ABC’s The Business ran a short segment last night on the “recessionary conditions” afflicting the retail sector, which is battling a killer combination of intense competition, tight profit margins and record low wages growth:
Reporter: “The $300 billion retail sector is doing it tough. So tough that analysts say it’s facing recessionary conditions”.
Jeremy Thorpe, Chief Economist, PwC: “We’re on the verge of a really problematic period in retailing. Three of the last four months have been declines in Australia’s retailing environment”.
Reporter: “Half a dozen Australian brands have gone under since Christmas, including the chains Pumpkin Patch and Marcs”.
Brian Walker, Retail Doctor Group: “Many of these businesses really only have to take a 10% to 15% sales decrease year-on-year for a couple of years and they are out of business”.
Reporter: “The next in line could be the upmarket fashion brand Oroton. It’s warned investors that earnings could fall up to $10 million for the full year, leaving a wafer-thin profit margin of just $2 to $3 million. For Oroton and others, there are big economic factors in play”
Wages growth is still at record lows, with yearly pay rises of less than 2%”.
Brian Walker, Retail Doctor Group: “We as consumers have less money to spend on discretionary items. Retail is all about selling discretionary items. So the impact is very quick”.
Reporter: “Underemployment is also a problem. And on top of this, there are worries in Sydney and Melbourne about a correction in the housing market”.
“The most recent snapshot of consumer sentiment found confidence slipped even further this month, and Australians are keeping their wallets shut despite the spending plans outlined in the federal budget”.
The retail slowdown is clearly illustrated in the next chart, which shows that real annual volumes growth fell to just 1.2% in the March quarter – the lowest level since September 2011:
Part of which can be explained by the collapse in employee income growth:
That said, the situation facing retail would be even worse had households not also reduced their savings. In the December quarter, the household savings rate hit its lowest level since before the GFC hit in September 2008:
Relying on further borrowings to support retail sales is unsustainable. Thus, the retail sector faces further headwinds once the household savings rate stabilises or increases.
