Consumer caution hits stock prices
On Monday, retail sales for April disappointed expectations, rising just 0.2 per cent, seasonally adjusted.
The largest contributor to the rise in sales was food, which grew by 0.5 per cent. This followed a 0.4 per cent fall in March.
Reacting to the data, consumer discretionary shares dropped 1.5 per cent, while consumer staples slid 1.1 per cent by close on Tuesday.
Despite interest rates being cut to a record low of 2.75 per cent, May saw a turnaround in the fortunes of retail shares, as consumer staples stocks lost 9 per cent and consumer discretionary fell 2.8 per cent.
"We had three good months at the beginning of the year, it's been a bit tougher since," said Platypus Asset Management chief investment officer Donald Williams.
However, over the past 12 months, consumer discretionary stocks have surged by 31.12 per cent, while staples have jumped 26.9 per cent, both outperforming the broader benchmark S&P/ASX 200, which is up 23 per cent.
"You've got some short-term issues, but the longer term view that we're at the beginning of a multi-year recovery in consumption is still valid," Mr Williams said.
Barring food-related stocks, weak consumer spending has plagued domestic retail stocks and the sector faces a number of structural issues, such as internet competition and the introduction of international retailers, that it has struggled to address.
"It's a bit like the horse and cart competing against the invention of the automobile," Tyndall senior analyst Craig Young said.
A lower Australian dollar would only marginally help retail stocks, Mr Young said. The price differential between Australian and international retailers was still very large, even if the dollar were to lose further ground.
"Once shoppers buy online, they generally keep buying online. It's kind of a big hurdle to make that step. And once you buy online domestically it's only a small step to buy online internationally.
"Because the pricing and the range is so much better overseas, you'd expect consumers to keep spending offshore, even if the price increases by 10-15 per cent because of currency."
The Australian retail market is only a blip on the radar and large international retailers, especially from the US, have the ability to offer significantly lower prices because they have lower labour costs and better buying prices.
While shipping internationally added extra costs, Mr Young said, the lower costs of the larger US enterprises offset this.
Frequently Asked Questions about this Article…
April retail sales rose just 0.2% seasonally adjusted, with food the biggest contributor (up 0.5% after a March fall). The data prompted falls in retail shares: consumer discretionary stocks dropped about 1.5% and consumer staples slid around 1.1% by close on the following Tuesday.
Over the past 12 months consumer discretionary stocks have risen about 31.12% and consumer staples about 26.9%, both outperforming the broader S&P/ASX 200 benchmark, which is up roughly 23% for the same period.
Despite the record-low interest rate of 2.75%, May saw a reversal for retail shares: consumer staples lost about 9% and consumer discretionary fell roughly 2.8%, showing the rate cut did not immediately revive retail-sector performance.
The sector faces structural headwinds such as growing internet competition and the entry of international retailers. These factors create persistent pricing and range disadvantages for many domestic retailers that have been hard to address.
A lower Australian dollar would only marginally help. The article notes the price differential between domestic and international retailers is large, so even with a weaker currency many consumers are likely to keep buying from overseas sites.
Once shoppers start buying online they tend to keep doing so, and switching from domestic to international online purchases is a small step. That stickiness makes it harder for domestic retailers to win back customers, because overseas retailers often offer better pricing and range.
Large international retailers—especially US-based—can offer significantly lower prices because they benefit from lower labour costs and stronger buying power. While international shipping adds cost, the lower operating costs of big overseas players often offset those shipping expenses.
Everyday investors should recognise short-term volatility in retail sales and stocks, but also note the longer-term context: some analysts still see the start of a multi-year recovery in consumption. Investors may want to weigh structural risks (online competition, international entrants) against recent 12‑month gains in the sector when assessing retail exposure.
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