tag:theconversation.com,2011:/id/topics/company-results-2016-30905/articlescompany results 2016 – The Conversation2016-10-03T23:42:33Ztag:theconversation.com,2011:article/660372016-10-03T23:42:33Z2016-10-03T23:42:33ZAustralian corporate social responsibility reports are little better than window dressing<figure><img src="https://images.theconversation.com/files/140073/original/image-20161003-20213-1k7k494.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Despite the increased focus on corporate social responsibility, businesses don't seem to be cleaning up their act.</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>Despite increasing visibility of corporate social responsibility (CSR) initiatives over the last decade, real change in corporate behaviour has tended to be modest. </p>
<p>This is clear from the sections in financial reports from Australian companies listed on the stock exchange that cover social and environmental initiatives.
For example, only a fraction of Australian firms report transparently, using <a href="https://www.globalreporting.org/standards/g4/Pages/default.aspx">suggested guidelines</a> when publishing annual reports. Instead, there are carefully tailored public relations documents, fancy media campaigns, and glossy reports that showcase the firm’s social good deeds. This weighting of image over substance, and <a href="http://www.afr.com/leadership/management/corporate-social-responsibility-has-an-image-problem-but-dont-kill-it-20160229-gn6cma">spin over objectivity</a>, leaves us questioning whether social initiatives today are simply window dressing. </p>
<p>According to the longest running study of CSR by the <a href="http://accsr.com.au/wp-content/uploads/2015/04/ACCSR_State_of_CSR_2014_FINAL020614.pdf">Australian Centre for Corporate Social Responsibility</a>, Australians believe that progress in CSR has remained slow and insufficient over the last decade. The same study reports that compared to ten years ago, today there is at least an awareness of CSR. </p>
<p>It seems the majority of Australian businesses are just aware rather than truly integrating CSR into what they do. For example, although <a href="http://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tpgyw/file/annual-reports/2016AnnualReview.pdf">Qantas</a> focuses increasingly on addressing its approach to and role in global sustainability, the balance of its latest annual reporting on sustainability in 2016 seems predominantly about the emerging possibilities for Qantas, rather than reducing damage to the environment caused by the company’s CO2 emissions. </p>
<p>Similarly, <a href="http://www.bhpbilliton.com/%7E/media/bhp/documents/investors/annual-reports/2015/bhpbillitonsustainabilityreport2015_interactive.pdf">BHP</a> states in its latest annual report that:</p>
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<p>“Sustainability is core to our business strategy and integrated into our decision-making. It helps us live our charter values of putting health and safety first, being environmentally responsible and supporting our host communities”. </p>
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<p>However, the same report also informs about five fatalities and two significant community incidents in 2015 alone, as well as the disastrous Samarco tailings dam collapse in Brazil. It seems that the company is all talk and no strategic action.</p>
<p>Another example is ANZ bank, which sets its yearly and half-yearly sustainability targets in a separate sustainability report. But, while the bank’s <a href="http://www.shareholder.anz.com/sites/default/files/anz_2016_half_year_corporate_sustainability_report_-_030516_final_9.45am.pdf">2016 report</a> shows that the organisation wants to improve its sustainability deeds, targets like “improving customer satisfaction ranking” are what the organisation should be striving for anyway in order to achieve its yearly profit. </p>
<p>In getting companies to do better, there are various motivations. This could come from increasing regulations, class action lawsuits, and social movements holding firms accountable not just for their misdeeds, but their very existence. An example of such jurisdictions is South Australia’s <a href="http://www.abc.net.au/news/2016-08-02/sportsbet-hits-out-at-sa-governments-online-betting-tax/7680514">“Punters Tax”</a> where 15% of South Australians’ losses will be payable in tax by online betting agencies, in part to assist with gambling addiction. We expect other jurisdictions to follow with similar taxes.</p>
<p>However good initiatives should also be encouraged and promoted. Working with communities to proactively mitigate the potentially damaging consequences of business activities can create significant long-term benefits for generations to come. For example, <a href="http://fmgl.com.au/community/five-star-program/aboriginal-cadetships/">Fortescue Metal’s</a> commitment to training and employing indigenous workers could change the lives of thousands of young people in the Pilbara.</p>
<p>Judging from the CSR reports of Australian companies above, businesses here seem to have at least understood in the last decade that the social and natural environments within which they reside are intertwined with their own existence. But, as there is no national standard on exactly how deep CSR must be entrenched in Australian companies’ strategies, the approach by even the largest firms towards CSR remains operational at best. </p>
<p>If firms truly want to incorporate CSR into their long-term strategy, then this is where CSR needs to sit right in the heart of the firm. Every action that follows, every move the firm does will then simply be a way of communicating this central cause.</p><img src="https://counter.theconversation.com/content/66037/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Rice is affiliated with the NTEU.</span></em></p><p class="fine-print"><em><span>Stephanie Schleimer does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Publicly listed Australian companies are still falling short of proper corporate social responsibility, judging by most recent reports.Stephanie Schleimer, Senior Lecturer in Strategy, Griffith UniversityJohn Rice, Professor of Management, University of New EnglandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/633962016-09-09T03:31:44Z2016-09-09T03:31:44ZCompany results wrap: weighing up the risks behind the profits of Australia’s big four banks<p><em>Companies have finished reporting results for the financial year so it’s time to take stock of how the different business sectors of Australia are fairing. In our <a href="https://theconversation.com/au/topics/company-results-2016-30905">company results wrap series</a> we take a step back from the short-term focus of quarterly profit and loss statements and examine what big picture factors are at play</em></p>
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<p>The biggest Australian banks are fairing well in a year of increased pressure to reform from politicians, international events like the Britain’s exit from the European Union and more regulation from the Australian Prudential Regulation Authority (APRA).</p>
<p>A number of interrelated factors have contributed to the relatively strong performance of the Australian banks. For instance, the banks have limited exposure to the types of securities which led to massive losses for their counterparts in other countries. The banks also heavily rely on domestic loans, particularly the low risk household sector, so better lending standards and a proactive approach to prudential supervision by APRA may have contributed.</p>
<p>The <a href="http://www.bis.org/bcbs/basel3.htm">Basel III regulatory requirements</a>, brought in after the 2008 financial crisis, emphasise holding an increased amount of subordinated debt, as a measure of market discipline. However all the big four banks are holding less and less subordinated borrowings. More specifically, it declined by more than 50% from 2007 to 2014, according to our calculations. </p>
<p>APRA limits banks’ holdings of higher risk securitised assets, these are loans packaged into securities, to a maximum of 25% of the banks’ loan portfolio. These are high risk if not properly understood or defined, as happened with United States home loans, blamed for the start of the global financial crisis.</p>
<p>When Australian banks calculate bank capital requirements, they need to fully account for securitised assets. This is a rule from APRA that goes beyond international standards, to reflect the risk inherent in these products. </p>
<p>Inter-bank liquidity tightened significantly with all banks increasing their holdings of <a href="http://www.rba.gov.au/media-releases/1999/mr-99-02-role.html">Exchange Settlements Accounts at the Reserve Bank</a>, this a form of low risk liquidity. Australian banks have lower interbank deposits compared to their Europe and USA counterparts and are also heavily involved in long term wholesale funding and are required to hold more liquid assets including government debt to deal with liquidity. All of this makes Australian banks less risky in times of crisis because spillover effects from other banks are less likely.</p>
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<a href="https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1251&fit=crop&dpr=1 600w, https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1251&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1251&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1573&fit=crop&dpr=1 754w, https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1573&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1573&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">The big four.</span>
<span class="attribution"><a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
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<p>There has been a significant increase in concentration in the Australian banking industry since the global financial crisis. For example with Westpac and the Commonwealth Bank of Australia taking over St. George Bank and Bank West, respectively.</p>
<p>Following mergers, the big four account for 88% of the Australian banking system assets. This reinforces the idea that the banks are <a href="http://www.afr.com/business/banking-and-finance/financial-services/too-big-to-fail-is-alive-and-well-20151025-gkhvpq">“too big to fail”</a>. </p>
<p>The banks have also moved to more fee generating activities, which increases risk, but to a lesser extent in Australian banks. Data shows between 1998 and 2014, on average, 1.2% greater interest income was generated relative to non-interest income for Australian banks, according to our analysis. However, there is also similar evidence for the top eight publicly-listed Canadian banks. They exhibit on an average, a 2.5% increase in net interest revenue relative to non-interest income over the same time period. </p>
<p>This reinforces that Australian and Canadian banks demonstrated extra ordinary resilience during the credit turmoil in the global financial crisis. The World Economic Forum in 2008 reported that Australia and Canada were among <a href="http://www.reuters.com/article/us-financial-soundest-banks-idUSTRE4981X220081009">the top four safest banking systems in the world</a>. </p>
<p>Large banks in Australia are active in international markets through direct ownership of foreign based banks and having offshore operations as a source of capital. Deregulation of banking in countries such as the USA, Canada, Australia and many developing countries has opened up new markets for foreign banks. Australian banks’ largest international exposure is to New Zealand, where all big four banks retain sizeable operations. </p>
<p>Although the growing interdependence among international economies and financial markets is certain to continue, the impact of Brexit on Australian banks remains minimal. It remains to be seen in the long-run how Australian banks will weather the international banking/economic developments.</p>
<p>As a last measure of the bank health, we can measure the domestic systemic risk with <a href="http://onlinelibrary.wiley.com.ezproxy.library.uq.edu.au/doi/10.1111/j.1467-8462.2013.12008.x/abstract">a methodology</a> based on <a href="http://www.bis.org/publ/bcbs255.htm">one used by the official Basel Committee on Banking Supervision</a>. Based on July 2016 monthly data, the big four banks account for 80.38% of the systemic risk in the financial system and the riskiest, from highest to lowest, are the National Australia Bank, the Commonwealth Bank of Australia, Westpac and ANZ.</p><img src="https://counter.theconversation.com/content/63396/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mamiza Haq receives funding from Australian Research Council. </span></em></p><p class="fine-print"><em><span>Necmi K Avkiran does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Australia’s big four banks are managing risk well, this could be contributing to their strong performance.Mamiza Haq, Lecturer in Finance, The University of QueenslandNecmi K Avkiran, Associate Professor in Banking and Finance, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/645422016-09-07T20:09:00Z2016-09-07T20:09:00ZCompany results wrap: is the resources downturn structural or cyclical?<p><em>Companies have finished reporting results for the financial year so it’s time to take stock of how the different business sectors of Australia are fairing. In our <a href="https://theconversation.com/au/topics/company-results-2016-30905">company results wrap series</a> we take a step back from the short-term focus of quarterly profit and loss statements and examine what big picture factors are at play.</em></p>
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<p>Some well known resource stocks in Australia have reported major losses, including <a href="http://www.bhpbilliton.com/investors/reports/bhp-billiton-results-for-the-year-ended-30-june-2016">US$6.38 billion for BHP Billiton</a> over the past year and <a href="https://www.santos.com/investors/company-reporting/">US$1.1 billion for Santos</a> over the past six months. These losses have largely been driven by lower commodity prices, which in turn is the result of a slowing Chinese economy and weak global growth rates. But the bigger question is whether this most recent downturn is heralding a long term decline in mining activities.</p>
<p>Commentators throughout history have predicted that minerals and energy production would eventually decline because of resource depletion and rising costs. One of the most well-known theories is Peak Oil, <a href="https://www.princeton.edu/hubbert/the-peak.html">originally developed by King Hubbert in the 1950s</a>. This theory explained how many oil fields have a bell-shaped production function from discovery through to exhaustion. This was used to predict the year and level of when the industry would hit maximum supply. Since then this same concept of an inevitable ‘peak’ has been widely applied to other commodities, to describe when global production might reach maximum levels.</p>
<p>However these predictions of maximum production outputs continue to be surpassed. Hubbert’s original projections were that global oil production would peak in 1995 when actual annual production has continued to grow steadily since then <a href="http://www.bgs.ac.uk/mineralsuk/">to be about 55% higher</a>. In fact the slump in oil prices since 2014 have largely been caused by excess supply (together with the effects of lower growth in China and other economies).</p>
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<p>Understanding why resource production continues to grow even when depletion must be occurring, provides some hints as to the future of commodities. The first is that mineral commodities tend to be driven by long term cyclical forces, particularly on the supply side. </p>
<p>Higher resource prices, as seen in the 2003-2012 resources boom, drove huge investments into new production, both in Australia and overseas. That growth in supply is now maturing because of the long lead time to get new projects developed, with virtually no new projects approved since 2012. Oversupply causes lower prices and shuts off new projects; there is often a long hiatus until the next boom because of an expanding supply base and the buffering effects of inventories. </p>
<p>The second pointer is that there are a variety of structural factors that shift both supply and demand. The key factors on the supply side are new discoveries and better technologies; these increase potential supply over time. </p>
<p>On the demand side, increased development of renewables and more efficient energy systems can systematically lower fossil fuel demand, while countries typically have lower metals requirements once industrialisation has been achieved. It was the combination of cyclical forces, such as lower economic growth, and structural changes in both supply and demand factors that led to the post-2012 slowdown in commodity prices.</p>
<p><a href="https://theconversation.com/chinas-energy-transition-effects-on-global-climate-and-sustainable-development-30883">Some analysts</a> have focused on the structural changes, arguing for example that greater generation of renewable energy and improved productivity will lower fossil fuel demands permanently. However it is unlikely that structural changes have been enough to date to outweigh increases in demand when the economic cycle moves more strongly into a growth phase. </p>
<p>For example the <a href="http://www.worldenergyoutlook.org/media/weowebsite/2015/WEO2015_Factsheets.pdf">International Energy Agency in 2015 predicted</a> that world energy demand would grow by nearly one-third between 2013 and 2040, and even though renewables will be the fastest growing sector there is still likely to be some growth in coal and oil consumption to meet the balance of needs.</p>
<p>The third pointer is that the major slump in commodity prices over the past three years has focused the minerals sector on cost-cutting and efficiency. This has been more intense than in previous downturns, but the end result is that production costs are much lower than in 2012. </p>
<p>As a result, any rebound in resource prices, as has occurred across some commodities this year, will not have to be as large for operations to be profitable. In essence the cyclical downturn has forced a structural reduction in operating expenses that will make the industry more resilient to future commodity cycles.</p>
<p>This broad summary papers over a number of factors that influence individual commodities; these include government regulation, exploration policies, controls on supply, market access, taxation and support policies, infrastructure access and charges, labour markets and technology drivers. While those factors help to explain movements between sectors, it is the cyclical forces of global demand and global supply that drive prices and returns for Australian companies. </p>
<p>Analysts should also keep in mind that the company accounting systems do not fully reflect all environmental costs; for example responsibilities for mine rehabilitation <a href="https://www.qao.qld.gov.au/reports-parliament/environmental-regulation-resources-and-waste-industries">tends to be underestimated</a> and there is no current system to internalise the spillover costs of greenhouse emissions. Regulatory and accounting systems need to be improved so that all environmental impacts and liabilities are fully recorded, particularly if a cyclical upturn in the future stimulates growth again in the sector.</p><img src="https://counter.theconversation.com/content/64542/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Rolfe currently leads a research project on mine closure with funding from the Australian Coal Association Research Program.</span></em></p>The mining industry is more resilient because of the recent downturn and it will be global supply and demand that will affect these companies in the future.John Rolfe, Professor of Regional Economic Development, School of Business and Law, CQUniversity AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/650322016-09-07T06:24:32Z2016-09-07T06:24:32ZBusiness Briefing: disrupted companies will need to think global to survive<p>Australian companies should better manage the expectations of shareholders who increasingly expect dividends and focus more on meeting the needs of global consumers, says UNSW Adjunct Professor Paul X. McCarthy.</p>
<p>That’s his advice for companies dealing with the disruption brought on by digital platforms. Aside from the price of iron ore affecting the big end of town in this year’s results, the major disrupter is the movement of advertising dollars to online global channels and marketplaces, such as multinationals like Uber, Google and Facebook.</p>
<p>He explains that sectors that were previously thought to be sheltered from the forces of digital disruption, such as legal services and real estate, are now facing the same challenges as other sectors.</p>
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<p><em>Read more analysis on the bigger picture of what is happening in Australia’s business sectors, in our <a href="https://theconversation.com/au/topics/company-results-2016-30905">company results wrap series</a>.</em></p><img src="https://counter.theconversation.com/content/65032/count.gif" alt="The Conversation" width="1" height="1" />
Australian businesses need to focus more on the global market and less on giving generous dividends to shareholders.Jenni Henderson, Section Editor: Business + EconomyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/635972016-09-06T20:11:03Z2016-09-06T20:11:03ZCompany results wrap: energy companies are facing disruption<p><em>Companies have finished reporting results for the financial year so it’s time to take stock of how the different business sectors of Australia are fairing. In our <a href="https://theconversation.com/au/topics/company-results-2016-30905">company results wrap series</a> we take a step back from the short-term focus of quarterly profit and loss statements and examine what big picture factors are at play.</em></p>
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<p>The energy sector is dealing with a complex mix of relationships between consumer trends, global commodity markets, and state, federal and industry regulation. Because large established companies in electricity generation and distribution and coal and natural gas export have a lot of influence in this process, Australian energy regulations reflect more traditional energy provision rather than global trends where renewable energy is becoming more prevalent. </p>
<p>State governments are currently coming to terms with the regulatory changes needed to accommodate public support for disruptive technology. One example is the ongoing adoption of ride-sharing company Uber. However this same pragmatism needs to be reflected in preparations for the provision and consumption of energy in Australia. The energy companies that are prepared for this disruption will survive and flourish, while those that cling to traditional structures will struggle.</p>
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<h2>Evidence of disruption</h2>
<p>Globally energy companies are already showing signs of being affected by the looming disruption. Coal miners have been subjected to multiple forces over the last decade, but the changing landscape associated with new forms of energy, is a strong influencer of their performance. Coal companies in the US are facing dwindling share prices or bankruptcy <a href="http://www.peabodyenergy.com/content/2625/chapter-11-protection">like Peabody Energy</a> and <a href="http://www.wsj.com/articles/arch-coal-in-new-deal-for-bankruptcy-exit-plan-1467732739">Arch Coal</a>.</p>
<p>Tesla’s share price, which increased from US$28.52 in August 2012 to US$220 in August 2016, is more than double that of more traditional vehicle company Toyota. Toyota has experienced moderate growth from US$79.62 in August 2012. With electric vehicles forcing themselves into the motor vehicle market, technological disruptors like Tesla are seen as more likely to succeed than traditional motor vehicle companies like Ford.</p>
<p>West Texas Intermediate, a benchmark international oil price, declined from US$133 a barrel in July 2008 to US$45 a barrel in July 2016. This followed a slowdown in global growth after the global financial crisis and <a href="https://www.eia.gov/finance/markets/supply-opec.cfm">increased production of oil in Saudi Arabia</a>, which some claim is to <a href="http://www.forbes.com/sites/panosmourdoukoutas/2016/04/16/the-real-reasons-saudi-arabia-wont-support-oil-prices-above-40/#25999cf513d0">gain market share</a>. Coal prices for export from Australia have fallen from A$180 a tonne in July 2008 to A$63 a tonne in July 2016 as <a href="http://www.lowyinterpreter.org/post/2016/07/22/Chinas-coal-cuts-continue-amid-boom-in-redundant-coal-fired-power-stations.aspx">China’s voracious appetite for coal has declined</a>. </p>
<p>International natural gas prices have also declined because in Europe the natural gas price has been referenced to the oil price. Separate to this, the US price of natural gas declined as a result of new drilling technologies which released huge quantities of natural gas onto the US market, dragging down the price. </p>
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<a href="https://images.theconversation.com/files/135228/original/image-20160823-30246-1mv5am2.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/135228/original/image-20160823-30246-1mv5am2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/135228/original/image-20160823-30246-1mv5am2.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/135228/original/image-20160823-30246-1mv5am2.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/135228/original/image-20160823-30246-1mv5am2.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/135228/original/image-20160823-30246-1mv5am2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/135228/original/image-20160823-30246-1mv5am2.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/135228/original/image-20160823-30246-1mv5am2.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Global energy prices.</span>
<span class="attribution"><span class="source">World Bank Commodity Price Data</span></span>
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<p>Many of these global trends are apparent in Australia too. Coal export prices have caused concerns for existing companies to the extent that <a href="https://www.australianmining.com.au/news/bhp-dumps-plans-for-another-3-coal-mines/">new mine development has been shelved</a> since 2008. Coal mine <a href="http://www.abc.net.au/news/2016-02-08/mining-queensland-resources-council-royalties-local-council-tax/7147570">profits have dwindled</a> and <a href="http://www.theherald.com.au/story/3633769/2016-has-everything-and-nothing-before-us/">job losses abound</a>.</p>
<p>Ambitious plans for <a href="http://www.smh.com.au/business/shell-shelves-plans-for-arrow-lng-project-in-queensland-20150130-132ahz.html">coal seam</a> and natural gas extraction for export to Asian markets <a href="http://www.abc.net.au/news/2016-03-23/woodside-abandons-browse-lng-project-kimberley-coast/7269556">have been curtailed</a> with some experts <a href="http://www.afr.com/business/energy/gas/energy-expert-fereidun-fesharaki-lng-pain-still-to-come-as-market-adjusts-to-glut-20160615-gpk4hg">predicting still further price declines</a> in response to oversupply. </p>
<p>While there have been recent small upticks in prices, the trend for Australian primary energy company share prices since early 2014 has been downwards.</p>
<h2>Challenges facing the Australian electricity generation sector</h2>
<p>The electricity sector in Australia is facing multiple challenges. Electricity consumption has <a href="https://www.aer.gov.au/wholesale-markets/wholesale-statistics/national-electricity-market-electricity-consumption">declined since 2009</a> and is <a href="http://www.aemo.com.au/Electricity/National-Electricity-Market-NEM/Planning-and-forecasting/-/media/080A47DA86C04BE0AF93812A548F722E.ashx">forecast to increase only slightly by 2035/6</a>. The closing of large energy users like the Kurri Kurri aluminium smelter and the Clyde Oil refinery, and a shift by residential consumers to the consumption of electricity from solar panels have contributed to this trend. </p>
<p>This is coupled with increasing supply of energy from low marginal cost wind power which, if the <a href="https://www.aemo.com.au/Electricity/National-Electricity-Market-NEM">Australian National Energy Market</a> is working as designed, <a href="https://theconversation.com/electricity-prices-fall-renewable-energy-deserves-merit-13300">reduces the spot price for electricity</a>. </p>
<p>Many electricity generators have launched or acquired retail businesses to market directly to customers. AGL and Origin are the two largest of these “gentailers”, with a combined 56% of the small customer market in the eastern states. However, there is potential for disruption to this existing industry model. <a href="http://pv-map.apvi.org.au/analyses">1.57 million households</a> now have solar panels on their roofs, and <a href="https://www.climatecouncil.org.au/uploads/ebdfcdf89a6ce85c4c19a5f6a78989d7.pdf">residential batteries</a> are expected to increase consumer control of residential electricity.</p>
<p>Startups like <a href="http://www.sunverge.com/">Sunverge</a>, <a href="http://www.repositpower.com/">Reposit</a> and <a href="http://powerledger.io/">Powerledger</a> are looking to connect households with spare energy to households buying spare energy. <a href="http://www.mojopower.com.au/">Mojo Power</a> is offering customers fixed price packages that are more reminiscent of mobile phone offers than electricity. At this stage it is unclear whether the National Electricity Market will play a part in, or hinder, these new business models. </p>
<p>A few retail companies, like <a href="https://www.redenergy.com.au/">Red</a>, <a href="https://lumoenergy.com.au/">Lumo</a>, <a href="http://www.powershop.com.au/p/da-o2/">Powershop</a> and <a href="https://www.infiniteenergy.com.au/">Infinite</a> spruik their renewable energy credentials. Renewable energy is viewed very favourably by the public. </p>
<p>Recent polling suggests that <a href="http://www.tai.org.au/sites/defualt/files/P234%20renewables%20and%20battery%20storage%20FINAL.pdf">71% of respondents</a> would favour a government that facilitated greater support for solar panels and batteries. Energy giant AGL has a larger renewable energy portfolio than Origin making it slightly more attractive to consumers with environmental concerns, but it is exposed to the risk of owning a large coal generation fleet. </p>
<p>Infigen is the only renewable, publicly listed company. Infigen faced torrid times during the multiple back-to-back reviews of the <a href="http://www.cleanenergyregulator.gov.au/RET">Renewable Energy Target</a>, but since the target has been set at 33GWh, Infigen’s share price has been recovering.</p>
<p>Of note, is the share prices of domestic energy companies AGL and Origin who are both in the business of generating and retailing electricity and previously were both engaged in the development of coal seam gas. Origin has continued its coal seam gas investment while <a href="https://www.agl.com.au/about-agl/media-centre/article-list/2016/february/review-of-gas-assets-and-exit-of-gas-exploration-and-production">AGL exited the market.</a> AGL has instead focused more on diversifying its electricity generation portfolio. Part of this strategy has involved formulating innovative plans for virtual power stations of <a href="https://www.agl.com.au/about-agl/media-centre/article-list/2016/august/agl-launches-world-largest-solar-virtual-power-plant">consolidated rooftop solar panels and residential batteries</a>. </p>
<p>Origin’s foray into the export of Liquid Natural Gas (LNG) has not been good for its share price. Concern over debt related to the investment in LNG and exposure to declining LNG prices has worried investors.</p>
<h2>Electricity distribution also faces multiple challenges</h2>
<p>Electricity distribution companies in Australia are regulated monopolies. Distribution companies in NSW and QLD have been government owned and as a result of hefty investment plans, large electricity price rises were passed through to customers after 2009. This was at the same time as environmental charges were being included in electricity tariffs. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/136379/original/image-20160902-1030-1dbmc9x.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/136379/original/image-20160902-1030-1dbmc9x.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/136379/original/image-20160902-1030-1dbmc9x.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/136379/original/image-20160902-1030-1dbmc9x.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/136379/original/image-20160902-1030-1dbmc9x.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/136379/original/image-20160902-1030-1dbmc9x.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/136379/original/image-20160902-1030-1dbmc9x.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Residential electricity price 2007-2015.</span>
<span class="attribution"><span class="source">Author</span></span>
</figcaption>
</figure>
<p>Customers were angered by the rise in electricity prices, but the NSW and QLD governments have enjoyed the profits that have flowed back into state coffers. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/136380/original/image-20160902-1018-1vehll1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/136380/original/image-20160902-1018-1vehll1.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/136380/original/image-20160902-1018-1vehll1.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/136380/original/image-20160902-1018-1vehll1.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/136380/original/image-20160902-1018-1vehll1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/136380/original/image-20160902-1018-1vehll1.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/136380/original/image-20160902-1018-1vehll1.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Electricity network profits: QLD and NSW.</span>
<span class="attribution"><span class="source">Author</span></span>
</figcaption>
</figure>
<p>The NSW government is now seeking to sell a large share of its distribution businesses, although the most promising buyers have been <a href="https://theconversation.com/protectionist-rejection-of-chinas-state-grid-misses-real-energy-security-issue-63768">knocked back by the federal government due to security concerns</a>. With the popularity of solar panels and the expectation about the benefits of battery storage to meet demand after sundown, investors buying into the electricity distribution sector will be facing disruption. </p>
<p>Origin and AGL have gambled on different strategies to face a future with carbon constraints and technological disruption. Origin has bet on natural gas being a transition fuel to a cleaner energy future, while AGL is betting on electricity from renewable sources with batteries as the preferred path.</p>
<p>Energy distribution companies need to wrestle with the technological disruption that is looming from decentralised, distributed generation from solar panels, batteries and peer-to-peer energy transactions. Coal miners should seriously consider diversification to face a carbon-constrained future. The energy sector is in a state of transition; profits and share prices may be volatile for a few years to come. It would be advantageous if regulation did not get in the way of the shifts already evident.</p><img src="https://counter.theconversation.com/content/63597/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lynette Molyneaux does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Energy companies shouldn’t rely on government regulation to protect them from the growing disruption from renewables and increased consumer control.Lynette Molyneaux, Researcher, Energy Economics and Management Group, Global Change Institute, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/633942016-09-05T20:16:28Z2016-09-05T20:16:28ZCompany results wrap: news publishers are transforming, but into what?<p><em>Companies have finished reporting results for the financial year so it’s time to take stock of how the different business sectors of Australia are fairing. In our <a href="https://theconversation.com/au/topics/company-results-2016-30905">company results wrap series</a> we take a step back from the short-term focus of quarterly profit and loss statements and examine what big picture factors are at play.</em></p>
<hr>
<p><a href="https://aut.researchgateway.ac.nz/bitstream/handle/10292/9894/MyllylahtiM.pdf?sequence=3&isAllowed=y">New research</a> on the business models of Fairfax and APN from 2004 to 2013 confirms the two companies have failed to transform their revenue structures from print to digital. However, Fairfax CEO <a href="http://www.fairfaxmedia.com.au/ArticleDocuments/193/2016-08-10_%20Full%20Year%20Results%20-%20Media%20Release.pdf.aspx?Embed=Y">Greg Hywood</a> argues that the company’s 2016 full year result is “proof that the [digital] transformation of Fairfax Media over recent years has succeeded”. </p>
<p>Recently, American billionaire <a href="http://www.politico.com/story/2016/08/the-playbook-interview-warren-buffett-226892">Warren Buffet</a> said that for most American newspapers “the transition to the internet so far hasn’t worked in digital. The revenues don’t come in”. He added that “local newspapers continue to decline at a very significant rate”. </p>
<p>Despite the gloomy outlook, News Corporation is expanding its regional newspaper portfolio in Australia. The company is buying APN’s regional papers including 12 daily newspapers and 60 smaller publications. </p>
<p>In New Zealand, Fairfax Media and New Zealand Media Entertainment (NZME) are currently seeking merger approval from Commerce Commission. If the merger is cleared, the new company <a href="http://www.comcom.govt.nz/business-competition/mergers-and-acquisitions/authorisations/merger-authorisation-register/nzme-limited-and-fairfax-new-zealand-limited/">will have 89% market share</a> in New Zealand’s print newspaper market. Fairfax is expected to own 51% of the merged company’s shares (currently, News Corp owns 14.99% of NZME shares).</p>
<p>Why the sudden interest in the sinking ship, print? Is it because the assets are cheap? In 2016 Fairfax made a heavy loss as it wrote down almost a billion dollars of its publishing assets. </p>
<hr>
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<hr>
<p>A closer look at News Corp’s and Fairfax’s revenue structures may shed some light on this interest in print. </p>
<p>In 2016, Fairfax’s Metro Media, Australian community media, and New Zealand media contributed 75% <a href="http://www.fairfaxmedia.com.au/ArticleDocuments/193/2016-08-10_%20Full%20Year%20Results%20-%20Media%20Release.pdf.aspx?">of the company’s total revenue</a>. Domain Group delivered 16% of its total revenue.</p>
<p>This simply shows that the company’s revenue, if not profit, is still reliant on the traditional revenue streams. Similarly, in the 2016 financial year, 64% of News Corp’s revenue came from news and information services and 9.9% from digital real estate services.</p>
<h2>Digital revenue covers a fraction of expenses</h2>
<p>Both Fairfax and News Corp argue they are turning into truly digital media companies, and clearly, something is changing. Both companies seem confident that their digital future lies in real estate and listing services. Commenting on the 2016 results, News Corp chief executive <a href="https://newscorpcom.files.wordpress.com/2016/08/q4-2016-press-release_final_08082016.pdf">Robert Thomson</a> said: </p>
<blockquote>
<p>“Since the advent of the new News three years ago, revenue at Digital Real Estate Services has more than doubled, and it is expected to become the biggest contributor to [earnings] in the future.”</p>
</blockquote>
<p>Similarly, Fairfax’s chief executive <a href="http://www.fairfaxmedia.com.au/ArticleDocuments/193/2016-08-10_%20Full%20Year%20Results%20-%20Media%20Release.pdf.aspx?">Greg Hywood says</a> digital and non-print earnings now make up more than 40% of Fairfax’s earnings before interest, taxes, depreciation and amortisation (EBITDA). If this trend continues, he says, next year it will be closer to 60%.</p>
<p>Both companies make a decent profit on their digital real estate services (and the share of profit is growing), but Fairfax’s digital revenue currently covers only 14% of the companies’ total expenses. So the company’s bright digital future clearly requires more cost cutting. </p>
<p><a href="https://www.researchgate.net/publication/305387958_How_digital_are_the_news_publishers_A_study_of_newspaper_publishers%27_evolving_revenues_and_how_they_may_support_journalism_and_future_newsrooms">Recent research </a>
shows that both Fairfax and News Corp have some work to do before they are “truly digital”, meaning the majority of their revenue comes from digital sources. For example, <a href="https://www.academia.edu/27050041/How_digital_are_they_really_A_study_of_newspaper_publishers_evolving_revenues_and_how_they_may_support_journalism_and_future_newsrooms">in 2015 digital revenue made</a> 62% of media groups Norwegian Schibsted’s and German Axel Springer’s total revenue. For Fairfax, the same number was 16.4% and for News Corp 8%.</p>
<p>According to Fairfax, in 2016 its paid digital subscriptions grew 17% to 209,000. The revenue from these was $38 million, representing two percent of the company’s total revenue. News Corp’s digital subscriptions continue to grow and “account for approximately 45% of the subscriber base”. </p>
<p>The <a href="http://www.fairfaxmedia.com.au/ArticleDocuments/193/2016-08-10_%20Full%20Year%20Results%20-%20Media%20Release.pdf.aspx?">company states</a> that “digital revenues represented 23% of news and information segment revenue”. Based on this percentage, the digital revenue delivered by its news and information services made 1.2% of the company’s total revenue.</p>
<h2>Convergences across telcos and media</h2>
<p>A short-term outlook for the traditional television broadcasters in Australia and New Zealand is weak. For example, in August <a href="http://www.sevenwestmedia.com.au/docs/default-source/financial-results/presentation-of-results16C200EF9473.pdf?sfvrsn=4">Seven West Media</a> gave a profit warning and is expecting its profit to fall 15-20% in the coming year due to the flat advertising market. Its 2016 pre-tax profit was $207 million of which Channel Seven contributed 82%.</p>
<p>Clearly, digital transformation is proving challenging for television broadcasters as well as newspapers, and more consolidation can be expected across the sector. This will also occur across the media, telecom and internet service providers. In April, it was <a href="http://www.stuff.co.nz/business/world/79326452/APN-and-Nine-mull-A-1-6b-television-radio-and-outdoor-merger">rumoured</a> that APN and Nine Entertainment were considering a mega merger, but this is yet to materialise. </p>
<p>In New Zealand, the pay television provider Sky TV is seeking merger approval with Vodafone NZ. <a href="http://www.comcom.govt.nz/business-competition/mergers-and-acquisitions/clearances/clearances-register/vodafone-europe-b.v.-and-sky-network-television-limited/">Sky TV says</a> the merger is necessary because, “the change in how video content is delivered to consumers is transforming traditional television and content markets”. The company is facing increasing competition from companies such as Netflix, Quickflix and Apple TV. </p>
<p>Interestingly, Fairfax Media is also branching out in New Zealand by launching a new internet service provider – Stuff Fibre. The new service will offer uncapped ultra-fast broadband, unlimited data, and no fixed term contracts. </p>
<p>Fairfax is clearly seeking to expand and to control its online content and video delivery. In New Zealand, the company already has an agreement with Radio New Zealand and TVNZ for content delivery.</p>
<p>Yes, media companies are transforming, and they have to, as the financial results demonstrate. On Friday, APN announced that it is now an “outdoors media and radio” company, as opposed to a news publisher or news corporation. Fairfax and News Corp are starting to look more like digital real estate providers. This strategy makes business sense, but one has to wonder if there is still room for journalism within it.</p><img src="https://counter.theconversation.com/content/63394/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Merja Myllylahti does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Media companies say their results are an indicator of a transformation taking place from traditional business to newer profitable digital platforms, but it seems the proof is still missing.Merja Myllylahti, Project manager and author for Journalism, Media and Democracy (JMAD) Research Center, Auckland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/631922016-09-05T12:49:21Z2016-09-05T12:49:21ZCompany results wrap: retail sales flat, but some retailers buck the trend<figure><img src="https://images.theconversation.com/files/136505/original/image-20160905-20255-n1p051.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The success of companies like T-shirt brand Threadless shows innovation matters in retail.</span> <span class="attribution"><span class="source">Todd Kopriva/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p><em>Companies have finished reporting results for the financial year so it’s time to take stock of how the different business sectors of Australia are fairing. In our <a href="https://theconversation.com/au/topics/company-results-2016-30905">company results wrap series</a> we take a step back from the short-term focus of quarterly profit and loss statements and examine what big picture factors are at play.</em></p>
<hr>
<p><a href="http://www.abc.net.au/news/2016-06-02/retail-sales-rise-in-april-abs/7470310">Retail sales data</a> showed growth in the sector falling flat last week, and it remains a tough time to be a retailer in Australia. </p>
<p>Overall, shoppers are expecting more for less, abandoning any sense of loyalty. However, there are bright sparks of success in the moribund sector that point towards what works and what doesn’t in making profits in retail. </p>
<p>Australia’s overall inflation, currently at historical lows, is only kept above zero by the increasing prices of services like health and education, not by retail goods. Retail staples like food, clothing and footwear are <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6401.0">all cheaper</a> than this time last year. Price competition, and pressure on margins in the grocery and clothing markets is intense. </p>
<p>The deflation in “food and non-alcoholic beverages” prices recently reported by the ABS can be most readily explained by the Aldi effect. Aldi’s continued expansion throughout regional Australia and continued push westward to South Australia and Western Australia is <a href="https://theconversation.com/woolworths-counts-the-cost-of-masters-blunder-with-food-business-under-fire-55385">playing havoc with the retail margins of both Coles and Woolworths</a>. Both have fallen to around 4.7% of sales as price declines have been outstripped by operational cost efficiencies. The major challenge for both Coles and Woolworths, however, is to address the fundamental difference in their cost of doing business versus the lean operations of Aldi. </p>
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<p>Away from groceries, as the seasons turn, Australia’s bulging wardrobes continue to make room for yet more clothes and shoes. Despite this, prices are falling. In clothing and footwear, deflation is better explained by the <a href="http://s3.amazonaws.com/academia.edu.documents/30860078/show.pdf?AWSAccessKeyId=AKIAJ56TQJRTWSMTNPEA&Expires=1472687430&Signature=u7LKyzI7pSctEQUMVqPJk7aoauY%3D&response-content-disposition=inline%3B%20filename%3DWhat_drives_consumers_to_shop_online_A_l.pdf">ascendant online marketplace</a> and consumer preferences, shopping traits and experiences. Overall online clothing retail sales growth continues to <a href="http://business.nab.com.au/wp-content/uploads/2016/08/NORSI-July-2016-Final.pdf">far outstrip</a> bricks and mortar retail, with small online retailers (sales less than A$2.5 million) seeing <a href="http://www.sciencedirect.com/science/article/pii/S0022435901000562">strong growth of more than 20% per annum on the back of more agile systems and shopper convenience.</a></p>
<h2>Green shoots</h2>
<p>Looking below the “sectoral” numbers to some examples of individual businesses provides some interesting evidence of these trends - both supportive and contradictory. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/136507/original/image-20160905-20220-1wh7no1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/136507/original/image-20160905-20220-1wh7no1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/136507/original/image-20160905-20220-1wh7no1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/136507/original/image-20160905-20220-1wh7no1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/136507/original/image-20160905-20220-1wh7no1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/136507/original/image-20160905-20220-1wh7no1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/136507/original/image-20160905-20220-1wh7no1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Retail chain Smiggle sells cheap things at high prices.</span>
<span class="attribution"><span class="source">rhoadeecha/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<p>Online surfwear and sportswear retailer <a href="http://www.news.com.au/finance/business/retail/surfstitch-in-a-trough-on-heavy-loss/news-story/a6acf405718441a0deef0c4de2e938c1">Surfstich</a>, for example, saw its share price savaged after it posted a <a href="http://www.abc.net.au/news/2016-08-30/surfstitch-coming-apart-at-the-seams/7799500">massive loss on the back of a flagging acquisition strategy and management upheavals</a>. In a closely related market, however, <a href="http://www.kathmanduholdings.com/">Kathmandu</a> is performing relatively well, flagging higher margins and earnings to come. CEO Xavier Simonet attributes these outcomes to “product newness and careful management of promotional activity” – basically selling a more narrow range of more appreciated goods with less discounting.</p>
<p>Premier Investments continues to outperform. Controlled by Solomon Lew and led by the colourful former CEO of David Jones, Mark McInnes, Premier seems to have the right portfolio of products and <a href="http://www.premierinvestments.com.au/wp-content/uploads/2016/03/20160318_PMV-Half-year-Results-Announcement.pdf">store-based and online business strategies</a> to maintain growth and margins. Its <a href="http://www.abc.net.au/news/2016-03-18/premier-investments-retail-group-profit-surges/7257238">Smiggle</a> business is a case in point. It sells cheap things at high prices to a demographic of adoring tweens, while the quality Peter Alexander brand works as a sales generating all-rounder in the family clothing sector.</p>
<p>Another somewhat bright spot seems to be <a href="http://www.arnnet.com.au/article/605540/kogan-profits-exceed-expectation-following-lackluster-ipo/">Kogan</a> – the online electronics retailer that recently listed on the ASX. It is a business that is hard to categorise. It has a portfolio of own-branded electronics, operates a channel of grey imported products from its offshore subsidiary, and is branching into services including travel. Trading at a discount to its IPO, it is fair to say the market is watching with interest rather than enthusiasm before it decides on the longevity of this idiosyncratic retailer.</p>
<p>One of the most resilient of retailers, <a href="http://www.sharecafe.com.au/sharecafe.asp?a=AV&ai=40971">Harvey Norman</a>, also reported last week. Its result was stellar and its share price soared. Sceptics wonder, though, how much of this can be attributed the the exit of Dick Smith and the rather topsy housing market which all but the most optimistic spruiker sees at or near its zenith.</p>
<p>Both Premier and Kogan point to an emerging trend – <a href="http://www.sciencedirect.com/science/article/pii/S0378720601001276">innovation matters in retail more than ever</a>. Strong growth among small online retailers is showing consumers want variety and novelty in their baskets and wardrobes rather than generic and cheap (or worse, generic and expensive). Globally, firms like <a href="https://www.threadless.com/">Threadless</a> (a T-shirt company whose customers design its logos) are trying new things and creating products that appeal to narrow yet loyal customer groups. In Australia, niche online retailers like <a href="http://babesintheshade.com.au/">Babes in the Shade</a> are showing they have a business model that can work over time.</p>
<p>But innovation is both risky and expensive. More often than not supermarket trialled novelties do not last, with the same true in clothing and elsewhere. This can explain the emergence of firms like Premier Investments that combine retail smarts, relatively deep pockets and novel ideas. Premier can afford the odd disaster when balanced with successes like Smiggle.</p>
<p>In the future, we expect more innovation and variety and thus more turblulence in the sector. Occasional narrow-brand innovators like <a href="http://www.nonib.com.au/">Noni B</a> will succeed, but a more likely model for success will be the porfolio players. They can ride out the ups and downs of retail’s various sub-markets and sustain profitability and growth.</p><img src="https://counter.theconversation.com/content/63192/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Rice is affiliated with the NTEU.</span></em></p><p class="fine-print"><em><span>Nigel Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It’s a tough time to be a retailer in Australia, but there are some retailers that have found the formula for success.John Rice, Professor of Management, University of New EnglandNigel Martin, Lecturer, College of Business and Economics, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.