THE DISTILLERY: Myer quagmire

Myer boss Bernie Brookes has a lot to contend with. The group's full year profit downgrade comes courtesy of the tight wallets of the Australian consumer, who is worried about a myriad of problems that are domestic and international, economic and political. While interest rate cuts will help local retailers, Myer's job is made all the harder by the rise of internet shopping and the stigma that comes from a recently-floated company with a depressed share price. There's more than a few business journalists thinking "Myer is my story" this morning.

First things first, Fairfax's Insider columnist Ian McIlwraith backtracks to when Brookes first said full year profits would be down 10 per cent and recalls that there was a fair number of commentators that were sceptical about that prediction.

"Insider was not one of them, because Brookes' argument was mathematically accurate, if sales did not deteriorate sharply – but they did. It is not that people are buying less – Brookes said the average ‘basket' of a Myer sale has risen to about $80 – but that fewer and fewer people are buying anything. We have become a nation of worriers. Brookes, Harvey Norman's Gerry Harvey, Solomon Lew's Premier Investments retail chains, who led the campaign against offshore shopping, are now suffering not because customers are doing just that, but because fewer of us are shopping at all. In fact, the jump in online shopping and global pricing comparisons should have played to the retailers' advantage because it has enabled them to demand that their suppliers cut wholesale prices to keep them competitive.”

The Australian Financial Review's Chanticleer columnist Tony Boyd took one look at the list Brookes delivered to explain why consumers are nervous and concluded that they have a right to be.

"The list is: the Greek sovereign debt crisis, Australian government policy, the carbon tax, the uncertain employment situation, the rising cost of living, the selldown in equity markets, and rising electricity and petrol prices. A closer look at each of these factors strengthens the argument for investors to keep holding high levels of cash and to continue avoiding sectors exposed to discretionary spending, particularly retail and media.”

Indeed, The Australian's Glenda Korporaal explains how the carbon tax is setting Myer and its customers back with higher electricity prices.

"‘Consumers are seeing their electricity prices going up, and they're seeing the cost of transport going up, and they're going to see the cost of products going up,' Brookes said. 'The perception is this (the carbon tax) is going to have another impact on their hip pocket to stop them from spending. There is the reality of how it will impact on the hip pocket and what the compensation level is, and there's the perception. We're fighting the perception that it's going to have a demonstrable impact on the consumer's hip pocket.' Brookes notes that in one state Myer was facing the prospect of a 37 per cent rise in its electricity bill during the next year.”

The writer does note that electricity costs are rising for reasons beyond the carbon tax. Whatever the reason for higher power bills, it's just one of the reasons why consumers aren't spending. This prompted Business Spectator's Stephen Bartholomeusz to point out that the 50 basis point cut from the Reserve Bank earlier this month was very necessary.

"The faint hope for retailers being ground down by the anxiety of consumers is that the cut – most of which has flowed through to home loan rates despite the retention of some of the 50 basis points by the banks – is that it helps stem the continuing erosion in their sales bases and margins. With daily headlines of large-scale job losses, sliding house prices, volatile stock markets, the continuing turmoil in Europe, a dollar that remains strong and the widely-held perception that government is dysfunctional, however, it may take more than one rate cut to alter the mood of consumers.”

The Australian's John Durie explains that consumer caution isn't the only issue Brookes faces.

"Myer has not grown sales per square metre for more than a decade and in the past two years these have fallen so the latest blip is not exactly a surprise. Brookes has two problems: consumers are not spending and he has too much space. How that cycle is broken is the problem facing Myer, not to mention the poor souls who believed the bankers and bought the stock in its 2009 float at $4.10 a share. Given sentiment is already at rock bottom one thing retailers could do is start dispelling the myths about the impact of the carbon price on consumer goods.”

And The Age's Malcolm Maiden describes Myer as the Facebook of Australian retail, with both companies disappointing significantly after floating.

"Instead of expanding Myer's sales and earnings simply by adding selling space as originally planned, Brookes is micro-managing for earnings growth. It's more complicated and more labour intensive, and the online strategy is the biggest wildcard. Like all the big local bricks-and-mortar retailers, the group's online sales are low, at 1 per cent of total sales currently. The best overseas clicks-and-mortar exponents are near or past 10 per cent. Brookes says 10 per cent is doable, but he isn't committing to a deadline. Shoppers who are switching to internet shopping won't wait for him if he is slow.”

In other news, The Age's Adele Ferguson contemplates the ambitions and achievements of the world's richest woman, mining billionaire Gina Rinehart. The Sydney Morning Herald's Ian Verrender takes a broader look at the BRW Rich List, while The Australian Financial Review's Matthew Stevens is still attacking Environment Minister Tony Burke.

In economic matters, The Age's Asian affairs reports Peter Cai says Greek jitters have got the People's Republic thinking about the stimulus button again. The Australian's Robin Bromby questions whether copper should be seen as a bellwether commodity. The same newspaper's Asia-Pacific editor Rowan Callick continues to promote Indonesia as a significant economics partner of Australia that deserves some more attention. He's right, by the way.

And finally, The Age's Eric Johnston tells his readers to look out for an increase in US covered bond issues from Australian banks with regulators moving towards allowing them to be sold directly to the public.