By Melinda Upton, Jessie Buchan and Courtney Adamson (Sydney)

Prior to 2014, the majority of large global retailers were electing to take a somewhat soft approach to their entry into the Australian retail market.  By opening up websites locally and/or shipping to Australia via online means, overseas retailers were able to follow a low-cost, low-risk way of entering a new market to test the waters before investing further.  One company that successfully followed this approach is US homewares giant Williams-Sonoma.  The company elected to introduce Australian consumers to its products and brand online before investing in bricks and mortar stores.  By the time Williams-Sonoma launched its ambitious plans to open stores domestically, Australia had already become its largest market outside North America thanks to its online presence.

Williams-Sonoma has since been joined by a collection of overseas department stores, such as H&M and Uniqlo, as well as fashion chains such as Zara and Topshop, that are pursuing organic growth in the Australian retail sector through a strong physical presence.

In 2014, these major global players showed a willingness to jump into Australian waters that they had once only been willing to test.  April 2014 saw H&M open its flagship store in Melbourne, with a second store opening in Sydney’s outer metropolitan region six months later.  That same month, Japanese company Fast Retailing opened its first store in Sydney through its Uniqlo brand.  By the end of 2014, it had established a further three stores in Australia.  In October 2014, Forever 21 opened its first store in Brisbane, quickly followed by a second store in Sydney and the leasing of further retail space on Sydney CBD’s main shopping strip, Pitt Street Mall.  Existing global retailers also introduced new brands into Australia during this time, such as French LVMH Group’s hugely successful cosmetic brand Sephora.

The retail architecture of Australia’s major shopping locations, such as Pitt Street Mall in Sydney, has changed dramatically as major international brands have stamped out large retail spaces.  These global competitors are being received well by more and more Australian consumers, and this has translated into strong performance and sales.  The most successful global brands that now operate in Australia operate in the realms of either apparel and footwear or supermarkets.  The experience of Swedish brand H&M provides a good example of the positive reception and rapid impact that international brands are having on the Australian market.  After only a few months of trade in 2014, H&M identified the Australian retail market as one of its strongest sales markets globally when sales hit more than AU$65 million.

However, since 2014, there have been a number of structural changes in the Australian economy, such as a sharp fall in the value of the Australian dollar, which have accelerated the pace of change within the industry.  This has prompted both overseas and domestic retailers to reassess their strategies for securing a profitable presence in the Australian retail market.

To illustrate, by the end of 2014, acquisitions of domestic retailers by international companies began to dominate transitions within the market.  This trend continued throughout 2015 and, due to the weaker Australia dollar, falling share prices and low interest rates, it is set to continue into 2016.  Domestic retailers are now more attractive to overseas buyers than they have been for years.

Recent examples of foreign buyer activity include South African based retailer Woolworths’ acquisition of David Jones.  By adding this new acquisition to a portfolio that already includes Australia’s Country Road brand, Woolworths has since become a major player in the Australian retail market.  Steinhoff Holding, another foreign entity that already holds significant operations in Australia in the form of retail brands Freedom, Snooze and Poco, also took ownership in Australia of the discount department store chains Harris Scarfe and Best & Less following its AU$6.7 billion global acquisition of Pepkor.

Given that the majority of the world’s leading global retailers with current operations in Australia are US companies, many would expect that inbound interest will continue to flow from the same direction.  However, inbound trends for mergers and acquisitions indicate that deals are flowing in from Asia but are priced in currencies linked to the US dollar.  This reinforces observations that Australia is being seen as an increasingly important retail market in the Asia Pacific region.

Interestingly, despite previous efforts to create greater commercial ties between Australia and China in the retail sector, of the eight strongest performing Chinese retailers that were included in Deloitte’s list of 250 leading global retailers (see Deloitte’s Global Powers of Retailing 2015:  Embracing Innovation report), none hold any operations in Australia.  However, in the wake of the 2015 China-Australia Free Trade Agreement, Chinese retail investors are more frequently looking to the Australian retail sector as an attractive, safe and receptive place to invest.

With a market outlook that is largely favourable to inbound global retailers and investors for 2016, a question that remains is the effect market conditions are having and will continue to have on Australia’s domestic retailers.  The falling Australian dollar has in some ways enabled price distortions that existed between products sold in Australia and overseas to correct.  Products sold by Australian companies are once again becoming more attractive in terms of price to domestic consumers, and the upward price pressure on a range of imported goods is making international purchases seem somewhat less attractive than domestic offerings.  However, a weaker Australian dollar has also increased costs for imported goods.  This combined with increased competition from overseas is crunching Australian retailers’ once world-high retail margins.

The pace of change in the retail landscape in Australia continues to adapt and evolve.  As global players continue to enter the market and expand their store footprint at a rapid pace, Australian retailers will continue to face significant challenges beyond their ability to manage costs and pricing.  Rather, their efforts to innovate online, drive improved processes and maintain consumer loyalty will be critical to their ability to remain competitive in Australia’s existing and future retail market.  Likewise, as it becomes more difficult for offshore retailers to establish a presence in Australia organically because of increased competition, and with an exchange rate tailwind behind them, it is likely that we will continue to see such retailers take a more aggressive approach to gain a foothold in the Australia market.  Either way, the rapid transformation is set to continue.