Retail pain here to stay

Yesterday’s announcement by the Reserve Bank of Australia (RBA) that the official cash rate would remain on hold provoked a stinging response from the Australian Retailers Association (ARA):

The Australian Retailers Association (ARA) says the Reserve Bank of Australia’s (RBA) decision to hold interest rates has left retailers struggling to hold on.

The ARA had sought a cut in interest rates, which it hoped would give consumers more confidence to spend in the lead up to Christmas.

ARA executive director, Russell Zimmerman,  said while the decision to leave the cash rate unchanged may have been a response to growth in parts of the economy and other factors such as inflation, the retail sector had been left on dangerous territory as consumers retract their spending even further.

“Consumer confidence is at an all time low, which has left the retail sector in the negative as year on year trade figures show declines across categories which rely on discretionary spend.

“Key events such as spring racing and the lead up to Christmas would usually see retailers employ more staff, bring in more stock and generally seize opportunities to post some healthy growth as consumers restock their wardrobes and start shopping for presents.

“However, with more pressure than ever on household budgets as a result of taxes, mortgage stress and the soaring cost of living, retailers will be reigning in on stock availability and staffing levels.

“In light of a struggling sector, retailers can only live in the hope that the strain of interest rates will be eased for consumers in time for the festive season by way of a rate cut in October,” Zimmerman said.

Certainly, the ARA’s concerns are warranted, with retail sales at near 10-year lows:

A number of inter-connected reasons have been put forward for the slump in sales, including:

(1) the sharp increase in the household savings rate to near 25-year highs:

(2) The reaching of peak debt by Australian households:

(3) And falling household net worth on the back of declining home prices:

While all of these explanations are valid, there is another that is likely to create headwinds for the retail sector for decades to come – Australia’s ageing population.

Yesterday, the Australian Bureau of Statistics (ABS) released the 2009-10 Household Expenditure Survey, which provided some fascinating insights about the spending patterns of different age groups.

According to the Survey, household expenditure peaks between the ages of 45 and 54 before declining sharply. And a household headed by someone over 65+ years of age spends roughly half of what a 45 to 54 year-old household spends.

As presented, the data is a bit misleading, since a typical 65+ household comprises less people than the younger cohorts (see below chart), suggesting that aggregate expenditure might not actually be significantly affected by population ageing if Australia ends up with a larger number of older households spending less.

To overcome this bias in the Survey, I have adjusted the above household expenditure data by the average number of people in each household group to derive the per person equivalent level of expenditure at each age group:

As you can see, per person household expenditure peaks between the age of 55 and 64, followed by those aged 25 to 34, 15 to 24, and then 45 to 54. Those aged 65 and over spend the least, followed closely by those aged 35 to 44.

So what does all this mean for the retail sector? Well, according to the ABS population projections, the percentage of the population aged 65+ is expected to skyrocket (see below chart). And given expenditure by the older cohort is typically the lowest of all the age groups, it follows that retail expenditure will decline, other things equal.

This analysis is supported by the projected dependency ratios for Australia – defined as the ratio of the non-working population, both children (<15 years old) and the elderly (over 65 years old), to the working age population.

As you can see, Australia’s total dependency ratio is projected to increase sharply, from around 50% currently to just over 60% by 2035. This increase in the dependency ratio is driven by a steady increase in the proportion of the population aged over 65 (the standard ‘retirement age’), offset partly by a reduction in the child dependency ratio (i.e. those aged under 15 years of age).

If the saying “demographics are destiny” is true, then Australian retailers are likely to face a prolonged period of sluggish growth and disappointment.

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  1. ARA starts whining about no rate cut which would supposedly allow people to spend the $100-200 per month or so saved on mortgage interest on flat screen TVs, IPADs and the like.

    Do these people really understand the fact is that most people are still paying off the debt of buying most of this crap in the first place, people have been waking up with “debt hangovers” for a while now.

    Retailers have had Years of price gouging and feasting on money from cheap credit. Now when things turn down lets go cap in hand to the RBA begging for the money tap to be turned back on

    Its like drug dealers complaining the price of tinfoil to wrap their “goods” in is so expensive now that its impacting their profits and lobbying Aluminium producers to cut prices

  2. UE, have you seen any data incorporating the participation rate into the dependency ratio ?
    Just a gut feel but I would say the a higher portion of retiring households would be single income this should act to push the effective dependency ratio down somewhat in the near term (say 10 years), but would also have raised the effective dependency ratio in the past. Net effect of this would be a steeper v but with the bottom a few more years out ?

  3. Thanks, UE – an easy read that conveys some very revealing truths. A few comments:

    “… and generally seize opportunities to post some healthy growth as consumers restock their wardrobes and start shopping for presents.”

    So this is what we’ve come to, is it? Restocking our wardrobes, and buying presents. If that’s the backbone of the “slow lane” of the economy, then bring on the mining boom.

    “However, with more pressure than ever on household budgets as a result of taxes, mortgage stress and the soaring cost of living…..”

    Taxes? Do these blokes remember when the top marginal tax rate was 60 cents? Haven’t we had one round after another of corporate and personal tax cuts over the last 10 years or more?

    Mortgage stress – yes, but why?
    House prices, perhaps?
    Why tackle the symptom….get stuck into the disease.
    Why don’t the retail sector have the necessaries to point out that all of that money locked up in over-priced real estate is money that could have been spent in their shops?

    “…retailers can only live in the hope that the strain of interest rates will be eased for consumers….”

    Oh, the strain!! A whole 7% or so of it.
    Once again, the fallacious interest rate bogeyman is trotted out. Gimme some more cheap money so I can keep the ponzi going.
    Please, Glenn….don’t do it!!

    As an aside, is anybody else getting sick to death of being referred to as a “consumer”?

    “Punter” is another one that gets up my nose.

  4. Very interesting analysis as usual thanks Leith. Yes, retailers are feeling the pain but everyone else is too – the sharp turnaround in savings is a sure fire sign that people are getting worried about the economy and as you rightly pointed out, consumption has to slump over the next 20-30 years as the 65+ demographic increases (retirees simply don’t spend like people in fulltime work).

    I also strongly agree with some of the comments here that ‘peak debt’ is a factor in the retail slump… everyone I know has a new telly except me… I still have a cathode ray and it won’t be thrown away till its actually broken. However what else can people possibly need when they already have everything? Gerry Harvey was trying to convince everyone six months ago that the new ‘must have’ item was 3D telly about but I think everyone was already maxed out on their credit cards by that stage…

  5. Harry Dent’s book “The Great Depression Ahead” is a must read if you want the detailed statistics for spending by age group for most of the developed countries. He states quite definitively that the cause of the coming depression will be due to Baby Boomer demographics.
    The bleakest prospects were Italy (proportion of tax paying people) & Russia (the population were drinking themselves to an early grave). He reckoned Aus was likely to escape the worst due to immigraton keeping the demographic balance on the young side. Of course he’s never tried to commute to work in Sydney or extrapolate what such immigration growth will do for tomorrow’s commuter….

  6. Good article UE. I agree that demographic trends certainly do not bode well for the retail sector. With regard to the negative outlook for the retail sector I would like to understand the degree to which the ‘unaffordable’ prices of residential property in Australia are a common characteristic of commercial property? Lease payments would have to be the largest fixed cost for most retail businesses and with ratchet clauses a common feature of retail leases market it would be interesting to know the cost structure of the struggling retailers. Perhaps the retail businesses will be the victim in the commercial property sector…

  7. Great post L, keep up the good work. Perhaps you could introduce demographic momentum into the population growth debate. Understanding is the key to problem solving and the solutions will be as hard as the challenges we face.

  8. I would be interested to see a retail spending chart going back 20 years (or more). I’m pretty sure the last 10 years is fueled by a credit binge, and what we are seeing is a return to trend. Peak debt for sure.

    The problem with retail is flawed business models,over capitalisation, and market saturation. Mostly because they fell into the new normal trap.

    “retailers will be reigning in on stock availability”

    Stock availability has always been abysmal in Australian retail. It’s one of the fundamentals that drives people to internationally located highturnover internet stores.