Shoppers be warned: discounting will not go on forever. With our local currency now treating 90 cents as the new normal, domestic retailers won’t have the luxury of being able to slash prices to lure conservative customers.
The prospect of rising prices and an ongoing malaise in consumer confidence paints a gloomy outlook for the retail sector.
Hedge funds and other sophisticated investors aren’t holding out much hope for some of our well known domestic retailers. Data compiled by Bloomberg has short interest as a percentage of shares outstanding at 16.3 per cent for Myer, 18.1 per cent for Harvey Norman and 12.1 per cent for David Jones. This is a large portion of the market banking the share prices will decline from current levels.
Not helping the retailers’ cause is the huge missed opportunity of tapping domestic online shoppers, with the Australian Bureau of Statistics estimating that $6.2 billion was spent on overseas purchases made online over the past year. A stronger dollar and cheaper prices provided a much more attractive offer than what could be bought locally.
With consumers looking for more value for money, the financial year just ended saw the weakest annual retail sales growth in 51 years for bricks-and-mortar stores.
The past two years have seen domestic retail sales relatively flat. A long sequence of rate cuts by the Reserve Bank has done nothing to encourage consumers to part with their money at the checkout of our favourite shops. In June, department store sales declines 4.5 per cent year on year and volumes were down 1.1 per cent for the quarter.
The soft sales environment has forced domestic retailers to discount aggressively to move goods, at the same time missing out on the benefit of selling the goods at full price.
We should expect a weaker Australian dollar will change online shopping habits, as the currency advantage has been eroded with the drop of 12 per cent in the Aussie dollar. Adding to this, a softer currency means retailers won’t have the luxury once afforded of being able to discount heavily.
Margins are already skimpy across the retail sector and the weaker dollar means they will have less room to move. To maintain profitability, goods will have to be sold at closer to their full price rather than the fire sale prices consumers have become accustomed to.
We have been hearing about confidence levels within the domestic economy for some time. The official cash rate has gone from 4.75 to 2.50 per cent in just under two years and domestic growth still remains tepid. CommSec economist Savanth Sebastian sees the issue of confidence coming down to government policy.
With the election drawing closer, there is the possibility that a majority government will help restore growth in confidence and encourage business and consumer spending alike.
Without a resurgence in confidence, which doesn’t seem likely to occur before the election, traditional retailers are facing a tough path. Beyond the election we will need consumers to move towards a sustainable combination of saving and spending, even just a little.