New crunch for retailers

The ugly collapse of the remainder of Borders stores yesterday sends a worrying message about Australian retail – not even bargain hunters saw any value in one of the best-known retail chains in this country.

Clearly the business had been terribly managed and was hemorrhaging cash. But it would appear that potential buyers could not see any long-term value in a business getting whacked by online sales, eBooks and high costs, particularly rent.

It didn’t even matter that the company has an extremely strong brand – the market is saying that extracting value from retail businesses is now extraordinarily difficult.

Another challenge to retailers was highlighted yesterday by Target’s boss Launa Inman, who revealed that her product sourcing team is now looking beyond China to find cheap goods.

Rising raw material prices (particularly in China) and big increases in wages mean China’s role as the world’s cut-price factory is now under threat.

According to Inman, buyers are now looking to Sri Lanka, Bangladesh and India, where wages are lower.

Exactly how much of Target’s sourcing could shift from China to cheaper parts of the region isn’t clear, but there is little doubt that retailers are going to be increasingly battling rising costs at a time when consumers are demanding lower prices.

That squeeze could have two outcomes. Either retailers accept further cuts to their profit margins – and thereby risk going the way of Borders – or they start increasing their prices, hopefully backed by improving economic conditions.

But while increasing prices help the retailers, it will mean we are “importing” inflation, thereby putting pressure on the RBA to raise rates.

If that happens, consumers will retreat further into their shells and the retailers will be back to discounting to get sales.

It’s an ugly scenario for retailers and the wider economy.

Let’s hope it doesn’t play out this way, but let’s also be under no doubt that the retail model – buy cheap stuff overseas and build big, national chains in shopping malls to sell it in Australia – is under massive pressure right now.