Insight
Retail magnates have produced a virtual laundry list of causes for the industry's difficulties in recent years.
The high dollar, internet shopping, labour costs, the carbon tax — all have copped the blame at some point.
But there's a much more significant cause for the industry's pain that they're much less keen to single out: their customers.
Since the middle of last decade, there has been fundamental change in household spending patterns. The effects of these changes to how we spend are still rippling through the economy, and are responsible for a large chunk of the challenges facing many big employers.
The graph shows that from about 2005, consumers began spending a significantly lower share of their incomes on goods and services that are discretionary, or non-essential.
The share of spending that is discretionary (such as cultural and recreational activities, retail, alcohol, hotels and eating out) has fallen from about 32.5 per cent of budgets to 28.5 per cent.
At the same time, we've devoted a greater share to what economists regard as necessities, such as education, health, food, housing and utilities.
What brought about the shift?
A common explanation is that households have re-adjusted their budgets because they started to realise the spending sprees of early last decade were unsustainable, as much of the binge was funded by a boom in asset prices.
Since the financial crisis, the share of income we're prepared to spend on many non-essential products has tended to drop.
Total spending is still growing. But it's doing so at a moderate rate of 3 per cent to 4 per cent — roughly in line with what we're earning.
Few would dispute that this is a much more sensible approach to household budgeting than relying on rising house prices and rising share prices. But for the industries that relied on us splashing out — especially retail — it's made life much harder.
Many of these businesses are being forced to cater to a more cautious breed of consumer, who are more reluctant about living beyond their means. It's a wrenching change for firms across the economy, even if it is ultimately in the households' best interests.
Frequently Asked Questions about this Article…
Even though the economy appears healthy, households have shifted how they spend their income. Since about 2005 Australians have dedicated a smaller share of their budgets to discretionary items, so retailers that rely on splurges and non-essential spending are feeling the pinch despite overall economic strength.
From around 2005 consumers have reduced the share of their income spent on discretionary goods and services (like retail, entertainment, hotels and eating out), while increasing the share spent on necessities such as education, health, food, housing and utilities — a shift that has reduced demand for many retail businesses.
According to the article, discretionary spending has fallen from roughly 32.5% of household budgets to about 28.5% since the mid-2000s, representing a meaningful reallocation of consumer dollars away from non-essential items.
Households reassessed their budgets after realising much of the early-decade spending was funded by a boom in asset prices. Following the financial crisis people became more cautious and reduced the portion of income they were willing to spend on non-essential items.
Yes. Total spending is still growing, but at a moderate pace of about 3% to 4% — roughly in line with income growth — rather than at the faster rates seen when discretionary spending was higher.
Retailers do cite the high dollar, internet shopping, labour costs and policy changes as pressures, but the article argues the more significant, underlying cause has been the structural shift in household spending away from discretionary purchases.
Businesses that relied on consumers splashing out face harder trading conditions and are being forced to cater to a more cautious customer. For investors, this points to structural headwinds for companies heavily exposed to discretionary spending rather than a short-term cyclical problem.
Watch trends in consumer spending shares — especially the split between discretionary and necessity spending — and overall household income growth. A sustained preference for necessities and only moderate total spending growth (around 3–4%) suggests ongoing challenges for discretionary-focused retailers.
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