ individuals to aid with jobs
such as cleaning and ironing. The average lengths of these shifts are less than three hours making them unlawful
under the Fair Work System. Operators cannot afford to extend the length of these shifts and these employees,
for the most part, are unable to work longer hours.
13
Wages represent almost half of the operational costs for independent fashion retailers. The Fair Work system
increases these costs to prohibitive levels for independent fashion retailers, which ultimately impacts on the
employees of these businesses.
Capacity to compete
In order to increase consumer purchases, fashion retailers are in the midst of a “discounting war”. Many of the
major retailers have been on a permanent or rolling promotion since January and the retail sector is experiencing
a surge in sale advertising, in-store promotions and catalogues. 3 Major department stores in particular are
believed to be driving up sales by heavily discounting prices and looking to their suppliers to increase
promotional activities. Department stores are a major competitor for independent fashion retailers.
Approximately 70 per cent of independent fashion retailers surveyed consider the capacity to compete a key
challenge to their business. Moreover, 45 per cent of independent fashion retailers surveyed suggest that
continuous discount represent the most significant challenge for their business.
Independent fashion retailers also suggest that the presence of factory outlets, large-floor warehouse buildings
that sell excess or previous season‟s stocks at reduced prices, creates a further pressure on their businesses.
Independent fashion retailers compete with retail spaces as they offer a retail environment similar to the major
shopping complexes (e.g. food and coffee outlets, shopping trolleys, car parks) with the added lure of permanent
sale products.
Independent fashion retailers feel that they are pressured to match the sales environment of the major players.
They have estimated that 50-80 per cent of shoppers will not pay full price in the current climate. Traditional
sales periods usually occurred after Boxing Day/into the New Year and mid-year (June-July). Some independent
fashion retailers are both extending the length of these sale periods and ensuring they offer a category of
discounted products at all times.
“I believe that Australia is leading the global phenomenon of continuous
discounting. We have taught our consumers not to purchase at full-price and
are now struggling in the aftermath.”
Continuous discounting and changes to the traditional sales periods prohibits marking products at full price and
makes it difficult to control margins. There is also a build up of inventory, which is further detrimental to
independent fashion retailers in terms of lost sales and storage costs. With consumers largely unwilling to pay
full price, a battle for continuously offering the lowest price and very little increase in sales growth, independent
fashion retailers are being placed under significant pressure.
Cash flow management
Approximately 60 per cent of independent fashion retailers surveyed suggest that cash flow management and
access to finance represents a key challenge to their business. This is particularly the case when operators are
endeavouring to pay suppliers within a 60 to 90 day period. Some independent fashion retailers have suggested
they are taking out or looking to take out loans to cover the payments to suppliers with whom they are trying to
maintain a strong relationship. Cash flow management is further exacerbated for retailers who cite rising costs
as an additional key challenge. In particular, approximately 65 per cent of independent fashion retailers
surveyed suggest rent and tenancy costs are significant challenges for their business.
3
E Greenblat & A Ferguson 2010, ‘Sales battle fatigue: how low can we go’, The Age, 2010 available at http://www.theage.com.au/business/sales-battle-fatigue-how-lowcan-we-go-20100509-ulsn.html accessed on 4 May 2010
14
Over the next 12 months
Table 5 illustrates the key challenges independent fashion retailers anticipate over the next 12 months.
Table 5: Key challenges for independent fashion retailers over the next 12 months
Challenge
Percentage of
fashion retailer
survey respondents
(%)
Decreasing sales, low levels of consumer confidence, competition from major retailers
Increasing costs – in particular, rent and wages
a
40%
15%
Continuous discounting
13%
Cash flow management
13%
Other – controlling costs, maintaining relationships with suppliers, consumers buying overseas
products
a)
11%
survey respondents who identified increasing wages as a key challenge also stated that this increasing cost was due to the Fair Work system.
Source: ARA Survey
Almost half of the survey respondents suggested that decreasing sales would remain a key challenge of their
business. Respondents who highlighted this challenge anticipate this to be an issue due to a loss of consumer
confidence and competition from major retailers.
3.4 Key opportunities
The most significant point of differentiation for independent fashion retailers is their ability to provide quality
and service. Consumers return to independent fashion retailers for the time, attention and product knowledge
these operators provide at a level that is not often available at other retail outlets.
A key opportunity for independent fashion retailers is to sell into niche markets. Clothing for women aged
40 years or older is one example of a demographic proving very successful for independent fashion retailers.
Successful independent fashion retailers are also limiting the type of items they stock. For example, rather than
selling home wares, an independent fashion retailer may find it more profitable to specialise in selling knives.
Independent fashion retailers also believe that they have greater profitability when they stock a line that isn‟t
available in department stores or at their major competitors. In this way, independent fashion retailers turn to
overseas suppliers or local boutique designers to access an exclusive product. The ultimate conclusion made by
independent fashion retailers is that the more unique the product the greater the opportunity for sales and
service.
Many independent fashion retailers are beginning to establish their online presence. By utilising websites and
social networking tools, independent fashion retailers have an extended way of accessing their customers and
illustrating their point of difference.
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4 Independent service station sector
Independent service stations are operating in an environment that requires these businesses to be
efficient, flexible and resilient.
4.1 Characteristics of the sector
Ownership
Independent service stations operate under three general business structures:
Branded independent sites – owned and operated by an individual or small company but have the branding
of a major oil company
Independent sites – not branded by an oil company or chain
Independent chain sites – owned by a large independent company, which is not aligned or owned by a
major oil company. The four main independent chains in Australia are 7-Eleven, Gull, Matilda and United.
Independent service stations account for approximately 25 per cent of service stations in Australia. The largest
operators of service stations are the major refiner-marketers; Shell, Mobil, BP and Caltex. Additionally, there
has been an expansion of supermarket-owned service stations since the late 1990s. Two major supermarketowned service station alliances currently exist:
Coles and Shell (Coles Express)
Woolworths and Caltex.
In May 2010, 7-Eleven acquired 295 petrol stations from Mobil Oil Australia. At this stage, the impacts of this
acquisition on the market cannot be accurately estimated.
Approximately 75 per cent of service stations are directly owned or affiliated with the major refiner-marketers
or supermarket-owned service stations. The share of retail fuel sales of the major refiner-marketer and
supermarket-owned service stations is estimated to be 90 per cent of the total retail fuel sales in Australia.
Size
The size of operators in the service station sector can be defined by monthly retail fuel sales.
Table 6 illustrates the average size of independent service stations.
Table 6: Size of independent service stations
Size of business
Monthly retail fuel sales (litres)
Small
100,000 – 150,000
Medium
200,000 – 300,000
Large
500,000 +
Source: Deloitte consultations with independent service station operators
Independent service stations in the „small‟ category typically rely on an additional business component to
remain profitable. For example, small independent service stations may have an attached mechanical services
component that is the core driver of the operator‟s business.
16
Employment
The independent service station sector employs approximately 25 625 employees nationally (see Figure 9).
Figure 9: Independent service station employees
295
5 460
2 040
2 130
8 800
5 990
910
Source: Deloitte
Independent service stations in Australia employ an average of 12 staff members. The majority of staff (57 per
cent) are employed on a casual basis (see Figure 10).
Figure 10: Independent service station employment mix
37%
Full-time
Part-time
57%
Casual
9%
Source: Deloitte
Service station employees fill four key roles; management, console operators, cleaning and maintenance.
Console operators represent the majority of service station staff. Service stations typically employ one or two
console operators per shift. The hourly wage rate for console operators is higher relative to other retail positions
due to significant responsibilites associated with their jobs such as liability for hazardous equpment/material and
shrinking or stock loss.
17
Operations
The typical operating costs for an independent service station are illustrated in Figure 11. Wages (61 per cent)
represent the highest proportion of operating costs. Wage costs can increase significantly at service station sites
that trade for extended hours (i.e. 24/7) due to higher penalty rates after midnight and on weekends. Utilities and
telephone (10 per cent), bank and credit card charges (7 per cent) and shrinkage/fuel loss (6 per cent) represent
other major operating costs for independent service stations.
Figure 11: Operating cost for independent service stations (as % of total operating costs)
2%
7%
Accounting Charges
1%
3%
Bank & Credit Card Charges
3%
0.7%
3%
Consumables
Insurance
Motor Vehicle
1%
Rates, Taxes, Licenses & Fees
Maintenance
10%
Security Services
61%
1%
Utilities & Telephone
Waste Disposal
6%
Store Shrinkage & Fuel Losses
Wages
Source: Deloitte consultations with independent service station operators
Most service stations have both a fuel and non-fuel product offering. Non-fuel products generally include:
Beverages
Confectionary
Dairy
Groceries
Fast food
Newspapers and magazines
Cigarettes
Health and/or beauty products
Car accessories and parts
LP gas bottles
Fire wood.
The product mix of non-fuel items differs between service stations and is dependent on the business structure
and size of the operator. Non-fuel products at service stations often resemble those sold by convenience stores.
Consequently, there is an overlap between the service station and convenience store model.
Figure 12 compares the sales and profits generated from fuel and non-fuel products.
Figure 12: Sales and profit for fuel and non-fuel products sold at independent service stations (%)
90%
80%
80%
70%
70%
60%
50%
40%
30%
20%
30%
20%
Fuel
Non-fuel
10%
0%
Sales
Profit
Source: Deloitte consultations with independent service station operators
18
Fuel accounts for approximately 80 per cent of service station sales however, 70 per cent of service station profit
is driven by non-fuel sales. This largely occurs as fuel sales represent a high volume, low margin business. The
gross margin on retail fuel is approximately 3 cents per litre. Fuel is considered a loss leader for independent
service stations as it is a product that does not generate the highest gross margin but stimulates other profitable
sales. Table 7 illustrates the margins on fuel and non-fuel products at service stations. For instance, the margin
on beverages and ice (50 per cent) are significantly higher than the margins on fuel (three per cent).
Table 7: Product margin for independent service stations
Product
Gross Margin (%)
Fuel
3%
Cigarettes
22%
LP Gas Bottles
35%
Car Accessories/Parts
40%
Confectionary
40%
Fast Food
45%
Beverages
50%
Ice
50%
Source: Deloitte consultations with independent service station operators
4.2 Market trends
Independent service stations are experiencing the following market trends:
Decrease in the number of sites and employees which has been driven by increased operating costs and
increased competition
Increase in supermarket-owned service stations which is due to the strong alliances between Coles/Shell
and Woolworths/Caltex
Higher than average fuel prices resulting from global economic conditions
Price as a key motivator for fuel purchases – consumers are highly sensitive to changes in the retail fuel
price
A negative correlation between the price of fuel and the amount spent on non-fuel goods – for example, if
the price of fuel increases, the purchase of non-fuel goods typically decreases
19
4.3 Key challenges
In the context of current market trends, independent service stations are facing a number of key challenges (see
Figure 13).
Figure 13: Key challenges for independent service stations
Legislation for environmental standards
49%
Competition from major groups
49%
Tobacco retail display bans
41%
32%
24%
Fair Work system
11%
Security issues (robberies, drive offs etc)
11%
0%
27%
10%
Most significant challenge
20%
5%
27%
24%
Major challenge
40%
Minor challenge
50%
Least signfificant challenge
5%
19%
11%
60%
3%
11%
38%
30%
5%
11%
24%
38%
3% 3%
70%
80%
14%
16%
90%
100%
Not a challenge
Source: ARA Survey
Competition
Increased competition from supermarket-owned service stations represents a significant challenge for
independent service stations. Approximately 81 per cent of independent service station operators surveyed
suggest that competition from major groups is either the most significant, or a major, challenge to their business.
Independent service station operators estimate that 70 per cent of retail fuel sales have moved away from
independent service stations towards supermarket-owned sites. The key reason for this shift is primarily linked
to the importance of price as a motivator when purchasing fuel.
The price of fuel is cyclical on a weekly basis, whereby fuel prices are generally higher on weekends. All
service station operators purchase fuel at a wholesale price (terminal gate price). However, independent service
station operators believe that it is not uncommon for supermarket-owned service stations to sell fuel 8 cents per
litre lower than an independent service station‟s wholesale price. In shadowing the supermarket-owned service
stations, some independent service station operators may sell fuel below their wholesale price, however this
does not occur for a sustained period of time. Independent service station operators estimate that when
supermarket-owned service station operators sell fuel below wholesale prices the independent operators tend to
sit one to two cents per litre higher to stay competitive. This trend is more apparent in metro areas when
independent service stations are in close proximity to supermarket-owned sites.
“On-going price wars make my business unsustainable”
Another competitive issue is the use of discount fuel dockets at supermarket-owned service stations. Both the
Coles-Shell and Woolworths-Caltex alliances typically offer customers discounted fuel at 4 cents per litre with
grocery purchases over a certain amount. Discount dockets are encouraging motorists to become more brand
loyal by capitalising on cheaper fuel. In this way, independent service station owners lose business when
customers choose to use their discount dockets at supermarket-owned sites.
Independent service station operators also refer to the impacts of cross-subsidisation. Service station operators
are able to subsidise the cost of retail fuel via their grocery operations. Supermarket-owned service stations
leverage their wider network of businesses to cross-subsidise fuel more efficiently. Cross-subsidisation adds to
the pressure of discount fuel dockets that independent service station operators face.
The growing number of supermarket-owned service stations is a major threat to the viability of independent
service stations. A number of independent service station operators believe that their inability to remain
profitable in a highly concentrated market may ultimately force them to close down or sell their business. As a
result, the potential decrease in independent sites is likely to further strengthen the market position of
supermarket-owned operations.
20
Legislation
Independent service station operators will be impacted by the introduction of legislation, particularly by changes
focused on mandating environmental and health standards. The legislative programs that represent a key
challenge to independent service stations are highlighted in Table 8. Approximately half of independent service
station operators surveyed estimate that legislation for environmental standards and tobacco retail display bans
represent a significant challenge.
Table 8: Legislative changes and costs for independents service stations
Legislative Program
Leak Detection
Requirement
Cost
Owners and operators must regularly check for
Ground Water Monitoring Wells $15 000
to $20 000 once off capital cost
leaks in the fuel tanks and pipes used to store
and handle petroleum products
To reduce regional emissions of volatile organic
Stage II Vapour
Recovery
Ethanol Mandate
Tobacco Legislation
compounds by around 5000 tonnes per year and
improve local air quality at and near petrol
service stations
Blending fuel to contain 10 per cent, by volume,
of ethanol (E10)
No point-of-sale displays of tobacco products
Monitoring costs of approximately $1 000
per year
Retrofitting costs of up to $250,000 for
those service stations proscribed by the
regulations
Conversion cost of approximately $5 000
Console area fit out costs of
approximately $5 000 and $10 000
Source: Deloitte consultations with independent service station operators
The tobacco retail display ban has already been implemented in New South Wales and is proposed for
commencement in Victoria on 1 January 2011 and in Western Australia. Independent service station operators
estimate that legislative changes will impose capital costs between $5 000 and $250 000. Approximately 51 per
cent of independent service station survey respondents suggest that the tobacco retail display ban is a major or
the most significant legislative requirement for their business.
In addition, approximately 41 per cent of survey respondents suggested that the Fair Work system is a further
major legislative burden on their business (see Text box 2).
Text box 2: Fair Work System
On 1 July 2009, Australia’s workplace relations system changed under the Fair Work System. Part of the new
Fair Work System is the award modernisation process and the introduction of the new retail award on 1 January
2010. The first of five transitional phases for the new retail award’s wages, loadings and penalty rates began on
July 2010.
Working Capital
The operation of a service station requires a large amount of working capital, the majority of which is spent on
purchasing fuel. On average, a medium-sized service station estimates that they spend between $200 000 to
$360 000 on fuel per month. Independent service station owners are required to pay for fuel with cash on
delivery.
As fuel is a high volume, low margin business this is a significant outlay for independent service station
operators relative to their returns. In the last 10 years, independent service station operators estimate that they
have dropped their volume of fuel by one-third.
An entity wishing to establish an independent service station faces significant barriers to entry. Establishing a
service station is a costly exercise as operators estimate the development and construction of a new service
station is upwards of $4 million. This is intensified by the high working capital requirement once in operation.
21
Security
Independent service stations are confronted by a number of security issues including:
„Drive-offs‟ – motorists driving off without paying after filling up
Theft of non-fuel products
Use of fake credit cards.
Independent service station operators estimate that fuel theft costs them $4 600 per year and is further magnified
when fuel prices rise.4 Independent service station operators estimate that the cost of security service is
approximately $2 000 per year.
Over the next 12 months
Table 9 illustrates the key challenges independent service station operators anticipate over the next 12 months.
Table 9: Key challenges for the independent service stations over the next 12 months
Challenge
Percentage of service
station survey
respondents
(%)
Complying with environmental legislation
22%
Maintaining high sales volume on fuel
19%
Tobacco legislation
9%
Competition – major groups
19%
Remaining profitable/increasing costs – utilities, compliance with legislation, wages, fuel sales
31%
Source: ARA Survey
Approximately 40 per cent of survey respondents suggested that challenges associated with legislation (either
environmental or tobacco related) will be a key challenge over the next 12 months. In addition, approximately
30 per cent of survey respondents highlighted the ability to remain profitable as a key concern. Of the
respondents who highlighted this challenge, many pointed to the loss of fuel sales and compliance with
legislation as a factor in their ability to be cost-effective.
4.4 Key opportunities
The viability of the service station sector requires operators to differentiate their businesses based on their
non-fuel products. As the sale of fuel incurs relatively low margins, independent service stations are looking to
provide extended products and services to their customers. These services have included:
Convenience shops – service stations maintain higher margins on non-fuel products making these
merchandise categories a critical factor for the profitability of these businesses
Cafés – café models range from simple self-serve coffee stations to more complicated businesses involving
a bakery or deli offering
Fast food – some independent service stations own and operate their own fast food business, which
typically prepares sandwiches, hamburger or fried food items. Alternatively, independent service stations
lease these spaces to other retailers, many of which operate as a franchisee e.g. Subway
Car washes – either coin-operated self-service facilities or tunnel automatic systems
Auto repairs – owned by the service station proprietor or space is leased to mechanics/technicians
Equipment hire – partnership with equipment companies usually involving the rental of trailers, lawn
mower, LP gas bottles and generators.
The ability to leverage revenue off these non-fuel products is a key driver of success for independent service
station owners.
4
G Trickey 2008, ‘Shoplifting and petrol theft rises in Victoria’, May available at http://www.heraldsun.com.au/news/victoria/petrol-fuels-crime-wave/story-e6frf7kx1111116490203 accessed on 4 May 2010
22
5 Convenience store sector
The convenience store sector faces competition from supermarkets, newsagencies and service
stations, viability is dependent on strengthening their customer base.
5.1 Characteristicsof the sector
Ownership
Two-thirds of convenience-stores are owned by the major convenience store groups or franchises:
7-Eleven
BP
Caltex
Mobil
Coles Express
Woolworths Petrol.
Coles Express (over 380 stores) and Woolworths Petrol (over 370 stores) are the largest of the major groups
with a combined total of approximately 750 convenience stores nationally.
The remaining one-third of convenience stores are independently owned. The major independently owned
convenience stores include:
APCO
Freedom
Gull
Night Owl
Reliance
United
Wessel
Westoil.
Size
The size of convenience stores can be categorised by annual turnover and the number of full-time equivalent
employees. Table 10 illustrates the typical size of convenience stores.
Table 10: Size of convenience stores
Size of business
Annual turnover ($)
Number of full-time equivalent
employees
Small
$520 000 - $1.4 million
2
Medium
$1.5 million - $2 million
5
Large
>$2 million
5-10
Source: Deloitte consultations with convenience store operators
Medium to large convenience stores estimate that they serve approximately 830 customers per day.
23
Employment
The convenience store sector employs approximately 14 820 employees nationally (see Figure 14).
Figure 14: Convenience store employees
90
3 400
690
810
4 530
4 750
550
Source: Deloitte
Convenience stores in Australia employ an average of 12 staff members. The majority of staff (71 per cent) are
employed on a casual basis (see Figure 15).
Figure 15: Convenience store employment mix
Full-time
Part-time
Casual
Source: Deloitte
Convenience stores employ an average of five staff members per store. The majority of staff at convenience
stores are employed on a part-time basis with an average wage of $22 per hour. The ratio between male and
females is almost equal, 51 per cent of employees are men of which 45 per cent are aged between 25-55 years
old. Convenience stores experience moderate to high levels of staff turnover, on average the annual staff
turnover is approximately 30 per cent.
Operations
The product mix offered by convenience stores is dependent on the size and location of the business. Figure 16
illustrates the typical products sold at convenience stores. Cigarettes account for 30 per cent of total sales and
comprise of the largest merchandise category. Beverages (17 per cent) and confectionary (12 per cent) represent
other key merchandise categories however these products combined have approximately the same turnover as
cigarettes.
24
Figure 16: Product mix for convenience stores (as % of total sales)
18%
Cigarettes
30%
Dairy
Bakery
5%
Deli
Groceries
Health/Beauty
8%
Snacks
Confectionary
9%
12%
6%
2%
5%
2%
5%
Ice cream
Fast Food
Beverages
Source: Deloitte consultations with convenience store operators
Table 11 illustrates the typical margins for products sold at convenience stores.
Table 11: Product margin for convenience stores
Product
Gross Margin (%)
Newspapers
13%
Cigarettes
22%
Dairy
25%
Bakery
25%
Deli
30%
Groceries
35%
Health/Beauty
35%
Snacks
35%
Confectionery
40%
Ice cream
40%
Fast Food
45%
Beverages
50%
Source: Deloitte consultations with convenience store operators
Beverages (50 per cent), fast food (45 per cent), ice-cream (40 per cent) and confectionery (40 per cent)
represent products that have the highest margins for convenience stores. Newspapers have the lowest product
margin at 13 per cent. The product margins at convenience stores are closely in line with those experienced by
independent service stations and newsagencies.
5.2 Market trends
Convenience stores are experiencing the following market trends:
Decrease in newspaper and magazine sales - more consumers are directly subscribing to
newspaper/magazine, bypassing convenience stores. Additionally, more people are accessing news sources
via the internet
Increase in water, energy drink and pre-paid mobile phone card sales – these purchases are on impulse and
are relatively inexpensive
The majority of new convenience stores are established in Queensland and Western Australia because of
economic and population growth
25
5.3 Key challenges
Figure 17 illustrates that key challenges faced by the convenience store sector.
Figure 17: Key challenges for the convenience store sector
Tobacco retail display bans
60%
20%
20%
High sales volume on low margin products
40%
40%
20%
Channel blurring
40%
40%
20%
Fair Work system
20%
0%
10%
Most significant challenge
40%
20%
Major challenge
30%
40%
Minor challenge
20%
50%
60%
Least signfificant challenge
70%
20%
80%
90%
100%
Not a challenge
Source: ARA Survey
Channel blurring
The traditional market position of a convenience store was based on their location alongside busy roads,
densely-populated urban neighbourhoods, at service stations or near railway stations or transport hubs.
Convenience stores stock products based on these key locations, for example bakery/deli products where
breakfast and lunch time traffic is high or live bait and tackle for sites at beach/holiday locations. The
development of new supermarkets in suburban and regional areas is encroaching on the traditional convenience
store model. Supermarkets offer a broader range of products and are often more competitively priced than
convenience stores. In this way, consumers are turning to supermarkets for products that they would have
normally purchased at convenience stores. Approximately 80 per cent of convenience stores surveyed suggest
that this „channel blurring‟ is the most significant or major challenge to their business.
Newsagencies are also impinging on convenience stores. As newsagencies look for new ways to remain
profitable (see Newsagency section, page 28) they are increasing their merchandise categories to include
products typically held by convenience stores such as beverages and confectionery. Newsagencies are located in
similar or close proximity to convenience stores and consequently, capture sales that would normally
“Supermarkets and newsagencies are encroaching on the traditional convenience
store model”
go to convenience store operators.
As the channel blurring with supermarkets and newsagencies deepens, convenience store operators believe that
consumers are likely to have difficulties in clearly distinguishing the products and services offered by their
businesses. In order to overcome this challenge, convenience stores have started focusing on offering products
based on the needs and interests of local consumers. Convenience stores are also staying open for longer hours,
with 24/7 trading becoming a point of distinction from supermarkets and newsagencies.
Sales volume
Convenience stores are pressured by the need to maintain a high sales volume in order to remain profitable.
Although cigarettes and newspapers account for almost half the sales at convenience stores, these products yield
low margin. For convenience stores to make up these low margins, the sales volume in these categories needs to
be high. In contrast, profits per item on fast food, deli and bakery products are much higher but sales are
generally lower. Approximately 80 per cent of convenience stores surveyed suggest that a primary challenge for
26
convenience stores is their ability to sustain high sales volume of low margin products while simultaneously
marketing and driving the sales of high margin items.
Legislation
Approximately 60 per cent of convenience stores surveyed suggest that the retail display ban on tobacco
products is the most significant regulatory impact on the convenience store sector. The tobacco retail display
ban has been recently implemented in New South Wales, Victoria and Western Australia. Compliance with the
tobacco retail display ban is expected to require significant reconfiguration of existing shop layouts for
convenience stores. Convenience store operators estimate that the costs associated with the fitting of new
tobacco storage units will be between $5 000 and $10 000. Convenience store operators also expect an increase
in operating costs through longer transaction time and new operating procedures. Sales at convenience stores are
also anticipated to decrease by prohibiting the display of cigarettes, a product that represents approximately onethird of total sales.
In addition, approximately 60 per cent of survey respondents suggested that the Fair Work system is a further
major legislative burden on their business (see Text box 2).
Text box 3: Fair Work System
On 1 July 2009, Australia’s workplace relations system changed under the Fair Work System. Part of the new
Fair Work System is the award modernisation process and the introduction of the new retail award on 1 January
2010. The first of five transitional phases for the new retail award’s wages, loadings and penalty rates began on
July 2010.
Over the next 12 months
Table 12 illustrates the key challenges convenience stores anticipate over the next 12 months.
Table 12: Key challenges for the convenience store sector over the next 12 months
Challenge
Percentage of
convenience store
survey respondents
(%)
Remaining profitable
80%
Tobacco legislation
20%
Source: ARA Survey
Approximately 60 per cent of the survey respondents suggested that the ability to remain profitable will remain
a key challenge of their business. Respondents who highlighted this challenge anticipate this to be an issue due
to competition from supermarket groups, a loss of consumer confidence and increasing wage rates.
5.4 Key opportunities
Key opportunities for convenience store operators revolve around the ability to provide targeted services to
consumers. ATMs and WiFi are amongst the new services that convenience stores are introducing in order to
attract customers.
Convenience stores are also developing a deeper understanding of consumers that cannot be serviced adequately
by other retailers. In particular, the following types of customers have boosted revenues:
„Time-poor, cash-quick consumers‟ who are willing to pay a premium for quick dinner options and other
household consumables
Trades people and early morning commuters who make purchases between the hours of 4:00am and
6:00am.
27
6 Newsagency sector
Newsagency proprietors need to be strategic and efficient in the way they market their products to
customers whilst minimising the challenges posed by supplier relationships.
6.1 Characteristics of the sector
Ownership
Newsagencies in Australia are typically owned and operated independently. The majority of these newsagencies
operate under a franchise brand or banner group.
Two major newsagency franchises operate in Australia; „The Lucky Charm‟ and „Supanews‟. The Lucky Charm
has 30 newsagency operators across Western Australia, Queensland and Victoria. 49 newsagencies belong to the
Supanews franchise and are located in Queensland, New South Wales and Victoria.
Banner groups are characterised by a common, identifiable brand that comprises separate independent small
businesses. These businesses draw upon a collectively funded centralised source of advice and support systems.
The three main banner groups, which operate across all states, include:
Xpress – 165 newsagencies
Newspower – 380 newsagencies
Nextra – 45 newsagencies.
In addition to franchisee and banner group operators, there are a small number of delivery only newsagents.
These specialist delivery newsagents work from light industrial premises and deliver publications to businesses
and homes. The largest number of delivery only newsagents operates in South Australia and Western Australia.
This differs from practices in Queensland, New South Wales and Victoria where the newsagent operates both a
retail store and delivery service. However, deregulation of the industry since the 1990s has seen newsagencies
increasingly separate their home delivery and retail functions.
Size
The size of newsagencies can be categorised by weekly turnover and the number of full-time equivalent
employees. Table 13 illustrates the typical size of newsagencies
Table 13: Size of newsagencies
Size of business
Annual turnover ($)
Number of full-time equivalent
employees
Small
>$500,000
0.5
Medium
$500,000 - $1.5 million
1-5
Large
$1.5 million - $2 million
6-10
Source: Deloitte consultations with newsagency operators
Large newsagency operators are also categorised by having shop spaces larger than 250 m2 in order to house
large volumes stock and multiple merchandise categories.
28
Employment
The newsagency sector employs approximately 18 290 employees nationally (see Figure 18).
Figure 18: Newsagency employees
120
4 560
1 400
1 310
6 220
4 230
450
Source: Deloitte
Newsagencies in Australia employ an average of seven staff members. The majority of staff (62 per cent) are
employed on a casual basis (see Figure 19).
Figure 19: Newsagency employment mix
25%
Full-time
Part-time
Casual
62%
15%
Source: ARA Survey
29
Operations
The typical operating costs for newsagency operators are illustrated in Figure 20. Wages (40 per cent) and rent
(26 per cent) represent the highest proportions of operating costs.
Figure 20: Operating cost for newsagencies (as % of total operating costs)
4%
10%
3%
4%
7%
Advertising
Accounting/legal fees
Insurance
Rent
26%
Repairs and maintenance
Telephone & fax
Wages
Vehicle
Other
40%
2%
3%
Source: Deloitte consultations with newsagency operators
Figure 21 illustrates the typical products sold at newsagencies in Australia. The traditional product mix for
newsagencies is magazines and newspapers, which accounts for 40 per cent of total sales. Gaming (30 per cent)
is the second largest merchandise category for newsagencies.
Figure 21: Product mix for newsagencies (as a % of total sales)
5%
30%
40%
Newspapers/magazines
Stationary
Cards
Gifts/toys
Gaming
Cigarettes
5%
10%
10%
Source: Deloitte consultations with newsagency operators
Newsagencies are experiencing a significant change in the product mix of non-core items. Products added to
newsagencies include:
Books
Phone-cards
Toys
Drinks
Confectionery
DVDs.
30
Table 14 illustrates the typical product margins for newsagencies.
Table 14: Product margins for newsagencies
Product
Gross margin (%)
Stationary
50%
Greeting cards
50%
Confectionery
50%
Beverages
50%
Newspapers/magazines
25%
Gifts/toys
20%
Cigarettes
17%
Phone cards
10%
Gaming
7%
Bus/train tickets
2.5%-8% (depending on jurisdiction)
Source: Deloitte consultations with newsagency operators
The highest product margins are on beverages (50 per cent), confectionery (50 per cent), greeting cards (50 per
cent) and stationary (50 per cent). The lowest product margins are on bus/train tickets (2.5 per cent), and gaming
(9 per cent). While newspapers and magazines account for almost half of the total sales for newsagencies their
margins are relatively small at 25 per cent.
6.2 Market trends
Newsagencies are experiencing the following market trends:
Decrease in newspaper and magazine sales – a result of a number of factors including direct subscriptions
with publishers, on-line access to news sources, mobile digital media
Steady but slow growth in greeting card sales as greeting card companies operate in a relatively competitive
environment and are affected by seasonal trends (e.g. Christmas)
Increasing reliance on confectionery, beverage and grocery (e.g. milk, bread) items – these products are
associated with relatively higher margins.
31
6.3 Key challenges
Operators in the newsagency sector are facing a number of key challenges (see Figure 22).
Figure 22: Key challenges for newsagencies
Continuous discounting/sales
45%
Rent & tenancy costs
40%
25%
Fair work system
40%
23%
Cash flow & access to finance
20%
Most significant challenge
20%
30%
Major challenge
40%
Minor challenge
50%
60%
Least signfificant challenge
8%
13%
20%
70%
80%
5%
13%
13%
60%
10%
5%
28%
40%
8%
0%
18%
30%
18%
Capacity to compete
10%
10%
5%
90%
8%
100%
Not a challenge
Source: ARA Survey
Supply chain dynamics
Publishers distribute circulation to newsagencies that hold a distribution contract. 5 In most states, the bulk of
deliveries from publishers are directed to the newsagency‟s retail premises. From here, the newsagency is
responsible for the territorial work of home delivery and sub-agent distribution. Regional newsagents may have
a home delivery area of approximately 130 kilometres per day, which represents a considerable time and cost
burden for the operator relative to the margins on these products. In Western Australia and South Australia,
publishers distribute products to depots that are shared by 6 newsagency operators. Other states are moving to
adopt this model.
Approximately 90 per cent of newsagencies surveyed suggest that the publisher‟s relationship with a
newsagency is highly contractual. Publishers do not compete between themselves for retail space in
newsagencies and as a result, have very little incentive to improve margins or be receptive to changes that would
improve the operations and market position of newsagencies. This is in contrast to greeting card companies who
operate in an environment that requires them to compete for display space.
Newsagency operators face a further sales challenge for circulation. Whereby newspaper subscriptions were
traditionally made via the newsagencies, many consumers are purchasing newspaper subscriptions directly from
the publisher. This has resulted in newsagencies losing a significant amount of foot traffic, which affects the sale
of other products. For example, a consumer who no longer frequents a newsagency for their daily paper does not
purchase the greeting card or lotto ticket, and thus the newsagency loses a sale it would have previously made.
Additionally, more people are accessing online versions of the news, which further diminishes the sales of
newspapers and the draw card for other purchases.
Cash flow management & administration burden
Working capital and cash flow management was cited as a major business challenge. Approximately 70 per cent
of newsagencies surveyed suggest that the cash flow management and administrative burdens specifically in
relation to circulation is a key challenge for their business. Newsagencies, especially large operators, stock
numerous editions of newspapers and magazines both in terms of variety and quantity. Newsagencies are
required to ensure that they have the holding space for large volumes of stock but also the working capital to
cover the holding costs. Holding costs for magazines can be up to six months. Newspapers and magazines that
5
Circulation is the industry term for newspapers and magazines
32
are not sold have a limited time frame in which they can be returned. The process for returns is often
complicated and time consuming.
Newsagency operators estimate that one-third of their trading hours are committed to processing the return of
newspapers and magazines. Given the retail/holding space, working capital and labour costs associated with
circulation the net profit for this merchandise category is significantly reduced. As newspapers and magazines
are the core product for newsagencies, pressures associated with their sales represent a key challenge for
operators.
Legislation
Approximately 65 per cent of newsagencies survey suggest that the Fair Work system is the most, or a major,
significant challenge to their business.
Text box 4: Fair Work System
On 1 July 2009, Australia’s workplace relations system changed under the Fair Work System. Part of the new
Fair Work System is the award modernisation process and the introduction of the new retail award on 1 January
2010. The first of five transitional phases for the new retail award’s wages, loadings and penalty rates began on
July 2010.
Increased pressure on newsagencies occurring as a result of the Fair Work system arises from the following:
An increase in the minimum wage (in addition to the new award‟s increase in wage rates)
An increase in penalty rates
Minimum work requirements that mean employees must work three or more hours per shift.
“Minimum work hours for our employees is the new killer for our business.
Fair Work is excruciatingly painful”
Newsagency operators anticipate that they will have to respond to the changes caused by the Fair Work system
by cutting staff hours. On average, large newsagency operators estimate that they will shed a maximum of six
staff members as they will be unable to employ them for more than three hour per shift. As newsagencies cannot
afford to maintain their causal employees, proprietors expect that they will have to cover these jobs with their
own time. Such an occurrence raises concerns regarding the pressures of work/life balance for newsagency
owners.
While the Fair Work legislative requirements represent a significant regulatory impact, newsagency operators
face additional legislative burdens such as the tobacco retail display ban.
Sales volume
Core products for newsagency operators are associated with low margins and high volumes. Approximately
90 per cent of newsagencies surveyed suggest that maintaining high volumes on low margin products is a
primary challenge for their business. Increasingly, where these higher volumes cannot be met, newsagency
operators are sourcing non-traditional products, such as toys and confectionery, on which they can turn a profit.
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Over the next 12 months
Table 15 illustrates the key challenges newsagency operators anticipate over the next 12 months.
Table 15: Key challenges for newsagencies over the next 12 months
Challenge
Percentage of
newsagency survey
respondents
(%)
Decreasing sales, decreasing margins
Increasing costs – in particular rent and wages
40%
a
27%
Difficulties with cash flow management
16%
Competition – supermarkets, Australia post
7%
Other – including pressures from publishers, oversupply of circulation
10%
a)
survey respondents who identified increasing wages as a key challenge also stated that this increasing cost was due to the Fair Work system.
Source: ARA Survey
Almost half of the survey respondents suggested that decreasing sales would remain a key challenge to their
business. Respondents who highlighted this challenge anticipate this to be an issue due to a loss of consumer
confidence, lower levels of disposable income and customers‟ ability to access circulation online.
6.4 Key opportunities
A key opportunity for the newsagency sector is the ability to source new product mixes. Newsagencies are
incorporating the convenience store model into their businesses by stocking items such as milk, bread and
beverages. These products represent moderate volumes of sales and gross margins.
Newsagencies are also becoming more strategic in stocking products based on the demographics of surrounding
areas. For example, newsagencies situated in communities with a significant migrant population found that the
sale of phone cards and the service of Western Union money transfers have been key drivers of success.
34
About the Australian Retailers Association:
For over 105 years, the Australian Retailers Association (ARA) has been the peak industry body in Australia’s
$292 billion retail sector which employs over 1.2 million people. As an incorporated employer body registered
under the Fair Work (Registered Organisations) Act 2009 and with a range of member services including business
consulting, policy development, advocacy and education, the ARA promotes and protects over 5000 independent
and national retailers throughout Australia.
The ARA’s mission is to continue to be Australia’s leading retail body, promoting and protecting the sector by
creating value for members and the retail industry through advocacy, advice, education and member services.
Visit www.retail.org.au or call 1300 368 041.
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www.retail.org.au | 1300 368 041