Fruits of disleveraging

So then, after today’s howler by Myer, reality has partially  dawned on the market and the media: Retail is toast.

The above chart shows today’s bloodbath for the stock. The only wonder is why it rose in the previous month.

There are a number of explanations in the media for the result, most repeating the line offered by mangement:

‘‘A likely continuation of the increased costs of living together with the widely anticipated flood levy and food inflation are expected to put pressure on discretionary spend during the remainder of calendar 2011,’’ Myer chief executive Bernie Brookes said.

…Mr Brookes said November’s  unexpected interest rate rise had a noticeable impact on sales that  month and in early December.

While sales in the lead-up to Christmas and the first week of Myer’s stocktake sale were in line with last year, there was a significant, unexpected and rapid decline in sales in January.

Australian Bureau of Statistics figures released today showed disappointing retail sales growth of just 0.2  per cent in December after Christmas trading was affected by the Queensland floods.

Fair enough, this blogger will conclude, but the list of grievances kind of suggests a convergence of bad luck. The truth is worse.

As this blogger has been saying for two years, the Australian economy can no longer rely on its former growth engine of borrowing debt to pump asset prices and associated wealth effects. Whether it’s the RBA, which will not allow borrowing to regain its historic growth rates, or it’s the banks and their cost of funds, asset prices will not resume their upward trajectory.

Which leads to the following chart that is the death knell for fast-growth (or any growth) retail:

The chart is the Australian household savings ratio from the ABS national accounts. Note the dip into “equity mate” territory through the mid noughties. Guess where all that cash-outed equity went?  Now, in the absence of stellar house price growth, the home ATM is shut and consumers have no choice but to become fair dinkum savers.

Without putting too finer point on it, that means retail as a sector is hardly going to grow and discretionary may well shrink some. With no top line growth, that means the only game in town is chasing market share. Hence today’s move to steal Sass  &Bide from David Jones.

This blogger recommends being very confident about management’s ability to outperform before investing a dime in retail.

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.


  1. FrankieFourFingers

    My cynical side is thinking that previous private equity holders of Myers knew the writing was on the wall. They are probably at some expensive cocktail bar laughing at the all the idiots who actually believed what was written in the prospectus.

  2. You just cannot take the other side of the transaction with Private Equity and expect to make a buck. The same with Macquarie – be very careful when trading with these guys.