Michael Pascoe
March 1, 2012
The Age
No, Gerry, Australians don’t need to run up more credit card debt to “save” some struggling retailers. As Woolworths’ results demonstrate, the retailing market is working just as it should. No-one ever said business was meant to be easy.
For all the improvements at Coles, the Woolies hardheads still demonstrated that their core business does it best where it counts the most: on the bottom line. Coles is increasing market share and growing profits, but Woolworths’ ratio of EBIT (earnings before interest and tax) to sales for food, liquor and petrol in the December half picked up 3 points to 6.79 per cent. Coles EBIT to sales ratio rose an impressive 23 points – but it’s still 3.81 per cent.
The Coles v Woolworths supermarket battle is interesting and the Kmart v Big W skirmish a fascinating story, but the bit that’s grabbed the immediate headlines is Woolworths’ $300 million write down of the Dick Smith business, coming hard on the heels of Gerry Harvey’s plea for Australian consumers to spend more to prevent retail job losses.
Harvey cites the Woolworths Dick Smith decision and the WOW Audio Visual Superstores chain hitting the wall as examples of something allegedly wrong in the state of retailing, when it’s really just another market sorting out the supply and demand equation. It’s not a sign of deeper economic malaise.
Prices drop
The wonderful deflation in electronic goods, the prices of flat screen TVs and computers diving by as much as 30 per cent last year, has made trading more difficult for those flogging them. (If the price of wing nuts halves, you have to sell twice as many just to make the same profit, all other things being equal and they’re not – it’s more complicated and harder than that.)
But what really hurts is that there had been an explosion in high-volume, low-margin electronic retail outlets during a temporary boom in wing nut demand.
The big roll out of JB Hi-fi and WOW stores on top of the usual expansion of Harvey Norman et al coincided with an unhealthy, uncharacteristic and unsustainable blowout in consumer spending. I’ve used a graph from Morgan Stanley on a prior occasion that shows the volume of stuff we bought (volume, not dollars) soared in the four heady and fiscally irresponsible years leading up to the GFC.
Funnily enough, at that time I didn’t notice any senior retailers advising Australians to put their credit cards back in their wallets and to behave more responsibly.
As that Morgan Stanley graph shows, when the GFC came along to save Australia from an RBA-induced hard landing, our retail volume dropped sharply, but only back to around its long-term average. Current retail volumes aren’t unhealthy – the 2004-08 boom volumes were. And let’s not totally forget all those headlines warning about credit card debt getting out of control back then.
Demand returns to normal
Thus an expansion of high volume electronic retail outlets looked wonderful when it coincided with an unsustainable demand for such outlets. Demand has returned to something more like normal and therefore the number of outlets needs to adjust. The market mechanism works.
As the RBA regularly tries to remind us and as the Australian Bureau of Statistics trend series show, Australians continue to spend more, albeit in different ways and on different things. That creates opportunities for those who sell consumers what they want, how they want it. And it winnows out those who don’t.
By all means have sympathy for the investors in and employees of those who don’t make it, but we’d be mugs to think this industry adjustment is the sign of an economy in trouble.
If you can’t make money selling TVs and computers, don’t. It’s no different to growing potatoes – if there are too many doing it, producing too many spuds, some will have to switch to growing something else or go broke. After a period of pain for potato growers, the supply and demand adjust and the cycle rolls on.
Woolies quitting Dick Smith and the WOW stores and others potentially closing, eventually make electronics retailing sustainable for those who remain. That’s capitalism. I don’t think Gerry Harvey would advocate the alternative.
Meanwhile the readers’ comments at the end of the report on Gerry’s plea to hit the plastic are a reasonable indication of what consumers think of the idea. It tends to take a sustained dose of dumb fiscal policy to turn us into mugs.
Michael Pascoe is a BusinessDay contributing editor.
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