Rate cuts not helping retail, but conditions are improving

James Thomson Sue Mitchell
Aug 29 2016
AFR
Australia’s top retailers have warned that interest rates are cuts are having limited impact on consumer spending, but lower petrol prices and the fading effects of election uncertainty should support retail sales growth.
Super Retail Group chief executive Peter Birtles, who delivered a 22 per cent fall in net profit on Friday, said that the recent rate 25 basis point rate cut which took the official cash rate to a record low of 1.5 per cent was unlikely to do much to stimulate the sector – and further cuts were unlikely to help much either.
“We haven’t seen interest rates be influential for some time now,” Mr Birtles told The Australian Financial Review.
Wesfarmers chief executive Richard Goyder backed this view, saying recent rates cuts were more about lowering the Australian dollar than stimulating the economy.
“There might be some impact but I don’t think we’ve seen the same impact that we might have when interest rates were higher,” Mr Goyder said.
Hilton Brett, chief executive of RCG Corporation, which operates The Athlete’s Foot chain, warned there could even be a “flip side” to low rates “if consumers get a little nervous when rates are so low and start wondering about the strength of the economy”.
The concerns echo those of Mike Kane, the chief executive of building products giant Boral, who last week declared “nobody cares” about falling rates and spending would not budge.
Soft conditions
Most retailers and consumer-focused business such as Flight Centre reported soft conditions in the final few months of the 2016 financial year and into July, as the political fallout from the federal budget and the longest election campaign in decades played out.
“There’s no doubt that didn’t help consumer confidence,” Flight Centre chief executive Graham Turner said on Thursday.
The company declined to provide guidance for 2017, saying that volatile markets in Australia and its international operations were simply too hard to read eight weeks into the new financial year.
But Mr Turner backed comment from Mr Birtles and Mr Brett who said that August had delivered better results.
“We saw the couple of weeks around the election being a little softer but outside of that we’ve maintained pretty strong growth. We feel there’s pretty good momentum,” said Mr Birtles.
His group delivered like-for-like sales growth of 3.5 per cent in the first seven weeks of 2017 in its key auto division (which includes Super Cheap Auto) and 4 per cent in its sports division (led by Rebel Sports).
Mr Birtles pointed to lower petrol prices, which are having a particular impact on the spending power of his core customer base of families in the outer suburbs.
Mr Brett agreed the consumer was in reasonable shape.
“Petrol prices are still reasonably low, interest rates are low, and house prices are high and unemployment is low,” he said.
Woolworths thrilled investors by revealing that like-for-like growth in its supermarkets division ran at 0.3 per cent in the first eight weeks of the year – the first growth in 15 months.
Economy patchy
But while chief executive Brad Banducci was cautiously optimistic about the retailer’s recovery, he warned the economy is patchy.
“Given our travails it’s hard for me to figure out what’s the economy and what’s been our challenges,” Mr Banducci told the Financial Review.
“We have seen very differential growth in different parts of the country – the old two-speed economy seems to have re emerged.”
He gave the example of strong growth in metropolitan Sydney versus poor conditions in Western Australia.
“There’s no consistency right now between the parts of the country.”
Mr Birtles reported similar conditions and said this showed the power rising house prices had on consumer confidence.
Boom in spending unlikely
But Coca-Cola Amatil chief executive Alison Watkins, who delivered an 8 per cent profit rise in the first six months to December 31 on Friday, warned that retailers and manufacturers cannot bank on a sudden boom in retail spending.
“This is the new normal – we are in a low growth environment for some time to come,” said Ms Watkins.
“We’re going to see low wage growth, we already have households pretty heavily geared and there are concerns about employment.
“I think that we need to just adapt to this sort of reality for some time to come and not regard it as a temporary problem that might go away.”
Mr Goyder said he was keen to see the government tackle the job of repairing the budget to ensure Australia retained its AAA credit rating.
“We have do everything we can to avoid an economic downturn and ensure we have economic prosperity,” he told the Financial Review.
“Business has a big role to play in that and government has as well. We have to work closely together and both have to get the job done.”
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