RBA’s Sober Warning On Retail Outlook

By Glenn Dyer | More Articles by Glenn Dyer

Australia’s retailing sector faces years or more of the same – unrelenting cost and price pressures – but don’t blame Amazon. According to Reserve Bank Governor Phil Lowe the sector has already been swamped by a slide in consumer spending to decade lows, and faces more of the same with low wages, low inflation and falling prices.

In fact the references to retailing in his speech are a warning to retailers and shareholders that things ain’t going to get better anytime soon.

The disappearance of growth in retail sales in the three months to September doesn’t look so much like a one-off for example, after reading Dr Lowe’s speech and retailing comments.

And that’s before the arrival of Amazon whose well oiled PR machine saw the worst kept secret in Australian retailing out in the open on Tuesday – Amazon starts operating in Australia on Black Friday in the US when an estimated 170 million Americans will shop in stores or on line – it culminates with Cyber Monday which the US online world’s equivalent of Black Friday.

There have been endless numbers of scare stories about Amazon’s disruptions to bricks and mortar retailers – ignoring the fact that the fastest growing online retailer in the US is now Walmart, the country’s biggest conventional bricks and mortar operator, which is what Amazon is now trying to nullify through the $US14 billion takeover of Whole Foods earlier this year.

Ignored in much of the reporting has been the impact on consumers facing low growing wages, rising household debts, high energy costs (and about to fee the highest petrol prices in two years and more) and rising road tolls especially in Sydney, Melbourne and parts of Brisbane.

It is a must-read for anyone invested in retailing, or thinking of it. His speech and the reasons for the intensifying competition in retailing is sobering news for shareholders, employees, managements and suppliers.

In to a speech to business economists in Sydney on Tuesday night, Reserve Bank Governor Phil Lowe singled out the intensifying pace of competition and falling prices in retail for special mention.

He thinks it is going to be here for quite a while longer (which is not good news for shareholders in many retailers). He didn’t mention the impending arrival of Amazon, but his scenario certainly includes it.

"Another factor that has a significant bearing on the outlook for inflation is the increased competition in the retail industry. I spoke a few moments ago about how, globally, increased competition is affecting pricing dynamics. Australian retailing provides a very good example of this.

"Competition from new entrants is putting pressure on margins and is forcing existing retailers to find ways to lower their cost structures. Technology is helping them to do this, including by automating processes and streamlining logistics. The result is lower prices,” Dr Lowe said (That is his ‘Amazon’ reference)

"For some years now, the rate of increase in food prices has been unusually low. A large part of the story here is increased competition. The same story is playing out in other parts of retailing.

"Over recent times, the prices of many consumer goods – including clothing, furniture and household appliances – have been falling. Increased competition and changes in technology are driving down the prices of many of the things we buy. This is making for a tough environment for many in the retail industry, but for consumers, lower prices are good news.

"A question we are grappling with here is how much further this process has to run. It is difficult to know the answer, but our sense is that the impact of greater competition on consumer prices still has some way to go as both retailers and wholesalers adjust their business models. So this is likely to be a constraining factor on inflation for a while yet,” the Governor told his audience.

That is not good news for retailers, shopping mall owners and employees. It means further pressures on wages, employment and oncosts such as penalty rates. It will mean weaker profit margins and dividends for shareholders (most of whom are some form of super fund of some type) for years to come and weaker share prices.

The struggling women’s fashion retailer, Speciality Fashion Group has 1,019 outlets in Australia and NZ in more than half a dozen chains. At the company’s annual meeting in Sydney on Tuesday, plans were revealed to cut 30% or 300 of these stores (many of which are losing money) by 20120 to try and give the company as a whole the chance to survive.

Struggling department store chain Myer has already closed half a dozen stores in the past couple of years and more seems to be on the cards with the company and big shareholder, Solomon Lew due to clash at Friday’s annual meeting.

Myer’s problems relate as much to the pressures on consumers (outlined by Dr Lowe) and falling prices for a widening range of goods, as it does to questions about its strategy, David Jones is also struggling with sliding same store sales.

Even some of Mr Lew’s chains (owned by his company, Premier Investments) are feeling the pinch of falling sales growth and tightening margins. A handful of small chains have gone bust in the past year to 18 months, such as Marcs and David Lawrence (Myer has rescued them) and TopShop (which was located in Myer), while semi luxury chain, OrotonGroup is struggling and cutting costs.

This intensifying competition is being added to by weak wage growth and high household debts which seems to be making consumers send less.

The Reserve Bank governor had an answer for those problems in his speech last night when he pointed out that the low wage growth and high household debt, are combining to drag household spending and consumption to the lowest level in a decade or more.

"At the same time, though, growth in consumer spending remains fairly soft. Indeed, for a number of years consumption growth has been weaker than we (The RBA) had originally forecast. The picture is pretty clear. For some years, consumption growth has been weaker than forecast and it has not exceeded 3 per cent for quite a few years.”

And he says that while the RBA is seeing a pick up in business investment, employment (both already underway), it also sees wage growth accelerating, household incomes rising and growth in consumer spending.

Given these factors, the RBA’s central forecast is for consumption growth to pick up to around the 3%. “This would be above the average growth of consumption for the current decade, but below the average for the period prior to the financial crisis.”

That in turn means those lazy, hazy days pre-2007 are never going to return, and that means tough times for years to come for many retailers, investors, owners and employees.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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