Share on Facebook Share on Twitter Share on Reddit + - It’s the hit to wealth that’s hurting retail By Leith van Onselen in Australian Economyat 7:47 am on May 23, 2012 | 119 comments Login to access MacroBusiness Members special reports. If you are not a member, sign up here. Please fill in the following form to login Username: Password: or Please fill in the following form to subscribe * Username * Email * Password About Latest Posts Leith van OnselenLeith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs. Latest posts by Leith van Onselen (see all) Melbourne listings rocket after real estate restrictions ease - October 23, 2020 What happened to following the COVID-19 science? - October 23, 2020 CoreLogic weekly house price update: Big rise! - October 23, 2020 Share on Facebook Share on Twitter Share on Reddit + - YOU MAY ALSO BE INTERESTED INAustralian flash PMI grinds higherVia Markit: The recovery in the AustralianOnly 6 local COVID-19 cases recorded overnightAustralia recorded 12 new COVID-19 infectionsHow long before Depressionberg realises he's crashed economy?The Depressionberg Unstimulus will take a littleWhy Australia needs more housing stimulusA group of university academics have called on Comments The Lorax May 23, 2012 at 8:02 am the Australian retail sector, which employs roughly 11% of the Australian workforce That would be 2, 3, 4 times as much as mining employs? And yet, no-one is concerned. Indeed, pretty much everyone here puts the boot into Aussie retailers at every opportunity. I simply ask, where will 1.2 million Australians employed in retail find jobs? Digging dirt? Cue MineBot to remind me that unemployment is falling (at least according to the ABS). coolnik May 23, 2012 at 8:53 am Lorax, I certainly agree with you, but we have to ask what Australian retail offers to the customers for the prices they charge. I, for one, would not shed a tear to see the businesses with “gouge the customers” as their only mantra go under water. The Lorax May 23, 2012 at 9:39 am Fair enough, but I reckon a lot of the apparent “gouging” is due to the rise in the Australian dollar. With the dollar at parity or above it certainly looks like gouging when we compare online US dollar prices with bricks & mortar retail prices. But if the dollar was to fall to 70c tomorrow, online prices would suddenly become a lot more expensive, and I doubt bricks & mortar prices would change much. Why? Because most of their costs are rent, labour, utilities etc, and not the wholesale price of the products they sell. I don’t have any good solutions, but it seems to me yet another example where the strong dollar is tearing apart the fabric our economy and society. Shopping malls have become the hub of today’s communities. Its where congregate, meet friends, relax, and if malls become empty and desolate where do we connect? Facebook? Say what you will about shopping malls, but I’d take coffee at the mall over Facebook messaging any day. reusachtigeMEMBER May 23, 2012 at 9:55 am Spot on about the $ impacts IMO, but I’ll take my coffee on the strip instead. The Lorax May 23, 2012 at 10:02 am Is the strip doing any better than the mall? 3d1k May 23, 2012 at 10:08 am Only in Craig Thomson’s electorate. willhew May 23, 2012 at 10:11 am With the high aus$ Australian companies are purchasing goods made overseas at the lowest prices in history but (for the majority) instead of passing these savings on to consumers and becomming more competitive they have just inflated profit margins. When you look overseas you realise how ripped off australian consumers are and I think people can no longer afford to or do not want to pay inflated prices. Purchased a new G shock watch for christmass from the UK for just under $100 inc delivery. Cheapest I could find it here was for $350(online or instore) and the UK company was still making a profit. I too would prefer to shop in a mall but I am not willing to pay the prices. Cognitive Dissonance May 23, 2012 at 10:37 am I just purchased something from Amazon, it was made in Australia and cost me $120 to have it transported back to our shores but I still could get it for much cheaper. Some manufactures and wholesalers protect themselves and restrict retailers like Amerzon from shipping outside the US but in this case I could. All I can think of is Perestroika (or restructuring in Russian) Some forwarding looking people must have also that troubled sleep back in 2008/9/10 when they IPO’ed there family company or retail chain(s) Sebastionbear May 23, 2012 at 10:58 am Online purchases and significant savings – particularly from overseas are the norm for me now. I needed a part for my motorcycle – $388 here with a 2 week wait time, $86.70 from the USA delivered in a week. I do not even bother going into Bricks and Mortar stores now as I live in country SA and online provides the source for the majority of my (overseas) purchases. Of course the dollar may crash but I doubt it will wipe all of the savings to be made. The Lorax May 23, 2012 at 2:46 pm Yes, yes, I know all of that, but WTH are the 1.2 million Australians employed in retail going to do if we all shop online? Get jobs in the mines? coolnik May 23, 2012 at 11:16 am Lorax: Shopping malls have become the hub of today’s communities. Its where congregate, meet friends, relax, and if malls become empty and desolate where do we connect? Since when we started looking at the shopping centers as community centers, and why is this good for the society? And why would one go to the shopping mall to get a coffee? StanGoodvibes May 23, 2012 at 12:49 pm Urrrrrrrghhh I *hate* malls and avoid them with zeal. If I’m wanting coffee out I’ll head to the sun and water (plenty of that in Sydney) and try and find a kid-free cafe to boot (the only thing I hate more than malls are children). Apart from some clothing items I want to try on before I buy (and the same logic applied last week shopping for a new bed), I buy everything online. I shop online at work, It gets delivered to my door (having a parcel waiting for you is exciting – like it’s a birthday!), and life is too short to spend it shopping! And it’s always cheaper. The Lorax May 23, 2012 at 2:49 pm I’m not here to defend malls — I hate the places — but the alternative is worse: We do everything online. drsmithyMEMBER May 23, 2012 at 1:15 pm Fair enough, but I reckon a lot of the apparent “gouging” is due to the rise in the Australian dollar. With the dollar at parity or above it certainly looks like gouging when we compare online US dollar prices with bricks & mortar retail prices. As a long time (since the mid-90s) buyer of goods (primarily electronics and books) from the USA, I can assure you that even back when the dollar was down around $0.50, it was still well worth (25%+ savings) buying from there instead of locally. dumb_non_economist May 23, 2012 at 2:57 pm Agreed. Having seen retail prices here, the US and UK over 12 yrs we have long been getting ripped off and the dollar has not been the reason for it, greedy retailers/shopping centres have been. Marcia May 23, 2012 at 4:27 pm Wholesalers have a lot to answer for – more so than retailers. A friend who works in retail is finding his customers can buy a product online and have it shipped to Australia for cheaper than the wholesale price he is charged from the manufacturer. drsmithyMEMBER May 23, 2012 at 6:26 pm Wholesalers have a lot to answer for – more so than retailers. A friend who works in retail is finding his customers can buy a product online and have it shipped to Australia for cheaper than the wholesale price he is charged from the manufacturer. I am also inclined to believe it is the wholesalers and have heard similar statements from friends who used to run businesses. A perfect example of this is certain European automobile marques who like to attach a 30%-100% “Australia markup” on their cars. Lori May 23, 2012 at 10:04 am Coolnik, Absolutely agree. The retailers got used to easy money and high profits and now they are struggling to restructure. One should ask whether it is viable for an economy to rely for wealth growth on ever rising housing prices instead of growing productivity through innovation and new technologies (not like Facebook technology though). We still don’t have good measure of productivity. Lifting the profit isn’t always equal to higher productivity, unfortunately. But lazy profits (rents) create this destructive culture where every business believes it is entitle for easy big profit just because it is a business. Business is like love, one has to give love for to be loved. Quickies don’t create stable relationships. [email protected] May 23, 2012 at 10:06 am The point that bugs me is reflected in both the above posts. Namely the nations economic structure. It aint workable in a sustainable way 3d1k May 23, 2012 at 10:09 am Lorax, is it one million unemployed retail workers now, instead of you previous one million unemployed manufacturing workers – or is it two million unemployed, displaced by wicked mining. Move on. The Lorax May 23, 2012 at 2:51 pm More than two million actually … and yes, all displaced by wicked mining. 3d1k May 23, 2012 at 2:54 pm Lol. You’re obsessed. Julius May 23, 2012 at 4:07 pm …said the pot to the kettle. 3d1k May 23, 2012 at 6:34 pm Yes. But in a good way. 🙂 Diogenes the CynicMEMBER May 23, 2012 at 8:04 am This is definitely a big factor at the household level and I think the savings rate will go even higher. But there are some other factors also at play – demographics, the rise of internet retail, mobile devices allowing price comparison, slower rates of household formation (the spend during a new house formation is much higher), and some slowdown in product innovation ie where is the next Ipad device? Serenco May 23, 2012 at 1:49 pm the price comparison is an important one. As an example, back in the day when big flat screens were coming into fashion I could go online and find a price well below (typically at least 20%, maybe more) the advertised price in store. You go in tell them their competitor has it for that price, boom instant discount and its delivered the same day. Now when I go into the same stores they are advertising the electronics at much closer to the real cost that one can get them online for since they know people know where to find this information. a63 May 23, 2012 at 8:17 am Don’t discount that people are worried about our political mess. Who knows what we’ll see on our utility bills, heath insurance, mortgage, and all the other real cost of living expenses in twelve months time. The economy is a house of cards, and more people realise that now. Also fewer believe the political spin IMO, and that effects their spending; well it does mine. LBSMEMBER May 23, 2012 at 8:33 am “Who knows what we’ll see on our utility bills, heath insurance, mortgage, and all the other real cost of living expenses in twelve months time.” a63 I think it will much sooner than that especially the (crap)carbon tax coming online in July. a63 May 23, 2012 at 8:52 am I’m also looking at increased rates for foreign sourced funding. I don’t believe what we read locally. That will impact quite alot if it does occur. StanGoodvibes May 23, 2012 at 12:52 pm The carbon tax will be offset by no longer having to pay the flood levy to Queensland aka The Smart State (So smart they need the rest of us to bail them out even though they are having a mining boom). hzhousewife May 23, 2012 at 10:22 pm My house and contents insurance is up 29% on last year. No fire risk, no flood risk, I’m just paying for national cover on behalf of my fellow citizens. This is OK while I still work, after I retire I’ll probably not insure house and contents, I would rather maintain my health insurance. Lori May 23, 2012 at 10:15 am Yesterday evening I received a new offer from CBA in my post mail box with a letter informing that the new law allows me to acquire up to $10,000 credit limit on my credit card and I have to hurry to apply for it as like this is something with very high demand and restricted supply and in deficit on the market. I couldn’t believe it. The credit card trap is getting deeper and easier to fall in. darklydrawlMEMBER May 23, 2012 at 12:10 pm Yeah, I get one or two of these a month, often from banks I am not even a customer with – Straight in the bin via the shredder. I thought it was illegal to do that now, but the letter of the (new) law is the banks cannot send you a “You have been pre-approved” letter. Apparently sending you a semi pre-filled application with an implied approval is just dandy, if not in the spirit of the whole show. Unless you have deep pockets and the ability to pay it out every month, why on earth would the average Joe/Joe’tte need (or desire) a $10K limit @ 20% interest anyway?? drsmithyMEMBER May 23, 2012 at 1:21 pm Unless you have deep pockets and the ability to pay it out every month, why on earth would the average Joe/Joe’tte need (or desire) a $10K limit @ 20% interest anyway?? Because sometimes you want to make big purchases – overseas holidays, cars, etc – on a credit card to earn points or benefit from freebies like travel insurance. I have a couple of cards with $15k limits. Haven’t paid a cent of interest on any of them in 10+ years because I always pay out the necessary balance before the interest free period is up. Alex Heyworth May 23, 2012 at 1:26 pm And on top of the points, you get an interest free loan for up to 55 days. Of course, there is a fee for this privilege, but it is not hard to wipe this off. You can even use your points to pay the fee. darklydrawlMEMBER May 23, 2012 at 1:35 pm Exactly DrSmithy – if you use your CC’s wisely and have the capacity to pay out the amount in full before you pay interest than that is great. Indeed, I am a big fan of using their money (interest free) rather than mine. My point is I feel it is prudent to ensure your cash position is sound enough to pay out the card in full if necessary. Clearly you already do this – however I know many folks who have massive CC debts, pay the min amount every month, spend it again, hit the limit and repeat… Based on my experience working within CC depts of the major banks there are many folks who are at the limit each and every month. Alex Heyworth May 23, 2012 at 1:27 pm A lot of people do have deep pockets and the ability to pay it off every month. Not that these people are the targets of the offers! a63 May 23, 2012 at 12:38 pm Lori, I got a Citi credit card offer one addressed to the householder for a similar amount. They are desperate to grow that credit, and give us more “debt cards” [email protected] May 23, 2012 at 12:47 pm Recently had some one suckered by this stuff. Didn’t workout that well for the bank. Unconscionable lending. Cost the bank more than it was worth. The_MainlanderMEMBER May 23, 2012 at 8:33 am Ouch UE “And the headwinds facing retailers, the economy and asset prices will only grow stronger as the baby boomers retire and pare back their spending.” that was a real kick-em in the guts when they are down … but hey it ain’t like they have not been warned for the last 6 years by Keen, Bubblepedia, MB etc. the list goes no! Great post, thank you! Janet May 23, 2012 at 9:16 am It gets worse! As one myself, not only do you stop buying, but you start selling..all those rooms full of ‘stuff’ that you don’t need now that (1) the family is gone or (2) you trade down to a smaller house, now there’s on the two of you or (3) you end up in the Twilight Villas, and don’t need anything. So it’s more than a halt to buying; it’s a reversal as well. campbeln May 23, 2012 at 10:20 am There is a lot to this; I can personally feel a sea-change in my consumerism addiction. I am sick and tired of re-buying the same cheap crap over and over again! Oil column heaters every few years, dust pans and brushes, blenders, couches… I hate the K-Mart commercial with the $12 toaster. that piece of junk will be in the landfill within 12 months! So I’ve started getting high quality used (like a BlendTec blender and an old-school metal dust pan) and not buying again. Now, this may be my demo (I’m 34), but I’m not really buying tech anymore either. I’ve got my phone (iPhone 2G), my laptop and a few external hard disks, I don’t need anything more. I’ve got my big screen. Couple this with a want to be more earth friendly (buying used is recycling AND cheaper) and I further restrict my purchases so as to not add to the landfill. I want LESS stuff in my house now, not more. I want to be able to pack up the bathroom in a single milk crate for the next move. Now, while I wasn’t a rabid consumer (agh, who am I kidding, I’m a Westerner, we’re ALL rabid consumers) I am FAR less now. I think the “less stuff” movement is gaining steam for a number of reasons… Matt May 23, 2012 at 10:39 am I’m a gen Y’er and am thinking along the same lines. I cant afford a large place to rent, but then I think if I had any more room it would only be filled with useless junk that I wouldn’t be using anyway. I also have rattling around my head that old axiom that “they don’t make these like they used to”. How much of the rabid consumption of the last 30(?) years has been driven by the tendency of product engineers not to over engineer consumption goods, giving them a short lifespan that will enable churn in sales (should also mention the consumers ever present drive for ‘cheaper’ goods – not taking into account the long term view no doubt)? I’m thinking kitchen goods, cars, clothing, etc etc. Mining BoganMEMBER May 23, 2012 at 11:06 am http://topdocumentaryfilms.com/light-bulb-conspiracy/ Mining BoganMEMBER May 23, 2012 at 11:10 am That’s embarrassing, it’s been removed. Anyhow, I’m sure you nerds know how to google. Eunicechinws May 23, 2012 at 11:28 am +100 Opinion8red May 23, 2012 at 12:14 pm “That’s the whole meaning of life, isn’t it, trying to find a place for your stuff” – http://www.youtube.com/watch?v=MvgN5gCuLac drsmithyMEMBER May 23, 2012 at 1:24 pm I also have rattling around my head that old axiom that “they don’t make these like they used to”. They do build them like they used to if you know where to look and what to look for. The problem is since it doubles or triples the price, most people either won’t or can’t pay (which in some cases may well be a better financial decision in the long run). dumb_non_economist May 23, 2012 at 3:13 pm Matt, a lot of that cheap “stuff” lasts longer than the expensive “stuff.” Not long after getting married and moving to Brisbane we buy the new “stuff” and one bit is an expensive kettle, stainless steel EU type, lasted just outside the warranty period. Replaced it with a 1/3 priced cheapie and it was still going 8 yrs later. A lot of the time you are paying for image only. forty-niner May 23, 2012 at 6:07 pm A light bulb that has burned continuously for 110 years has its own webcam. Unlike the bulb, the first webcam lasted just 3 years. http://www.centennialbulb.org/photos.htm http://www.centennialbulb.org/ Cognitive Dissonance May 23, 2012 at 10:49 am Amen Brother AnonNL May 23, 2012 at 1:00 pm Agree, I hate cluttered homes. I honestly would not know what else I would genuinely need, other than new clothes etc every once in a while. 😛 MicroMaker May 23, 2012 at 4:00 pm I see this a big trend that is only just getting started. We are saturated with material goods. Structural change doesn’t just apply to the macro view. http://www.storyofstuff.org/movies-all/story-of-stuff/ christopher dahl May 23, 2012 at 2:08 pm Some malls are already struggling. Yesterday at lunch time I walked around the ex-DFO at Spencer Street (Melbourne). I counted there are roughly 110 shops, of which 31 were empty. How are malls doing in your neck of the woods? Aussieoil May 23, 2012 at 4:58 pm That place is a ghost town… Even worse try Harbour Town at Docklands. Those places must have a sweet lease deal as I never see people there – which I pass by weekly to play Ice Hockey. I also don’t notice many lights on in the appartments around the area – interesting! dodger May 23, 2012 at 8:59 am Actually it looks like savings rates are stabilising which might mean that spending starts to grow again in line with GDP growth having effectively rebased at a lower proportion of GDP. Reductions in the dollar will ease a bit of the pressure too. I think that the price deflation of a lot of imported goods is also having an impact. Just how many giant flat screen TVs can you buy? I spent 3K on a widescreen TV 11 years ago, now get a much bigger and better one for $600. Just bought a new car and prices (in $) are about the same as 7 years ago when I last bought a car. campbeln May 23, 2012 at 10:25 am “Reductions in the dollar will ease a bit of the pressure too.” Followed up by… “…the price deflation of a lot of imported goods is also having an impact.” We can’t have it both ways for long! Sure, those pieces of tech that were brought in at $1.10 to the USD are cheap but if the AUD is headed lower… no more 55″ LED for under $1500. And retail is already hurting with this “perfect weather”… eep! AlistairMaclennanMEMBER May 23, 2012 at 9:02 am The flip side of the argument made here (which looks sound to me) is that the excess expenditure on retail in previous years led to excess supply of goods and outlets. It never ceases to amaze me that there are so many shops selling mostly indentical products. If half the shops closed there still wouldn’t be any shortage of goods to buy. a63 May 23, 2012 at 9:09 am Almost word perfect on what I heard from a retail manager in the fashion sector in Melbourne. Dr Watson May 23, 2012 at 9:50 am I agree entirely, but I can help wondering what is going to be done with all these vacant/empty shopfronts? russellsmith55 May 23, 2012 at 10:35 am Convert to residences? (not that Melbourne needs another nail in the massive oversupply coffin!) Rusty Penny May 23, 2012 at 10:41 am I’ll buy a suburban shop for $1,000 if they rezone it. I’ll quite happily put gyprock partitions for a room or two, and they tend to have high enough ceiling for a mezzanine bedroom. Rent it out for $40/week, I’ll help solve the ‘rental crisis’. poid May 23, 2012 at 11:35 am Allow small retail to thrive again and undercut the big box stores, which will end up with massive overheads due to their size and staffing costs. It’s why corrections are a good thing! Lighter Fluid May 24, 2012 at 12:55 pm Malls have been re-purposed and reclaimed for community, or mixed use in the States: http://stateimpact.npr.org/new-hampshire/2012/02/17/how-communities-are-reclaiming-vacant-malls/ Examples include galleries, atriums/gardens, all-in all more like post-modern town-squares… Rusty Penny May 23, 2012 at 10:20 am That’s what I would tihnk. A credit bubble fueld the retail sector to over-capitalise. No sector ever volunteers to reduce in size. You need economic dislocation occur to restore things. Janet May 23, 2012 at 9:08 am So we New Zealanders have the historically had the worst net wealth/disposable income ratio ( only recently eclipsed by the USA as their housing market implodes) and yet we have consistently been at the top, along with Australia, in terms of the amount of net wealth we have tied up in our houses; now eclipsing even you Aussies! I wonder how this is going to end, now that our ‘dirt'( our milk, actually, the commodity that is holding our economy together,) has dropped +40% in price the last year….And don’t forget, Our Banks are actually Your Banks… StanGoodvibes May 23, 2012 at 1:02 pm That’s why we’re all over here Janet. The ‘housing wealth to disposable income’ chart has NZ blazing away at the top there, but the chart is starting to head downwards… still a great time to be over here knocking off the kiwi mortgage at 5.5% interest and NZ$1.3 to the Ozzie. Of course it pays to keep your country pile in NZ for when it all goes to custard a la Tyler @ Zerohedge. AmusedMEMBER May 23, 2012 at 9:21 am every time i hear or see gerry harvey in the press i go and write some HVN call options hzhousewife May 23, 2012 at 10:44 pm actually, gerry’s been silent for about 6 weeks -what gives ? thomickersMEMBER May 23, 2012 at 9:24 am And yet Thorn Group (radio rentals) survives against the odds. manfin May 23, 2012 at 9:52 am I know a guy who runs one of the stores. He says his figures improve every month. thomickersMEMBER May 23, 2012 at 12:25 pm I acquired their stock during the GFC and accumulated all the way upto $1.10 🙂 Cashflow report is a little poor this reporting season however. Sean G May 23, 2012 at 9:52 am They have a very loyal customer base. When I was living in South Australia I knew lots of people with “Radio Rentals” loyalty cards who could always get a new applicance regardless of their credit rating. Not the cheapest place to buy but they will always give a loyal customer with one of those cards a hire-purchase no questions asked. They don’t seem to have the same sort of market penetration here in Victoria – I guess because there’s so much competition here. reusachtigeMEMBER May 23, 2012 at 9:58 am It’s a model that works best in tougher times. [email protected] May 23, 2012 at 10:10 am +1 prescient no? AmusedMEMBER May 23, 2012 at 10:48 am we floated it at the broker i worked at at it popped very well on the first day for any clients who bought on thr IPO dumb_non_economist May 23, 2012 at 10:49 am Not that surprising really. Just looked at their website and you can “rent/try/buy” the following for a total of $44 pw; fridge, washer, lcd tv and dining rm table. All new and most people would spend more on a meal down at the pub. However, not very economical in the long run! GB May 23, 2012 at 9:48 am good article UE. just more and more evidence of deflation as the same amount of retailers compete for fewer and fewer $ and many just cant survive. The cuase is deflation as is the effect. retailers going broke owing millions (in this case more than $30 million in debt). These are assets on the balance sheets of creditors that disapear. i.e fewer dollars again. This is how deflationary spirals look when they start. now wonder 3yr bond yeilds have dropped to just 2.4% and the AUD is now under 98 cents….short the AUD. jimjim May 23, 2012 at 9:48 am Another major factor in the slump would be that most of the retailers have brought forward sales with interest free purchase plans. They have borrowed from tomorrow, now there is no tomorrow. technofreak May 23, 2012 at 10:01 am I wondered about that as well. Has to be having an effect in some way. And then there are those that are not going in for the interest free deals as they are maxed out already or scared of credit now…? amaroo May 23, 2012 at 10:30 am Not just the fact of ‘interest free’ itself. Previous sales growth also came from an interest free period that kept increasing – 1yr, 2yrs, 3yrs, 5yrs – which is obviously unsustainable. darklydrawlMEMBER May 23, 2012 at 12:26 pm Keep in mind that “Interest Free” is a marketing ploy for folks who didn’t do too well at Maths. The interest (and then some) is factored into the repayments over the life of the loan. It is also often geared that the minimum payments won’t pay out the loan completely over the X years. The rates applied to any outstanding / late / overdue balances would make most folks noses bleed. Jumping jack flash May 23, 2012 at 12:40 pm This is true, my wife has a store card and when the bill came in each month she was only paying the minimum that it said on the bill. I took a look and after some quick calculations, asked her to treble the repayment so it would be paid off within the interest free period. They do have a disclaimer on them though which says the amount on the bill may or may not be enough to repay it within the interest free period. Clever, clever. It is little wonder why so many are in trouble and the economy is all but ruined. darklydrawlMEMBER May 23, 2012 at 1:40 pm You can see this for yourself in action rather easily. Go to any store that offers interest free (HN will do) and ask for the best price on X that is available on the plan. Then tell them you want the best price if you pay cash today. There is usually a big variance in favour of cash today. Actaully if there wasn’t I would walk away there and then. Sean G May 23, 2012 at 9:56 am Tony Abbott’s solution would probably be to cut everyone’s wages (despite the fact that retail is already the lowest paid sector next to hospitality). People just aren’t spending any money at the moment. As I’ve commented here before (and it was in the ‘Age’ today) Chapel street is being hit particularly hard at the moment with lots of long-term empty shops, particularly down the Windsor end. Being my local shopping strip I’ve also heard from shopkeepers that it’s really hard at the moment and that agents are spruiking big discounts for long-term leases. It’s just a sign of the times… reusachtigeMEMBER May 23, 2012 at 10:01 am http://www.youtube.com/watch?v=Gbk03Gdq0OY Jumping jack flash May 23, 2012 at 12:54 pm cutting wages is actually a very good thing to do, although I generally don’t subscribe to any of the media-fuelled, business-owned, puppet political parties we have in this country. One of the problems in this country, and most of the western world is low productivity and high wages. Raising productivity isn’t as easy as cutting wages. Besides, we need to compete with the $20 a week pseudo slave labour in Asian nations who now do most of our manufacturing for us because of the global con-trick of globalisation. We can’t compete with that easily when we demand a minimum $20 an hour to do any kind of menial task. drsmithyMEMBER May 23, 2012 at 6:39 pm I’m comfortable with cutting wages so long as we start at the top and work our way down. Even better would be to say that the highest remunerated employee in the company cannot earn more than (sticks finger in the air) 20x more than the lowest remunerated employee. amaroo May 23, 2012 at 10:22 am Hi MB THis sentence, near middle of article, sounds odd. “The key point is that rising (falling) home prices tends to lead to decreases (increases) in consumption spending because of the wealth effects described above.” DrBob127MEMBER May 23, 2012 at 2:33 pm I noticed that too, I think that one of those is the wrong way round. hamish May 23, 2012 at 10:38 am Looking at the first graph, I’d struggle to call things a disaster. From the commentary you would think sales have fallen of a cliff, instead it’s merely the growth that has stopped. So maybe profits were easier to come buy when you could bank on ever increasing sales each year, and several businesses are now coming unstuck because they have borrowed on the expectation of that sort of growth continuing. Then there are all the landlords (like Westfields) that have had the expectation of continually being able to up the rents regardless of what is happening with sales. Rusty Penny May 23, 2012 at 11:08 am have had the expectation of continually being able to up the rents regardless of what is happening with sales. This is a glaring example of the absence of the invisible hand. Whilst Bogan Joe tapped into his unearned home equity, both Retailing Joe (Gerry Harvey) and Retail Property Joe (Frank Lowy) rubbed their hands together thinking they can herd (collude) together to gouge Bogan Joe. However the path was unsustainable. Once thr Kool Aid ran out, Harvey is now p*ssed off that he has to take the brunt of the deflation, thinking Lowy should do the honourable thing and volunteer to take some of brunt as well. 😀 Good luck there !! Other industries are just as guilty, particularly small manufacturing who thought they were niche enough to be non-tradable. This is where the likes of Heather Ridout and various retail lobby’s are complete and utter incompetents. In the long term, it is never in the intersts o any sector, and definately not those reliant on discretionary spending, for bubbles to occur. Heather Ridout should have been decrying a housing bubble, the worst kind of bubble, every minute on the way up as to protect her members when the bubble bursts. They needed to be the invisible hand that corrected the economy in 2003, not 2012. Their modus opeandi has been to reap extraordinary profits on the way up, and hope they can socialise the losses on the way down. The downfall this time was the moment in time they needed to socialise the losses, conincided with the only entity rich enough to do so was mining, who beat them at the lobbying game. Cest la vie. Creative destruction must take its course. Sean G May 23, 2012 at 11:35 am I’m always astonished that anyone who rents at Westfield can actually make any money. Not only are the rents themselves really steep but they take a proportion of your turnover – no wonder Frank Lowy is as wealthy as he is. Gerry actually owns most of the real estate that his shops reside in so he’s not as troubled as other people are; however the value of his real estate is probably declining as it is across the board. david collyerMEMBER May 23, 2012 at 11:41 am +1 Rusty. Falling land values mean the loyal consumer is paying down debt, not buying stuff. When Gerry Harvey offers sharp prices, 4 year interest free loans and free parking yet receives only a weak response, we can see the game is up. The Lowys can’t clip the retail ticket if consumers ain’t buying. Their business model has more ratchet gears than a Swiss watch, but without eager consumers to wind it, this finely calibrated cash stripping machine stops. And the business leadership is woeful. Anyone in the debate who sees their task as shifting cost and the pain of adjustment to others invites and deserves exposure and public ridicule. We have travelled the GFC better than almost any country. This great good fortune can be continued, if these ‘leaders’ advance national prosperity by embracing the tax reforms Ken Henry and Treasury offered. The housing downturn is unstoppable, yet there is nothing inevitable about the prolonged recession that normally follows. But self-interest trumps progress, yet again. Sigh! The Patrician May 23, 2012 at 12:07 pm Sales growth slows and stops => Stressed tenants bail on locked-in rent increases => Over-leveraged landlords left with empty shops have to drop rents to get new tenants => Banks review valuations of commercial property based on new rents => Margin calls on over-leveraged commercial property prompt fire sales => return to start Car hits tree => Drivers head hits steering wheel => Drivers brain still traveling at 100kph hits the inside of his now stationary skull. Its the last bit the kills you. Whether a disaster or not depends on speed at impact and saftety belt/air bags etc. I fear some of our retail friends and property types are driving unrestrained, at high speed in those 1950’s era F1 cars. Probably intoxicated. Not all will survive. DomMEMBER May 23, 2012 at 11:03 am Of course this only brings forward the day when Australian retailing is controlled by very few large companies. Then we will experience the usual Australian cosy duopoly controlling 90-95% in all retail sectors (now rolling out in hardware) that will have suppliers in their control and apart from the small number of weekly specials, increased margins. Rusty Penny May 23, 2012 at 11:17 am Competition is inhibited from springing up when barriers to entry are high, and wages have little do do with it. Wages only inhibit the rent seeking fantasies of entitlement. I am currently looking at gas BBQ’s. The things you see going for $3,999 at Hardly Normal, I have now sourced for roughly $550 per unit on a big enough consignment. I can undercut quite a bit from that $3,449 margin for operating. My inhibition is not wages, I’ll do the first point of wages, when business gets busy enough, I’d hire extra staff who will add a margin. if my volume isn’t sufficient, I don’t even make an outlay in this area. But if I do employ, I obtain an extra margin, profit is profit. The only ones who complain about wages are those that expect to do no work, and hire casual staff at $18 an hour straight away. In other words, retire because they own one small business outlet. That’s where our productivity declines, this sort of entitlement in regards to rent-seeking. My inhibition is massive rents. I looked at even floor space at Wanneroo markets, trying to do this on the weekend. Even that was prohibitive. Rents are a fixed cost. The high price of fixed costs is what inhibits competition. Alex Heyworth May 23, 2012 at 11:24 am And rents come back to inflated land prices. The price of land is the most pernicious influence on our economy. It hurts almost every sector. roylefamilyMEMBER May 23, 2012 at 12:33 pm Hear Hear!! technofreak May 23, 2012 at 12:34 pm +1 Alex hamish May 23, 2012 at 1:48 pm Local Councils can also act as a barrier to competition as well. Mate of mine is a planner in Sydney, as was talking one night how they have done studies to determine how much office space they will allow to be built, and was complaining about developers wanting to build too much… I think it fair enough for councils to determine things like where, how high, preservation of heritage buildings, and aesthetic standards, but I’m pretty sure developers are perfectly capable of working out how much to build. Pfh007MEMBER May 23, 2012 at 7:02 pm +100 Australia has about half the retail space per capita compared to the US. There is your explanation of gouging. Local council planners who think they know best how much retail and office space is required hamish May 24, 2012 at 1:29 pm This just reminded me of the Orange Grove affair several years ago in Sydney http://en.wikipedia.org/wiki/Orange_Grove_affair Admittedly this was more about state govt level intervention, and it also shows an incumbant (Westfields) using the law to shut out competition, but it couldn’t have happened without Liverpool Council’s zoning restrictions on how much of a certain type of business is allowed. I’m sure one of the reasons Westfields can get away with the rents they charge, is because they are confident the local government will prevent any competition opening up. In a similar vein, I’ve heard that ALDI has had problems opening additional stores in Australia due to Coles & Woolies successfully lobbying various local councils against additional retail space. MicroMaker May 23, 2012 at 4:24 pm Ahh I see you are in Perth like me. Gotta pay boom state rent rates to rake in all that mining money. tsport100MEMBER May 23, 2012 at 11:45 am “consumers made increasingly skittish by the European financial crisis” LOL These idiots will use any explanation, so long as it doesn’t reinforce actual reality! Retail failures couldn’t be caused by the previous 10 years of consumer spending growth being fake… fuelled by ever increasing consumer debt that has now simply maxed out @ 160% of disposable income? Nope…. it’s some news from Europe making everyone forget they’re up to their armpits in debt. Lets just keep pushing for a 200% household debt ratio. Jumping jack flash May 23, 2012 at 4:03 pm Agree entirely. Europe is a convenient ruse because we have no control over it. It is being used as the financial boogeyman. While the situation there is very dangerous for the global financial markets (read: debt mountain), I don’t think most people wake up in the morning and check the status of Greece, Spain and Italy before deciding whether to buy their morning coffee or not. “Whoops, Greece got downgraded last night. So it’s canned fish paste and two minute noodles for dinner tonight, kids.” Evan May 23, 2012 at 12:25 pm I’m wondering about factoring in job insecurity – casualisation of employment. When income isn’t secure people will naturally want more savings for a buffer. technofreak May 23, 2012 at 12:37 pm Or the dark shadow of jobs and industry going to Chindia…That’s got me pulling my horns in. The Claw May 23, 2012 at 1:45 pm You need to get out more. There is a difference between wanting more savings and being in a position to save. People with less job security tend to save less not more. They simply don’t have the spare money. tonyddMEMBER May 23, 2012 at 6:01 pm In a general sense its why the Chinese are great savers. Insecurity for any reason or cause will make sane people more conservative in spending and great savers. Its not rocket science. rob barrattMEMBER May 23, 2012 at 1:27 pm “Australians began using their homes as ATMs, withdrawing large amounts of their new found home equity” – money spent on an asset price that’s not going to be realized to (quote JimJim) spend tomorrow today. Massive price gouging – lazy profits. A government whose only vision is the minute regulation of every aspect of real industry. Qantas worker’s unions trying to persuade people not to fly Qantas. An epic example of hubris. Even if you ignored the exchange rate barriers, what are the the prospects for industries that people will need to work in to pay back those debts? Sounds like a “Decline & Fall” saga to me. A story of arrogance and entitlement. Of course I might be wrong… Jumping jack flash May 23, 2012 at 1:49 pm you are absolutely correct. Its the stuff that topples empires. dumb_non_economist May 23, 2012 at 6:14 pm With regards to hubris and Qantas I think you can throw in the management pay structure there as well. rob barrattMEMBER May 23, 2012 at 6:36 pm Show me any company where everybody thinks the executive aren’t being paid enough. I’ve been the victim of executive greed when I worked for a large IT consultancy. We got no pay rise for 4 years & then discovered the executive were topping up by 30% PA. This doesn’t change the fact that for a untion to effectively push to become a suicide bomber targetting their own members jobs is totally unacceptable. Velociraptor May 23, 2012 at 9:44 pm When did ALAEA or ALPA/AIPA persuade people not to fly QF? Link? rob barrattMEMBER May 24, 2012 at 7:44 am Rolling wildcat strikes are meant to play on peoples fear of getting to the airport and finding they can’t fly. That constitutes a deliberate campaign to put people of using the carrier VR. http://www.theaustralian.com.au/news/features/fasten-your-seatbelts/story-e6frg8h6-1226349882403 To quote Joyce: “I think unions have a role to play in society and they can be a force for good, but sometimes they can be a force for not so good. At the end of the day you have to stand up to bullies and what depresses me badly is that we have union leaders who took a deliberate campaign to hurt the brand … it was so outrageous and destructive.” He says he always voted Labor, I believe him. Jumping jack flash May 23, 2012 at 1:47 pm Servicing unimaginably massive debts sure takes a lot of money out of the economy. A million here for this house, a million there for that house, pretty soon you’re talking real money. Money that could have been used for far better things than swap houses with each other and buy worthless trinkets made overseas. In essence, the massive debt bubble transformed our economy from something that was functioning to something that now requires constant life support in order to survive – life support from continuously increasing debt injections from either the private or public sectors. The money used to repay the debt, of course, flows back overseas because that’s where it was originally sourced from by our banks. We don’t even get to keep it. technofreak May 23, 2012 at 3:09 pm Isn’t there a bit of a baby boom going on at the moment…? Velociraptor May 23, 2012 at 9:24 pm Top post LVO. “With house prices rising inexorably, Australians began using their homes as ATMs, withdrawing large amounts of their new found home equity. Much of this money was spent on consumption, thus further boosting incomes and employment.” “Rising home values between 2002 and 2008 created a positive feedback loop whereby households borrowed against their homes to fund consumption expenditure.” Why can’t the media get on to this? Its got SFA to do with online retail. “The key point is that rising (falling) home prices tends to lead to increases (decreases) in consumption spending because of the wealth effects described above. And as long as Australian housing values remain stagnant or falling, consumption expenditure, credit growth and job creation will remain subdued relative to the decade leading up to the GFC. Further, any falls in home prices are likely to have an oversized impact on consumer confidence and spending in Australia, simply because housing represents a higher proportion of household net worth than in most other nations” Did I hear a pop? “…47% of Australian consumers felt they were in financial trouble or not financially secure – a figure higher than the economically ravaged European Union and United Kingdom! And according to the the leader of BCG’s consumer practice in Australian and New Zealand, James Goth, the decline in Australian home values is a key factor behind the pessimism”.