Running out of puff

Australia’s tobacconists and small speciality retailers – a category that includes delis, milk bars, corner stores and convenience stores – are under pressure.

Not only is consumer sentiment falling rapidly, but the market power of Australia’s supermarket chains makes it difficult for one or two person stores to compete.

IBISWorld estimates that this industry will grow at an average annual rate of just 0.5% over the five year period to 2008-09, despite the fact industry revenue has actually grown.

While many Australians have become more health conscious and adopted healthy lifestyles, there have also been increases in overweight and obese people and demand for confectionary has grown.

Perhaps surprisingly, the tobacco industry has also experienced growth, with a slight increase in per capita consumption for individuals – mostly teenage smokers – and higher prices for tobacco products. Demand for ham, cheese and small goods has also grown.

Unfortunately, much of this growth has been taken by supermarkets through competitive prices and diversification, forcing out smaller players.

IBISWorld forecasts that this industry will grow at an average annual rate of 0.4% over the five year period to 2013-14. Competitive pressure from supermarkets and other grocery stores will remain strong over the next five years.

The majority of this competition will be price-based, and as a result retailers will increasingly choose to differentiate themselves rather than try and match supermarket prices.

Per capita consumption of confectionery is unlikely to increase significantly over the next five years, due largely to continued concerns about the health effects of sugar and fat consumption. Demand levels will also be affected by continued competition from supermarkets.

On the other hand, growth in consumer demand for vitamins and supplements will increase as consumers seek natural alternatives to traditional medicines.

The increase in sales will be aided by growth in disposable income levels. However, tobacco sales will not benefit from this and are expected decline. Industry employment and wages are also set to rise, albeit slightly due to the low growth in stores.

Key success factors for operators in the industry

• Ability to franchise operations. Due to the fragmented nature of this industry, operators benefit from belonging to a franchise group that maximises brand awareness among consumers and provides extensive store coverage.
• Ability to control stock on hand. Operators should ensure that they have sufficient stock controls to manage stock levels during peak seasons for some goods, such as chocolate at Easter and Christmas.
• Having a clear market position. Operators should ensure that they provide a clear and consistent image of the company, the goods they offer and their target market.
• Production of goods currently favoured by the market. Operators should take account of the local demand for small goods, confectionery etc (in particular ethnic concentrations).
• Experienced workforce. Staff employed by this industry should be knowledgeable about the products they sell, be able to provide accurate and valuable information to consumers, and assist in the daily store operations.
• Attractive product presentation. Stores should offer a clear layout for consumers in which stock is presented in an efficient and attractive manner to consumers.

Products and service segmentation

Geographic spread

BISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au