Got them retail blues

bermuda shopThere was some, but not much, Christmas cheer in the retail sales figures for November, which were released by the Department of Statistics last week.

The report  said sales had risen in November, and that the increase was largely due to Black Friday sales on November 29th.

According to the RSI report, spending rose by 4.7 percent to $87.7 million for the month.

After taking inflation into account, the volume of sales was up 3.7 percent.

That marked the biggest increase in nominal terms since July 2012 and it was also the first time this year that retail sales had increased for two consecutive months.

However, it’s worth remembering that much of the jump was attributed to Black Friday, which saw the widest participation ever. Given that many goods on Black Friday were heavily discounted, this meant that retailers were getting very little margin on their sales, and it will be interesting to see if the heavy discounts resulted in lower sales in December when margins were wider.

Unlike the recent past, when retailers avoided offering discounts before Christmas, this year saw more discounting in the days and weeks before Christmas Day, and anecdotally, it seemed like Hamilton was less busy than it was previus years.

It is sometimes difficult to know what to believe in the RSI. Few retailers will admit to taking part in it, so just where the figures come from is a mystery. And while it tracks overseas purchases declared at the airport, the Department does not track mail order and Internet purchases declared at the Post Office and with couriers.

That means that it is unclear whether the recent decline in overseas purchases (down in seven out of 11 months this year) is due to people travelling less and being more prudent, or if there has simply been a shift to Internet ordering. Indy’s money is on the latter, but who knows?

Still, for all its deficiencies, the RSI is useful for spotting trends and despite the recent upturn, the truth is that retail remains in serious decline.

Despite a small improvement in 2012, retail sales were ten percent lower than they were at the RSI’s peak in 2008. And when the sales are broken down by segment, the reality is even more stark. The RSI uses 2006 sales as a baseline. In 2012, food sales were 27 percent higher, liquor store sales were up 23.7 percent and gas and service station prices rose 14.9 percent. All other sectors have declined, in some cases almost by half.

And it is not as if all the business acumen in Bermuda rests in the food, liquor and service station areas. Prices in those areas have exceeded the sales growth, meaning they have shrunk in real terms. Inconveniently, Statistics uses 2004 as its baseline for tracking inflation and Indy does not have the time to work out the percentages from 2006 right now, even though Indy should do just that.

Nonetheless, between 2004 and 2012, the Index  for food prices had risen 30 percent, for liquor 35 percent and fuel and power prices were up 54 percent.

So it’s no surprise these segments have seen nominal sales increases. You have to eat, and you have to drive, if only to look for a job. Drinking more is a classic recessionary behavior and can you blame us (Oops, them)?

These three sectors have something else in common as well. All three are reasonably Internet-proof.

Amazon.com has not yet figured out a good way to ship ice cream to individual consumers without making a mess, and the same goes for alcohol and gas.

But most other sectors are faced with ever increasing competition from the Internet, and this is something Bermuda retailers are even less well placed than their mainland counterparts to compete again due to the Island’s isolation and high structural costs.

Arguing against Internet shopping is as futile as telling the tide to stop rising, and retailers generally have to learn to adapt. But it is much harder to offer competitive online shopping in Bermuda than it is on the mainland because businesses like Amazon.com succeed due to scale and the incredible variety of goods they can offer. Bermuda businesses can’t do that as the local market is too small.

Other factors hurting retailers include:

  • The recession, which means people have cut discretionary spending.
  • The population decline, both in residents and visitors. Bermuda had an outsize retail sector for its population from the 1950s and earlier until the early-1990s, because 10,000 visitors a week would come to the island, primed to buy sweaters, jewelry, Wedgwood china etc. As the visitor profile changed and numbers fell, they were offset to some degree, as Larry Burchall has ably shown, by “permanent visitors”, international company executives and their families, who wanted SUVs, granite counter tops and all of the other trappings of financial success. That kept the retail sector, construction companies and car dealers happy until the recession came, and 4,000 or so permanent residents left. Since then, retail has been hammered.
  • Isolation and high structural costs (see above). Shipping to Bermuda is insanely expensive, much more so than for much greater distances between larger countries. That’s partly because the vast majority of containers have to be carried back empty, and partly because the economies of scale which come from having larger ships and larger containers don’t exist here.
  • Customs duty means prices are higher from the day goods land, and retailers are stymied because they have to pay the duty before they have sold the goods, tying up cash which could be used to buy more product.
  • Despite the recession, the cost and labour remains high compared to other countries, while the quality of labour, while improved, is still poor. And rents, despite reductions by some landlords (the sensible ones) also remain much higher than they are outside of Fifth Avenue.
  • Discounting: Retailers can take some of the blame for this. To generate cash, prices are cut and goods are sold at a discount. As a result, consumers learn to wait for the sale. As a result, the next round of discounts are deeper and there is even less money to pay labour, rent, taxes etc., let alone to buy more stock, And so the spiral continues until the business closes.

At some point, this may bottom out and the last stores standing will be somewhat sustainable although the lack of competition will lead to a poor product mix, high prices. Mostly, people will buy food, liquor, gas and other Internet-proof products from local retailers, who will also offer other low quality goods like cheap clothes, toys, some household furniture. The rest will come from the Internet, and there will be a lot of empty storefronts if something doesn’t change.

Note: We are not alone. Here are retail trends from Time Magazine.

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