Bleakest of views from the shopfronts

Terry McCrann
Sunday Herald Sun
March 04, 2012

THE Australian retail sector is in trouble like it’s never been before. Not even in the dark days of the 1990 recession.

That should have been made blindingly clear when Woolworths, our biggest and most successful retail group, unveiled on Thursday its first drop in profit in nearly 20 years.

True, the drop was caused by the accounting provision for losses it expects to suffer as it prunes and then (hopefully) sells its Dick Smith electronics chain.

The normal operations of the supermarkets and the other stores still managed to eke out a small rise in profit — but with the emphasis on that word “eke”.

Its “normal” run of strong profit increases has been “interrupted” by Coles abandoning the cosy duopoly that had previously operated, with its aggressive campaign to cut prices, most dramatically with milk.

Dick Smith and more aggressive competition in supermarkets points to how it has become tougher in shops across the board.

Yes, Woolies is getting out of electronics because it stuffed up with Dick Smith.

It got creamed by JB Hi-Fi.

But even JB has lost its growth mojo.

This story is repeated, with varying degrees of intensity, across all retail.

The casualty list is long and growing. From women’s fashions – one of the mainstays of shopping – to housewares and home furnishings, to the big department stores.

Sales are struggling, profits are plunging, jobs are being slashed and names are disappearing from high streets and shopping centres.

For shoppers, it’s something of a sweet spot.

They’ve never had it so good. The $100 you spend in a supermarket buys you about 5 per cent more in goods than it did a year ago.

It’s even better in the other stories, where retailers have slashed prices, desperate for turnover.

It is, though, a two-edged sword. Because shops, and the consumer spending they service, are the core of the economy. Shops are also the biggest employers.

And, after individuals and home loans, the biggest customers – as borrowers and depositors – of banks.

Borrowing that phrase about General Motors in the US, you might say that what’s good for shopkeepers is good for Australia.

At least, a retail sector in trouble will send shocks rippling through the economy and the financial system.

The biggest and most direct cause is you. We have switched from spending more than we earn to saving about 10 per cent of our incomes.

That’s right, from spending around $104 of every $100 we earned – across the entire community – to now spending only $90 of every $100.

That’s an extraordinarily dramatic contraction of money flowing into shops. It collided head-on with the continued expansion in the number of shops out there.

The spark was the GFC, the global financial crisis, even though the direct pain felt in Australia wasn’t remotely close to that in the US and Europe.

But we still woke up with a big debt headache and a big drop in our net wealth, represented by our superannuation balances and the value of our properties.

It is going to take a long time to work through. And the digestion process will feed on itself.

There’ll be fewer shops and fewer jobs in them.

That will ripple back into more reduced spending.

The negatives will ripple out in all sorts of directions. Into construction. Into bank lending.

To the extent that a Woolies is ploughing on, opening new supermarkets and expanding into home improvement, that just makes it even tougher for someone else.

The numbers from the big listed retailers, such as Harvey Norman and David Jones, are ominous enough. We are not really seeing the havoc wreaked across small mum-and-dad retailing.

Lower interest rates would help, leaving more money in consumers’ pockets.

That’s why it’s not wise to rule out further rate cuts, just because of the continued boom in the resources sector.

The jobs and spending from the boom, at least, put some floor under retail.

But for the foreseeable future it’s going to be good for shoppers.

Not so good for shopkeepers.

Or the broader economy.