Retail’s real struggle

Following my post last week Let Retail Burn, Cameron Murray has followed up with a series of log-scale charts that show real retail sales growth per capita since the early nineteen eighties. Firstly, Cameron offers the overall sales picture (I have added trend lines in red):

As you can see, there is an accelerating trend that really took off in the mid nineties and peaked in late 2004. That tracks the Australian credit bubble pretty nicely to my mind.

Cameron goes further with a second post that breaks up the internals of sales into segments:

My approach is to examine retail from a household perspective. Rather than look at total turnover in current prices, I will examine real spend per capita in each of the main retailing subsectors. I do this because economic theory has a lot to say about changes to household spending patterns during economic cycles.

Economic theory would suggest that in boom times, retailers of luxury goods would see turnover increase more rapidly than incomes. As Wikipedia explainsIn economics, a luxury good is a good for which demand increases more than proportionally as incomerises. The reverse should also be true for these goods.

Importantly, retail trends need to be seen in the context of a housing driven wealth effect. The wealth effect is an increase in spending that accompanies and increase in perceived wealth, rather than spending which is driven by growth in incomes.

The wealth effect is also behind many of the saving decisions of households. Since 2005 the trend of declining household savings rates was dramatically reversed. We now have a household saving ratio not seen since 1987 (see the RBA’s chart below). This is an important backdrop to the retail story.

These factors are important to consider if you foresee near term home price declines. In this scenario, spending in wealth driven retail sectors would be expected to fall more than flat or falling household incomes, and increased savings alone would suggest.

Now to the detail.

The graphs below show the performance key subsectors in retailing. Note the log scales, which mean a straight line indicates a constant rate of growth – the steeper the line, the higher the rate of growth. Note also that this is a real per capita measure, which is indicative of trends in household spending decisions. Quarterly chain volume data is used, with May 2011 current price data adjusted to substitute for June 2011 data. The ABS explains some of the trends in more specific subcategories here (definitely worth reading the context of this post).

A few points jump out at me from the graphs. First, household goods (maroon in first graph) have outperformed by a long way, for a long time. This category includes furniture and appliances, hardware and gardening, floor coverings and electrical. This sector also appears to have seen the sharpest shock around the end of 2007 – from having the strongest rate of growth to nearly the weakest. The rising part of the curve might partly be attributed to a greater appetite for expensive furniture and appliances, which is indicative of a luxury good effect. Also important is the impact of the construction boom of the early 2000s which has since collapsed in many areas.

Second, clothing and accessories (green line) was on a declining trend for 14 years until 1997. For a decade since then, the growth rate in this sector was only bettered by household goods. Spending recovered strongly since the GFC. I’m not exactly sure why this might be the case. Perhaps some readers have experience in this sector.

Food retailing has been the steadiest (as you would expect) with only a slight easing from the growth trend since 2009 (maroon in second graph).

Other retailing (which includes pharmaceuticals, recreational goods, cosmetics and books) appears very sensitive to the housing wealth effect, seeing big spending boost during the 2002-03, the 2007, and the 2009 house price booms. Surprisingly spending has remained strong since the GFC – the only retail sector where this has occurred.

We might attribute some of the recent robustness to the high Aussie dollar. The ABS explains that pharmaceuticals and cosmetics and toiletries are the strongest components of this sector.

Cafe and restaurant spending (orange line) also appears sensitive to the wealth effect, and is noticeably one of the more volatile sectors.

Department store spending has been declining steadily since the end of 2007 (purple line). Anyone who had closely examined this data would not have been so surprised about David Jones’ recent profit downgrade. Spending at department stores is now back where it was in 2003 on a per capita basis.

Finally, the second graph has the period of 2002-03 circled. This is simply to highlight that all retail sectors grew at abnormally high rates during the house price boom of this period. Indeed, we can see the wealth effect correlation between house prices and retail growth in many sectors in 2007 and 2009, although to a lesser extent.

My near term outlook is for a subdued retail sector. As I have said before, I believe that in these challenging times for retailers, innovation will be the key to staying ahead. New business models that use internet shopping to good effect, with a small physical store presence might be one path for many. Those companies who adapt quickest will benefit.

Could not have put it better myself. Thanks Cameron.

Houses and Holes
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    • Per capita data is pretty damn good, and I don’t think CM needs to go back and do a per household study as well.

      This is amazingly good work and is extremely revealing.

  1. Sigh, instead of forcasting a 20-year China FutureBoom! that even the Chinese don’t believe they will enjoy, if only our Treasury and RBA economists do as much research on the data as Cam Murray and MB do.

  2. If interest rates were overlaid on 4th chart a lot is explained. In 4 years up to 1993, IR dropped from 17% down to 5%.

    However, the deliberate ramp up in land/house prices (thanks to over-generous tax system & govt halving Capital Gains Tax + banks relaxing lending standards) resulted in subsequent flow-on wealth effect (which still lingers).

    With Aus population growth the highest by a long shot in developed world (about 2% compared to say Austria @ 0.3%), it is obvious retail cannot really fall long term. Discretionary spending might take a big hit but food, clothing, furniture sales etc must increase over time.

    • Interesting assumption on population growth bob – given that the last four years before the GFC where an aberration, and the previous two years have seen a significant reversal in population growth.

      Replacement rate is on par with European countries (and falling) – its only migration that is boosting population growth, and that is decelerating.

      I will not be surprised (and from a long term point of view, happy) to see our growth rate head well below 1% here on in…

    • Anecdote wise, nearly every kid of first-generation migrants I know of, have emigrated out of Australia to places like US, UK, Switzerland and even Japan.

      If the spruikers think they can keep growth going via a population ponzi scheme, then they should start looking at Ireland and Dubai example more closely – Job seeking immigrants can exit just as fast as they came in.

  3. Great charts Cameron. I’d be extremely nervous if i was Gerry Harvey right now, the home equity ATM has been feeding furniture and home electronics retail for a decade but cannot continue.

    Clothing revenue from what I’m hearing is still strong, but everyone is on sale so the margins are shrinking rapidly.

    If I was investing it’d be in food or cafe/restaurants.

  4. If you go back to the 1970’s since the last resource boom, savings rate tend to be high. So expect that this will continue for at least 5 years. Especially with the pronounced volatility in the markets.

    And retailers in Australia have enjoyed high margins for years. Welcome online shopping and suddenly the market place has opened a lot more competition for them to compete in. Once they readjust their prices down, then they will be structurally placed to manage the new consumer!

    • Not to mention the exchange rates which has to be having a marked effect on retailers with thrifty people buying easily transportable goods (electronics, clothing, etc) online internationally.

    • Jimbo,
      Re Retail margins being high. Bull crap. While gross margin has increased over the last 10 years, nett margin has remaind unchanged or droped depending on the sector. Wages and rent are what you are paying for. Oh and GST.

  5. This is just my opinion but I think that the cost of housing (to buy or to rent) is cannibalising the entire economy. The more people spend on putting a roof over their head, arguably non-discretionary spending, the less they have for toys.

    Still, expensive real estate and big holes in the ground (employing relatively few people) is what the government seems to want. Retarded but I’m just here for the laughs at this tragic comedy.

    • ASX3K, think you might be correct to say housing is “cannibalising the entire economy”.
      Welcome to the world of FIRE economy where:
      “business plan of bank marketing departments is to capitalize any economic surplus into debt service. Loan officers see any net flow of income as potentially available to be captured as interest payments. Their dream of growth and financial success is to see the entire surplus capitalized into debt service to carry loans.”
      Our policy writers were up to the task of flushing the broader economy down the toilet in exchange for higher debt loads for Joe & Jill Sheeple.
      Nothing like a contemporary tragi-comedy complements of Labor & Libs.

  6. moderate mouse

    Excellent read – thanks Cam. Something also interesting that is often not mentioned alongside savings rates is that, as far as I understand it, savings are calculated simply as a residual of income after consumption. Someone please correct me if I’m wrong but doesn’t this mean that the ‘near record’ household savings ratio isn’t necessarily leading to increasing savings at all, but rather a reflection of the greater proportion of incomes being diverted away from consumption and towards debt servicing. If this is how it works then the line being run by the MSM that consumers are taking a breather, suring up their savings and consumption will come roaring back as sentiment improves is bunk.

    • You’re on the right track mouse: a few months back I had a quick look at the growth in deposits (available at RBA) and at first glance it doesn’t appear to gel with the ABS household savings ratio increase….

      If I had more time, I’d look into it further….

      • According to the ABS:

        “Household net saving is calculated as household net disposable income less household final consumption expenditure.”

        I’m not certain, but pretty sure home repayments, or at least part of home repayments are included in final consumption expenditure.

        This would support the theory that the increased savings rate is simply the increased service of debt.

      • prince if the foreign debt is over 1 trillion, how can there be savings? who owes all the debt? if the country owed no money private or public i can understand, how can you have savings when the money is a debt it doesnt make sense to me. yu cannot save dollars and the value of those dollars have the same buying power. I use to buy ice cream for 30c its now $2 +.

      • Asset poor, cash poor, debt rich. Says it all.

        Global credit bubble/cycle blew up in Feb. 2007.

        Last lights going out now.. Mom & Dad as lender of last resort.

        Dreamin’ of a beer budget. Beer in a public bar in Brisbane region is $11.22 per litre ($3.20 per pot/10oz/285ml).

  7. Efficient and Timely..There’s alot of Terrain
    mapped,Balanced and Blueprinted…
    Nice-Cam…,your Tune’s,make MB’s Motor Humm….Thanks

  8. I feel sorry for small business people, the true entrepreneurs not the big multi national bureucrats, when they lose they cry for a bailout.