Soaring expenses is costing Australian retailers their profit margins, according to a study by BDO.

BDO’s inaugural ‘Spend Trend’ report, which examines 18 ASX-listed retailers, found that while retail turnover and margins have remained relatively flat, expenses are rising as a percentage of sales, which has led to a drop in net-profit margins of 70 per cent over the past three years. 

According to John Bresolin, partner at BDO and author of the Spend Trend report, this is due to high fixed costs such as salaries and rent, coupled with asset write downs and a significantly increased marketing spend.

“Controlling fixed expenses is among the biggest challenges faced by retailers.  For specialty retailers, aggregated salaries, wages, rent and marketing expenses as a percentage of sales increased from nearly 34 per cent in financial year 2010 to 41 per cent in financial year 2012,” he said.

“The major increase was as a result of marketing and selling expenses which, when expressed as a percentage of sales, increased by 70 per cent over the three year period.

“So while looking to keep employee and rental costs under control, marketing spend has increased significantly as retailers compete for market share, which has significantly impacted retailers’ profits, given the relatively flat revenue levels.”

However, when Australia’s two largest listed retailers Wesfarmers and Woolworths are included in the examination, the results are far less severe.

“Wesfarmers and Woolworths have withstood the economic pressures better than specialty retailers thanks to their diversity and presence in commodity product areas, namely food, beverage and petrol,” Bresolin.

“However, specialty retailers have suffered far more due to the discretionary nature of their business. While people will always need to buy groceries, alcohol and fuel, occasional high-value discretionary purchases like televisions, whitegoods, fashion items, etc can either slip off their shopping list or can be more easily sourced through the multitude of overseas websites, invariably at a significant discount.

Despite the difficult economic environment, Australian household spending is increasing, albeit at a faster rate than retail revenue.

Simon Scalzo, BDO head of retail said this finding reinforces the view that spending isn’t taking place in Australian retail stores. 

“In addition to the increasing ease and convenience of online shopping, the high Australian dollar has also played a critical role in the decline of Australian revenue levels. 
Not only are online retailers more attractive, the high dollar is dampening incentives for inbound purchases; whether it’s shoppers purchasing Australian products online or tourists spending money whilst holidaying in Australia.”

“Moreover, discretionary items are products that lend themselves perfectly to online purchasing, where the selection and buying process involves research and more often than not, global price and product comparisons.”

Surprisingly, despite the dwindling profit margins, increased gearing and reducing stock turnover, many retailers haven’t reduced the rate at which they pay their creditors.

“Reducing your payment rate is a common business tactic during difficult trading conditions when cash flow is difficult to maintain.  Why retailers are not doing this is uncertain, but perhaps this is something they could consider to help shore up their cash reserves,” he said.  

Commenting more broadly, Bresolin noted that despite the fact the retail sector’s average gearing levels have increased significantly over the last three years, they remain at reasonable levels when compared to many other industry sectors.

“The average gearing level for the retail sector in Australia is around 30 per cent.  While this is no cause for alarm, the trend in gearing levels is rising.  For example, specialty retailer gearing ratios increased by more than 60% over the three year period,” he said.