Retailers pay the price for the government's bad sales job

The hit to consumer confidence is spreading further throughout the economy and major cost-cutting is already taking place.

The hammering the Abbott government has received in the polls has finally been recognised by the government as a problem of its own making. Malcolm Turnbull admitted as much yesterday, saying that the Coalition had failed to communicate properly why they brought in such a tough budget. In a word, the government is spooked and now Australia’s retailers are paying the price.

Over the weekend I found myself in the company of Chinese traders, who supply a good deal of the merchandise that goes to Australian department stores and other retailers. They have seen a big drop in orders in both clothing and a wide range of other non-food goods. While there are different movements between stores, they say that the demand from retailers has dropped by 10 per cent compared to a year ago.

As I wrote recently (Trouble in store for Australian retailers, June 23), small retailers saw an almost immediate drop off in sales at around the time the government set about leaking elements of the budget. Sending consumers straight into their spreadsheets to work out the impact has clearly caused them to take a second look at their spending and discretionary retail has been the obvious loser. The big downgrades by major listed retailers confirm that fact.

That consumer nervousness is now reverberating through the supply chain and there is going to be some nasty cost-cutting ahead. Businesses who service the retail sector are making big cuts to their costs to maintain profitability. That means leaner operations with fewer people, and certainly not much chance of a rise in wages. Given the retail sector employs some 10 per cent of the workforce, that will have an impact on the wider community.

Some companies will adapt to the tough consumer spending patterns and their inability to lift prices better than others. The people I talk to are making big investments in their systems to squeeze every operational efficiency out of their business.

Meanwhile, the Chinese traders confided in me that they supply the same -- or very similar -- goods to US retailers, but the price they charge US retailers for the same goods is substantially lower than in Australia. That partly reflects the fact that we do not negotiate as well as the Americans, but it also reflects the enormous difference in the size of orders. That helps explain why goods purchased online in the US are often much cheaper than Australian retail prices, despite the delivery charges. For retailers who are struggling to make ends meet, finding that the same item is available in the US for up to half the price will be putting further downward pressure on margins.

At the moment, the pressure on retail rents is severe. You will remember I wrote about the way big institutional owned shopping malls are offering incredible deals to people prepared to quickly occupy empty space.

Locally, I found that in our village shopping centre, a clothing fashion store is moving to a much more heavily traded strip centre with a perfectly fitted out store that was twice the size of her village store -- but the rent was almost the same. The landlord of the village store that she is leaving is a retiree who has traded in the store for decades and saw rent from his retail freehold as his retirement pension.

Unless he can find a tenant prepared to pay the old inflated rent, he will have to change his lifestyle. He may need to sell the property, which will lower property values in the strip. And so the ramifications spread.