With Woolworths already warning that next year will be the most challenging ever for retailers, the Government’s proposed carbon tax has the potential to be a double-whammy, adding more stress to retailers’ profit margins and growth as the economy continues to tighten.

It is natural then that uncertainty around how the carbon tax will impact Australia is creating a sense of fear, especially when you consider there are only 11 months to go until it kicks in.

Yet, savvy retailers who plan ahead may find the consequences are not as severe as anticipated. Indeed, those who take the initiative and start looking at cost savings now will be in a good position come 1 July 2012.

So, what can retailers do to cushion against the supply chain price rises that will inevitably accompany the carbon tax? And what can we learn from retailers that have already taken steps to strength their markets? 

How many price hikes can your customers take?

In Crowe Horwath’s experience, when any price rise occurs in the supply chain – whether it is rent, cost of raw materials or transportation – many retailers become fixated on how to pass the extra cost onto their customers. Yet, in this economically challenging time, customers are already reluctant to purchase more than essential items; hence, a price hike is a dangerous strategy, especially for discretionary items. David Jones’ shock announcement in July of a profit downgrade after a sharp fall in sales in the final months of the 2010-11 financial year is a sobering reminder of how careful consumers have become.

For smaller retailers with less room to manoeuvre, passing on carbon tax costs to customers undoubtedly has appeal. However, retailers that choose to pass on such costs may discover that the resultant negative growth and strain on profit margins make their businesses uncompetitive and ultimately unsustainable.

All is not lost

There are retailers thriving in the current economic climate. The furore that accompanied Costco’s recent opening of its second Australian store – in Auburn, Western Sydney – reveals how well the retailer is benefitting from Australians’ increasing price sensitivity. Not only does Costco position its stores carefully, its business model, which is to price bulk buys of everyday items at least 10-20 per cent less than its rivals, is highly attractive to customers and poses a threat to Australia’s well-established retailers.

In practical terms, the retailers that will be best prepared for 1 July 2012 will be those that adapt or remodel their businesses to mirror what is happening across the economy, just as Cosco does, starting with a line by line review of your profit and loss statements to identify cost savings.

Kmart is one retailer which is taking advantage of the stringent economic environment by rigorously cutting costs and passing on the savings to its customers. During the two years since Guy Russo took over as CEO, Kmart’s strategy has been to source direct from suppliers in Bangladesh, India and China rather than dealing with middlemen. As a result, prices have been slashed by more than 30 per cent.

For most retailers, which do not have the negotiating muscles of Costco or Kmart, finding ways to cut costs can be more of a challenge. Yet, there is much to learn from the bigger players. It is clear from their examples that a little lateral thinking could be the difference between make-or-break as the carbon tax takes effect. 

What you can do, starting now

The next 11 months will be critical. What really matters is how retailers deal with expenses now, before they go up. Retailers need to get to grips with how the carbon tax will cascade through the economy into their businesses. This means finding ways to shave costs, especially in the areas most impacted by the tax.

Take rent, for example. Even if you are part way through your lease, now is the perfect time to lock in a new deal with better terms. It’s a sign of the times that many landlords are prepared to talk about new lease deals, putting retail tenants who are able to offer, for instance, an extension to their lease in return for discounted rent, in an excellent position.

In the same way you may be able to achieve a better deal with your landlord, your suppliers may also be open to discounts if you have something to offer, such as larger orders. Likewise, are you getting the best deal from your freight or electricity providers?

Better waste management is another opportunity to reduce costs. Reducing waste by recycling instead of throwing items away can cut costs from your P&L, helping to buffer against rising prices once the carbon tax is in place.

Another factor to consider is the labour market. Economic uncertainty makes people hesitant to change jobs and employers may find it becomes more challenging to attract quality staff. Consequently, as the labour market constricts, pressure on salaries will increase. Although this may feel like another slap for retailers, if salaries rise you can justifiably expect more in return from staff. We have seen retailers grow sales by introducing incentives or commissions and ensuring their staff undergo proper sales training to improve the customer experience.

Simon File is a retail specialist with Crowe Horwath, a member of the WHK Group