It seems that Australia has entered into a new era of consumer austerity. Despite low unemployment and continued wages growth, consumers seem reluctant to spend and inclined to save. That is, at least what we’re being told. Whilst I’m not an avid contrarian to the mainstream commentators, I believe that given the airtime this topic has received, there are a few issues that deserve some clarity. Firstly, the impact of online retailing in Australia has been overstated. Whilst there has been an increase in online retailing (including online to offshore retailers), the market penetration is only 3.8% of total sales, according to the Commonwealth Bank. Online retailing has certainly increased its market share and will continue to do so, but it’s a structural change that domestic retailers will learn to live and work with. Already a number of domestic retailers have employed a ‘bricks and clicks’ approach to align their online and in-store approach.

Another largely cited indication for softening retail turnover growth has been the increasing level of household saving. Whilst the rationale is undisputable (households are actually saving), the reasons are less clear. Household debt continues to grow, (albeit at a slow pace) so it’s counter-intuitive for households to save more at the same time as increasing their levels of debt. Is it then likely that mortgage holders are pricing in an interest rate rise and accumulating a capital buffer for an expected increase in their monthly mortgage costs….perhaps? A more likely scenario may stem from the stall in house price growth and a range bound equity market that is eroding the wealth effect and increasing household’s propensity to save.

Furthermore, inflationary pressures of non-discretionary goods and non-retail spending items are absorbing capital typically allocated towards discretionary items. Volatile food and energy prices as well as inflation in healthcare and education have been key drivers of the reallocation of spending away from discretionary goods.

Finally, the rise of the Australian dollar. A seemingly double edged sword, it has appeared to be less friend and more foe to domestic retailers. The stronger dollar has also supported an Australian national obsession… international travel. The incurred spread between foreign arrivals and domestic departures can be considered escape expenditure. Due to the onset of the GFC as well as the adverse foreign currency conversion, inbound tourism growth has stalled which is eroding domestic retailers’ top line. On the other hand, there has been an unprecedented increase in outbound tourism, often at the expense of domestic retailers.

Either way you look at it, the retail sector has hit a soft spot and will continue to face headwinds of consumer caution. Landlords have limited scope to continue the upward momentum of rents without justification. Rental growth is likely to come back in line with turnover growth which is currently tracking below headline inflation. Specialty occupancy costs in Australian retail centres have been pushed to capacity (in some centres >20%) and landlords that attempt to increase rents beyond turnover growth without justification may face the retail equivalent of a depreciating Laffer curve.

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