The sector faces pressures but the big chains have no justification for complaining, writes Michael Baker.
RETAIL king Gerry Harvey took a swipe at his peers at a conference last Thursday. According to media reports, he accused them of complaining about how tough things were when Australia was in the middle of a boom.
The other executives on Harvey's panel Woolworths chief executive Michael Luscombe, Peter Davis of Bunnings, Mark McInnes of David Jones and Ian McLeod of Coles were by implication among the "chief whingeing officers" of Australian
retail.
And all are guilty as charged. These sourpusses should perk up and get real.
Characterising the economy as booming is, of course, a bit rich. And with zero sales growth at Harvey Norman's Australian stores in the first quarter, it isn't certain that even Harvey believes in all his belligerent rhetoric.
But Harvey, like his counterparts on the panel, would be aware of how much the large retail chains in Australia gorged themselves on the Rudd stimulus.
Before they arose reluctantly from the dining table last July, they had pigged out on close to $5 billion of stimulus money in two sumptuous courses.
So on that basis alone Harvey would have a point when he tells the other retail executives to stop their bellyaching.
Unfortunately, he is wrong if he thinks Australia is in a boom and he is certainly well out of touch with what is going on in a broad swathe of the independent retail sector.
In another part of town two days earlier, Reserve Bank governor Glenn Stevens made a presentation to another audience, in which he put the case for a transformed and more conservative Australian consumer, which, if true, would have some serious implications for the retail sector long-term.
The focus of Stevens's remarks was actually how naughty the Europeans had been in cooking up their current debt crisis. Then he turned to the subject of debt and deleveraging in the Australian household sector.
Stevens suggested that Australians might have entered a new phase of conservatism in which they had reduced existing debt and were less willing to take on new financial obligations than they had been historically. As far as Stevens was concerned, this was a good thing.
As evidence, he pointed to growth in credit card balances, which had declined pretty steadily from the middle of 2006 until the middle of last year. Despite beginning to rise again in August last year, balances now sit well below the double-digit levels that were the norm throughout much of the 1990s and 2000s.
Greater reluctance to take on debt means less borrowing against future income, and an increased reliance on population and disposable income growth to drive sales of consumer products.
Is this change enduring and what would it mean for retailers?
In the longer term it is hard to see this being good for retailers like Harvey Norman, which are in the consumer finance business and prey on the impulse for instant gratification, with payment coming at some point in the future. Harvey Norman might even cede some market share to competitors that offer lower prices for cash up front. (Shorter term, though, Harvey Norman would benefit from the market share donated by smaller, marginal competitors that don't survive the shakeout.)
More broadly, though, the Australian retail sector has evolved in an environment where long-run average sales growth is well north of 5 per cent per year. A shift in consumer behaviour that results in a lower long-run growth rate will affect everyone in the retail sector to some extent, because it will tend to compress margins.
Affected first and foremost are the independent retailers and smaller unprofitable chains, as intensified price competition ensues among the larger retail chains that have the ability to pull price levers. This is not something that will occur in the future, by the way, it's happening now.
Nonetheless, talk of a permanently reformed consumer could be a bit premature. Credit card balances began to rise gently again in August last year, a timing that coincides suspiciously with the end of the stimulus.
This suggests that consumers may have started increasing debt again after the stimulus payments were exhausted. But there is a long way to go before credit card debt growth approaches historical levels.
Even so, Australia's independent retailers have already lost almost 10 per cent of market share in recent years and should not have been waiting for a dogfight among the chains to start transitioning away from price competition towards the competitive advantages conferred by such things as localisation and personalisation.
Meanwhile, as Gerry Harvey says, would the leadership of Australia's largest chains please stop whingeing.
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Frequently Asked Questions about this Article…
What did Gerry Harvey say about other big Australian retailers and why does it matter to investors?
Gerry Harvey accused fellow retail chiefs of 'whingeing' about tough trading despite large chains benefiting from the Rudd stimulus. For investors, his comments highlight tensions in the sector and remind you to look beyond executive rhetoric to underlying sales trends and how past stimulus inflows may have distorted recent results.
How did the Rudd stimulus affect large Australian retail chains and investor expectations?
The article says large chains collectively spent close to $5 billion of stimulus money, which boosted sales temporarily. Investors should note that stimulus-driven sales can mask underlying demand, so post-stimulus performance and sustainable growth indicators matter more for long-term investment decisions.
What does 'consumer deleveraging' mean and how could it impact retail stocks?
Consumer deleveraging refers to households reducing existing debt and being more reluctant to take on new debt. The Reserve Bank governor suggested Australians may be more conservative, which could reduce borrowing-driven purchases. For retail stocks, this can compress long‑run sales growth and margins, especially for retailers that rely on consumer finance and impulse buying.
Why might Harvey Norman be more vulnerable if consumers stay conservative with debt?
Harvey Norman is noted as being in the consumer finance business and appealing to 'instant gratification' purchases paid for later. If consumers avoid new debt, Harvey Norman could lose market share to competitors offering lower cash prices up front and face weaker long-term sales growth.
How are independent retailers faring and what should investors know about market share trends?
According to the article, independent retailers have already lost almost 10% of market share in recent years. Investors should be aware that intensified price competition among large chains (who can 'pull price levers') tends to hurt independents first, increasing the risk profile of smaller retail players.
What do recent credit card balance trends tell investors about consumer spending recovery?
The Reserve Bank observed credit card balances fell from mid-2006 until mid-last-year, then began to rise gently from August (coinciding with the end of stimulus). Balances remain well below the double‑digit growth common in past decades. This suggests consumers may be slowly resuming borrowing, but debt growth is not yet back to historical levels — a key sign investors should watch for retail demand strength.
How could a permanent change in consumer behaviour affect long-term retail sales growth?
The article notes the Australian retail sector historically saw long‑run average sales growth well above 5% per year. A lasting shift toward more conservative consumers — less borrowing, more reliance on population and disposable income growth — would likely lower long‑run growth rates, compress margins across the sector and intensify competition.
What competitive strategies should retail companies adopt and what should investors look for?
The piece suggests smaller chains should move away from pure price competition toward advantages like localisation and personalisation. Investors should look for retailers that are differentiating on service, local presence or tailored offerings, as these strategies can protect margins and market share when price competition heats up.
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