Aussie retail sector facing crunch this year, warns Deloitte Access Economics

Households have propped up Aussie retailers by living beyond their means, but a reckoning looms as house prices fall and spending dries up, a leading economic forecaster is warning.

A NATION living beyond its means has propped up many retailers but a reckoning looms this year, a leading economic forecaster has warned.

The viability of many in the nation’s $310 billion retail sector will be threatened this year as house prices fall and spending dries up, according to a new report from Deloitte Access Economics.

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That said, those that make it through will benefit from a pick-up in consumer spending from 2020 onwards, Deloitte analysts say.

The grim short-term outlook comes as Morgan Stanley warns big-box retail appears to be “slowly dying”.

Latest financial updates from heavyweights such as Dan Murphy’s and Bunnings raise the prospect of “significant” store closures, according to analysts at the investment bank.

Deloitte’s report, to be released today, shows retail sales growth slowed to 2.2 per cent last year.

Sales growth is expected to slip further this year, to 1.6 per cent, before lifting back to 2.2 per cent in 2020.

Deloitte economist David Rumbens said the retail sector had been supported by households dipping into savings in order to spend.

Spending has grown at an average rate of 2.5 per cent annually over the past five years while household disposable income has only risen by 1.9 per cent a year.

Big box retailers such as hardware giant Bunnings are facing a tough outlook, says investment bank Morgan Stanley.

“That difference is a fair chunk of change,” Mr Rumbens said.

“Many retailers have only survived the last few years because we have lived beyond our means.”

Mr Rumbens said the willingness of households to continue to spend rather than save would evaporate as property prices fell in major cities such as Melbourne and Sydney.

“When overall net wealth is heading downwards, it provides a fairly strong incentive for people to be more prudent with their cash,” he said.

“The willingness of households to forgo savings for spending will come under pressure as the housing market moderates.”

While spending was slowing, Mr Rumbens said the upcoming federal Budget and election would provide the retail sector with some relief as the government spent up in order to win over voters.

“The federal election will deliver a sugar hit to consumers to help get through what would otherwise be a more constrained income environment,” he said.

Liquor chain Dan Murphy’s is another big box retailer facing an uncertain future, according to investment bank Morgan Stanley.

Spending would pick up in 2020 as house prices stopped falling and pressure on wage growth increased, Mr Rumbens said.

Morgan Stanley said an analysis of the financials of 22 major retailers for the first half of this financial year shows only three majors grew sales more than 2.5 per cent.

Analyst Tom Kierath said this was “alarming” given rents grew 2.5 per cent and labour costs 3.5 per cent during the period.

“We think that consumers are shifting away from big-box retail formats as they increasingly prefer convenience and experiences that are better cultivated in a small-box environment,” Mr Kierath said.

“Further, we think online is taking a disproportionate bite out of the big-box retailers.”

Retailers covered included Coles, Woolworths, Bunnings, Dan Murphy’s, Rebel, Officeworks, Harvey Norman, Myer, The Reject Shop and Baby Bunting.

Mr Kierath said soft sales per square metre would “likely bite soon”, potentially forcing retailers to cut back on staffing, opening hours or marketing, and to close stores.

“Big box retailing looks to be slowly dying in Australia,” he said.

“We think that over the coming 12 to 18 months significant store closures are likely.”