Retailers hit by promotional fatigue

by Sue Mitchell
Jan 31 2017
AFR

Retailers who slashed prices in the weeks before Christmas to lure thrifty shoppers are now paying the price. 

Analysts say a serious case of promotional fatigue has dented post-Christmas spending and threatens to squeeze sales and earnings in the June-half, capping off a patchy first-half for discretionary retailers and supermarkets.

Citigroup’s head of research Craig Woolford said retailers lost their nerve and starting discounting heavily in mid-December, selling more products on promotion.

This followed heavy discounting during so-called Black Friday promotions at the end of November.

As a result, Christmas trade was “lukewarm,” especially after a strong Christmas in 2015, and January sales had been “sluggish”.

“I’d describe it as promotional fatigue,” said Mr Woolford. “If you wanted to buy something for summer you probably already bought it by Christmas or the early Boxing Day sales. 

If the weak sales momentum carried into February and March it augered poorly for trading in the June-half.

“With retail it’s all about momentum,” Mr Woolford said.

“They may have finished the December half-year with reasonable momentum in some cases, but they might be more cautious about what they’re looking forward to in calendar 2017, given trading conditions in January so far.”

Analysts believe retailers exposed to the strong housing market, such as JB Hi-Fi and Harvey Norman, would perform well in the first half of 2017.

Myer is also thought to have held its own, despite weakness in womens wear and accessories categories.

However, Citigroup believes there is a risk that retailers including Super Retail Group, Wesfarmers’ Coles and Bunnings, Billabong International, Premier Investments and Specialty Fashion Group will miss expectations, while Target is expected to report another loss.

OrotonGroup has already downgraded profit guidance for the first half of 2017, citing weaker than expected Boxing Day sales and steep discounting by international brands.

Deutsche Bank says food retailing was competitive in the December-half as prices continued to fall.

Woolworths supermarkets performed well, posting the strongest same-store sales growth for two years, but investment in price was expected to drag Australian food earnings down another 22 per cent, taking underlying group net profit down 20 per cent. 

Deutsche Bank expects earnings at Coles to fall 0.4 per cent, with same-store sales growth slowing and margins squeezed by lower prices. Bunnings earnings are forecast to rise just 3.5 per cent after strong growth in the year-ago period and heavy discounting by Masters, while Kmart and Officeworks are expected to post mid-single digit earnings growth. 

Wesfarmers’ underlying group net profit for the December-half is forecast to rise 9.6 per cent, buoyed by a $253 million turnaround in coal.