Currency to help smaller retailers

The weakening local currency is usually bad for the retail sector, but this time around smaller specialist retailers are set to benefit from it.

The falling Australian dollar is normally bad news for local retailers, but the impact of the exchange rate is less clear this time due to the shake-up in the traditional retail business model.

In fact, the softening Aussie could prove to be a net benefit even though Australian outlets typically pay for inventory in US dollars and sell in Australian dollars.

But the internet has turned this paradigm on its head. When the Australian dollar was surging well over $US1, the brick and mortar retailers were in a world of pain as consumers started purchasing online from offshore sellers.

This has led some of our leading retailers to call for the goods and services tax (GST) to be imposed on all overseas purchases as opposed to the current rule that allows purchases under $1000 to be unmolested by the tax.

The 14% plunge in the Australian/US dollar will probably put this debate to rest, especially since some experts are forecasting the Aussie to fall to around 80 plus US cents in the coming months.

Suddenly, the risk of buying electronics from eBay doesn’t seem so attractive.

While not everyone believes there is further downside risk for the Aussie (see US dollar bubble), the sweet spot for the brick and mortar retail sector is probably around the current exchange rate.

Bank of America Merrill Lynch calculated that 2014-15 earnings before interest and tax for consumer discretionary stocks will need to be downgraded by between 4% and 19% if the Aussie stayed at 90 US cents, unless retailers lifted prices by 3% to 6%.

But I think increased demand from local consumers could more than offset the margin squeeze in many cases, or at least to a large part.

Further, it is the smaller specialist retailers that are likely to be in a better position to capitalise on the exchange rate. The broker believes Harvey Norman (HVN) and Myer (MYR) are most vulnerable; while OrotonGroup (ORL), Super Retail Group (SUL) and Premier Investments (PMV) are the best placed in a low Australian dollar environment.