It's all in the retail
Retail confidence has fallen but there are some areas which are showing signs of promise. Gayle Bryant and David Butcher report.
Australian consumers may have recently received income tax cuts but higher petrol prices and interest rate rises appear to have accounted for the extra money, a situation reflected in a subdued retail sector.
NAB's monthly Retail Report, which provides timely information on a wide range of indicators, found that retail is one of the weakest sectors across non-farm business.
Retail conditions softened in mid-2006 as sales growth in the sector remained below average, profit growth eased and jobs were shed.
NAB's retail economist, Dean Wickenton, says that performance across retail sub-sectors continues to diverge, with strengths and weakneses in different areas. "Business conditions remain strongest in food retailing, which contrasts with the weakness in personal and household goods and cars", he says. "Car retailing is a sector that is extremely sensitive to sustained higher fuel prices as well as interest rates."
NAB's survey results are very similar to those from the Australian Bureau of Statistics (ABS). ABS data shows that conditions in food retailing remained stronger than for other retail segments – particularly cars.
In mid-2006 the ABS reported total retail turnover was about 5.5% higher during the past year, with food up by more than 7%. However, ABS figures show car sale numbers in mid-2006 were around 4% lower, led by declines in the large vehicle segment.
Confidence down
Retail confidence remains subdued. "The disappointing recent sales outcomes have weighed on confidence," Wickenton says. "The tax cuts haven't impacted on sales and the expectation of more interest rate increases has led to a lack of follow-through by consumers. Not surprisingly, food retailers generally remain the most optimistic about the outlook."
Falling confidence will also have been affected by the squeeze on retailer margins. Selling prices are rising by around 2% on an annual basis, well below the annual increases of 3.5% and 3.2% in labour and purchase costs respectively.
ABS retail trade data by state shows the continued outperformance by the resource-rich Western Australia and, to a lesser extent, Queensland.
"In mid-2006 retail turnover in Western Australia and Queensland was growing at around 8.5% and 7.5% respectively on an annual basis," Wickenton says. "This compares with the near 5% growth rates being recorded in NSW and Victoria."
Profits are declining
The NAB Retail Report also showed that profit growth is trending lower, in line with the weaker trend in sales and pressure on margins.
"While a focus by retailers on managing costs has supported profits, higher purchase and occupancy costs in some segments are now impacting more heavily on returns," Wickenton says.
Duncan Shaw, Executive Director of the Australian Retailers Association believes that some smaller regional retailers are struggling against the marketing might of larger department stores and retail outlets.
"Benefiting from scale and purchasing power in some segments, the larger retailers are marketing heavily to increase turnover volumes at reduced margins, and unless smaller retailers are located near the large retailers, they are finding it difficult to attract and retain customers," he says. Shaw explains that small retailers need to generate cash flow now to fund stock purchases for the December Christmas retail trade, and some are needing to trade on finer margins to increase cashflow turnover.
Challenges for retailers
Shaw says retailers are facing challenges within present economic conditions. For example, fuel prices are increasing the cost of goods, and both are having an inflationary impact. With higher inflation, interest rates are increasing and putting upward pressure on leasing costs and consumers are becoming more prudent in their discretionary spending.
The challenge for smaller retailers is to turn these issues into opportunities. By reviewing location, distribution channels, value-added services and overall service standards they can take on the larger retailers, reduce the impact of the current economic conditions and establish a firm foundation to share in the future growth of a dynamic industry.
For the latest updates on retailing see NAB's Retail Report, available monthly.