How the RBA stole Christmas: Bartholomeusz

This is supposed to be the season to be jolly but, for retailers, it appears this Christmas is anything but a cheerful and optimistic one.

The Reserve Bank minutes for its December board meeting released yesterday said that spending by the household sector remained subdued, with the household savings rate now back to levels last experienced in the mid-1980s.

The RBA noted that there had been a “surprisingly large” fall in the Australian Bureau of Statistics’ estimate for retail spending in October and that retailers continued to report that households were cautious in their spending and that there was widespread and significant discounting occurring.

Well, if October produced a surprisingly large fall in retail spending, it will be interesting to see how the RBA describes what happened last month.

Retailers are saying privately that they were travelling quite comfortably until the speculation in October of a November rate rise started to percolate. That accounts for the fall off in sales in October.

The confirmation of that speculation caused sales to fall precipitously in November right across the retail sector. Just about all, if not all, of the major retailers apparently suffered negative comparable sales growth, ranging from modestly negative to double-digit percentages.

With a lot of promotional activity, sales are said to have picked up a little in December but not sufficiently, apparently, to recover the ground lost in October and November.

The hardest hit segments is said to be the middle market offerings, particular for fashion, with the new consumer conservatism sparked by the rate rises compounded by the unseasonal weather. The lower price points and top-end fashion appears to be faring reasonably well, but in an environment which is quite volatile.

So far The Reject Shop and Billabong have announced downgrades to their outlooks, while Premier Investments’ annual meeting was told first quarter sales for Just Group were marginally below last year’s and Fantastic Furniture is predicting flat like-for-like sales this year.

Premier Investments’ chairman, former RBA board member Solomon Lew, told his shareholders late last month that he strongly disagreed with the rate rise, which he said was having a clear and demonstrably negative effect on already fragile consumer confidence.

While the retailers are pinning their hopes on the post-Christmas sales recovering some of the lost sales, they are very nervous about the outlook for the rest of the year. There is a strong consensus that the RBA will continue to raise rates through 2011, with possibly three or even four more increases to come.

The experience of October and November makes that a chilling prospect for the sector and makes for a very nervous festive season.

That anxiety about the outlook for 2011 and beyond may explain why senior retailers like Lew, Gerry Harvey and Bernie Brookes have started campaigning for GST to be applied to purchases from offshore online retailing.

Online buying by Australian consumers from offshore retailers represents a tiny proportion of retail sales, but at this point even relatively small amounts of lost sales have become meaningful for the local bricks and mortar retailers and the growth rate in online purchases is threatening in the longer term.

Harvey and Brookes have threatened to set up their own online brands offshore if imports aren’t taxed. For big retailers with direct sourcing capabilities the online channel could, in fact, create a real opportunity to generate incremental sales at incremental cost without necessarily, if the online offer were managed carefully, cannibalising their in-store sales.

That is, however, a longer term response. The immediate challenge is to try to generate whatever sales they can while doing everything possible to offset the losses of turnover with measures that protect profitability. Next year’s first-half reporting season could be quite an unhappy one for the discretionary retailers and their shareholders and it may not be the last.

This article first appeared on Business Spectator.

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