Sales outlook pre and post Christmas 2010

In the lead up to Christmas many retailers went on sale rather than waiting for the traditional post Christmas sale period. But at what cost?

Although the official December 2010 retail sales figures are yet to be released, in its press release on 4 January 2011 the Australian Retail Association ("ARA") anticipated 3.5% sales growth for December 2010 compared to December 2009.

The ARA was also positive on the post Christmas sales period, predicting a 3% growth rate, although whether this eventuates will no doubt depend on the impact of the horrific floods in Queensland.

While the ARA's figures sound like good news, all may not be what it seems.

Retailers that took the opportunity to bring forward their sales to December clearly acted in the interests of their customers. Yet if bringing forward sales to December is a strategy more likely to protect top line sales numbers, I wonder if it is necessarily the right one. If it results in a lower gross profit margin, it could also result in a lower return on capital employed ("ROCE") if overhead costs are not properly controlled. ROCE by definition is:

To meet sales targets, retailers have to stock up. However, it is easy to forget that carrying extra stock can bring hidden costs. For example, by reducing their available cash, retailers may lose access to early payment discounts.

Holding a higher dollar amount of stock also means that a greater EBIT or profit margin is required if a business is to maintain its ROCE. ROCE is a key driver of business value. If ROCE is down, then the business' value can also go down. Clearly a balance needs to be struck between top line sales, cost controls, profit margins and ROCE.

Hence, it is important that retailers bear the significance of ROCE in mind as they complete their planning for this calendar year.

Additionally, businesses need to balance their financial KPIs with their non financial KPIs, such as delivering customer satisfaction, to ensure that their strategic goals are being achieved.

$1,000 GST threshold on imported goods

Another topical point in the retail environment is the debate around the $1,000 GST threshold on imported goods purchased overseas, such as from online retailers.

A number of high profile retailers have sparked a debate, asking for the removal of the threshold to create a level playing field. But it seems that removing this threshold would be administratively impossible. There is no existing government body that would be responsible for collecting GST from offshore online retailers, so I doubt the government will go down this path.

A better approach could be to offer a similar concession to all Australian retailers, as touted by Gerry Harvey. I agree that this is the way forward, although I wonder how easy it would be for the government to implement given the pressure that a number of other sectors in the Australian economy are also currently under. An alternative approach suggested by Independent Senator Nick Xenophon is that the $1,000 GST threshold be extended to small business.

So watch this space for continued debate and discussions around this issue. If you have any comments to share, please get in touch.

Simon File

Principal, Business Advisory