It has been a bad month for retailers already.
It has been a bad month for retailers already.

The killing season: Why so many retailers have gone bust

What's going on in retail? January is supposed to bring respite.

The first month of the year is not usually a big time for retail insolvencies - in fact, with Christmas spending money keeping them afloat, January is traditionally the quietest month for retailers going broke.

But in 2020 the killing season appears to be here early, and it is taking down big names. Harris Scarfe went in December. And if that wasn't enough for you, Jeanswest raised its hand in January, admitting it was all over.

Between the two of them, around 3000 jobs are at risk. Women's clothing retailer Bardot went into administration even earlier and is now at the point where it is closing stores.

Most retailers have not come clean yet about Christmas trading, but several who have admit it was not good. That suggests 2020 could bring a lot more insolvencies. As the next graph shows, February usually brings a lot more retail busts than January. The ugly January we're having is a grim portent for the year ahead.

 

January could just be the start of the collapses.
January could just be the start of the collapses.

 

WHAT IS 'ENTERING ADMINISTRATION?

Administrators are experts who take over companies that are broke. Their job is to salvage something out of the mess.

What they do is get together everyone who is owed money and try to agree on a plan. The plan usually involves cutting costs by closing stores and trying to sell off the remaining business. Sometimes a buyer can be found and sometimes it can't.

A company that goes broke usually has a lot of debts. The big advantage an administrator has is once a company is in administration not all debts are equal. Some people will get their full money, others will not.

Staff payments are the highest level of debts, so they get paid first. Then bank loans get paid off. Suppliers are usually at the back of the list, and when administrators take over, tradies and other people who supplied things to Jeanswest might find their best option is to agree to get a few cents back for every dollar they were owed.

BUTTONS AND ZIPS

There's one thing the retailers who've gone broke have in common. They're selling clothing.

Clothing is an extremely tough market because we've come to expect clothes to be really, really cheap.

I remember paying around $70 for a pair of jeans in the 1990s. I'd expect to pay the same now. Or, more likely, less.

This is partly because cotton farming has got efficient and the price of cotton has barely changed in 30 years.

But mostly because cutting and hemming has moved to low-wage places. Even China is too expensive to make most clothes these days and the sewing machine jobs have moved to Bangladesh.

Here's a graph of clothing price inflation over the past few decades compared to food inflation. The difference is spectacular.

The clothing index was twice as high as food in the 1970s and rising fast. Then it suddenly stopped. In a way, this is great. It means everyone can clothe themselves these days - poverty doesn't mean wearing rags any more.

 

Why our clothing is so cheap.
Why our clothing is so cheap.

On the one hand, with prices lower, we buy more clothes. That's helpful for clothing retailers. But low prices also mean low margins, and that's tough, especially when competition gets intense. Not everyone can survive.

WHO'S NEXT?

Australia simply has a lot of clothing retailers - not only major brands like Just Jeans, Country Road, and Cotton On.

There's also Politix, Sussan, Tarocash, Dangerfield, and many more. They're familiar to anybody who has ever wandered around a shopping centre.

But right now, competition is intense. Kmart and Target are selling basics really cheaply. The Iconic and Asos are providing the latest in fashion-forward choices online.

And Uniqlo is dominating the middle, selling reasonable quality plain clothing to mainstream dorks like me. Uniqlo sales in Australia jumped from $245 million two years ago to $305 million last year. I used to browse places like Just Jeans. Not any more.

2020 is shaping up to be a killing season for retail - especially clothing retail. The only remaining question is this: Who's next?

Jason Murphy is an economist. He is the author of the new book Incentivology. Continue the conversation @jasemurphy



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