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Trickle-down shopping habits boost discount stores, but no good news for retail

The release of Woolworths' sales numbers and the significant downgrading of David Jones' earnings is starting to reveal a pattern in consumer behaviour and provide some forensics around spending patterns of different demographic groups.

The release of Woolworths' sales numbers and the significant downgrading of David Jones' earnings is starting to reveal a pattern in consumer behaviour and provide some forensics around spending patterns of different demographic groups.

The supermarket sales figures from Woolworths tell us a couple of things. The first is that even in a tough retail environment shoppers are still buying groceries - but the make-up of the supermarket trolley is changing.

In the fourth quarter to the end of June this year Woolworths' food and liquor sales were solid. They were not great and a long way from the halcyon days a few years ago. But consumers are responding positively to the lower cost of grocery items.

They are remaining fairly frugal with their choices and tending to increase the proportion of the lower-cost home brand items over the branded products. They are also easing up buying the fresh foods that have increased in price.

Thus Woolworths' supermarket division's performance is more a product of competition with the rising star competitor, Coles.

There is no consumer exodus from supermarkets. The shoppers move between the two major competitors, which gain market share from smaller competitors but suffer some leakage to newish entrants such as Aldi.

The more interesting observation from the Woolworths sales result is how its non-food brands are faring. Despite the fact that we are hearing about immense levels of pain in discretionary retail, the result from Big W was not so bad.

Sales for the quarter were up on a comparable store-by-store basis by 3.3 per cent (after adjusting for the Easter period).

Once again this is not a stellar result, but it is by no means a disaster. The number of items people are buying has not changed significantly - instead, to the extent that there is weakness in overall sales, it is more a reflection of the fact that the items are cheaper.

This suggests that at the bottom end of the market the consumer may be feeling frugal rather than fragile.

It could also mean middle-class shoppers that are staying away from high-end retail are moving to the discount department stores. (This is the same pattern that sees grocery shoppers choosing the cheaper home brand goods.)

This is not to suggest that those at the bottom end of the earnings scale are spending wildly, but perhaps that they are not feeling as insecure as the middle/higher income earners.

There could be a couple of reasons for this. The first is that the wealthier households are feeling more nervous about falling property prices and the sagging stock market.

The concerns of the lower income earners could also be mitigated by numerous government policies that are compensating them for increases in the cost of living.

At the upper end of the scale the government has been eroding their income through additional imposts such as the flood levy, curtailing their level of superannuation contributions, reducing rebates on private health insurance, and the eventual cost of the carbon tax.

All consumers are nervous about future prospects but lower income earners are probably feeling it less.

At the very top of the socio-economic tree all is well. The luxury end of the market is not impacted by much. At David Jones its wealthiest customers are fine - so are those that shop at Louis Vuitton.

The David Jones boss, Paul Zahra, noted last week that it was the aspirational shopper that had deserted his stores. Maybe this consumer has trickled down to Myer, or even Target.

In turn Myer's sales are also down. It could be that its aspirational shopper has also ventured further down the pecking order. This doesn't mean that it's all about the trickle-down. The discount department stores are not now housing a deep pool of discretionary retail demand.

It's just they do not appear to be suffering quite the same sales slump as their upmarket brothers.

Meanwhile the Woolworths consumer electronics brand, Dick Smith, performed in line with others in this category - badly. No amount of rebranding could save this division from a poor performance.

It's a bloodbath out there in this area of retail. While Woolworths boss Michael Luscombe said volumes were good, the price of a TV was 20 per cent less than in the previous corresponding period and computers were down 30 per cent.

This fall in prices is a direct response to competition from online retail - a structural issue that probably won't go away, even when the consumer does open their wallet.

Perhaps the most depressing offering from Luscombe was that he saw no good news on the horizon.

Discounting across the spectrum will continue as consumers show no signs of changing their behaviour.

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