Australian consumer spending: are retailers set for boom or bust?
Colliers International research director Nora Farren has put retail turnover under the lense. Here are the highlights of her white paper.
Discretionary spend drives growth
The most recent figures from the Australian Bureau of Statistics show signs of improvement in retail.
Trade jumped 1.2 per cent in January, continuing a strong run of spending growth that started in August 2013.
The Reserve Bank has left the cash rate unchanged for the eighth consecutive month, with the last change a 25 basis point cut in August 2013.
The result? Consumers have loosened their purse strings.
Annual retail sales turnover growth is currently running at 6.2 per cent, its highest rate of growth since November 2009.
The healthy increase in retail spending over the last six months annualises out at a very strong 9.4 per cent per annum.
Recent increases in turnover are driven by a lift in discretionary spending - and for once, outside of food retailing.
In fact, growth was strongest in the department store sector, recording an increase of 2.6 per cent in January.
Retail spending goes against confidence levels
While traditionally there is a strong relationship between consumer sentiment levels and movements in retail turnover, the last few months has seen a disconnect emerge.
The level of consumer sentiment declined in both December 2013 and January 2014, yet retail sales turnover growth was much stronger than expected.
Households and retail
Household wealth has continued to increase strongly in recent quarters and is estimated to be 10 per cent higher over the year to December 2013.
The most recent GPD figures for the September quarter 2013 show strong growth in consumption expenditure.
Annual growth in household spending lifted to 2.6 per cent up from 2.1 per cent the previous quarter.
The savings ratio also fell by almost a full percentage point to 9.7 per cent at the end of 2013, the lowest level since June 2010.
The increase in reail spending growth reflects the impact of record low interest rates on consumers.
Positive sentiment and increasing house prices directly impact on how wealthy consumers feel and their propensity to spend.
The large gains in house prices recorded last year (Sydney +14.5 per cent, Melbourne +8.5 per cent, Perth +9.9 per cent) have been reflected in strong retail turnover in these markets.
Overseas investors
According to the most recent data from the Foreign Investment Review Board, there was $17.2 billion worth of approved residential property investment coming in from overseas in the year to June 2013.
Chinese buyers are currently spending some $5.9 billion a year on Australian property, both residential and commercial.
Onshore investors spent approximately $1.5 billion on retail assets in calendar 2013.
The strong purchasing power of Asian consumers and preference for luxury goods will further support growth in retail spending throughout the current cycle.
The Aussie dollar
Since August 2013, the dollar has falled approximately 10 per cent to around US90 cents.
The decline has seen a corresponding moderation in the growth of online retail, with global retailers losing a competitive advantage.
According to NAB Online Retail Sales Index, annual growth is running at 11.3 per cent, more subdued than the 20 - 30 per cent growth rates between 2010 - 2012.
Domestic retailers are currently attracting 74 per cent of online sales.
The dollar may negatively impact retailers' gross profit margins - if higher costs are unable to be passed on to consumers - but this will be checked by recovering sales, hedging and investment in back-end efficiencies.
Population growth
Over the twelve months to June 2013, Australia's population increased by 1.8 per cent, which is the largest annual increase since September 2009.
Net migration will be one of the most important drivers of retail spending through the next cycle.
The latest readings for net overseas migration from mid-2013 are remarkably strong at 244,000 per annum - more than 90 per cent above the long-term average of 129,000.
Outlook
The recovery in retail sales will continue to be driven by the low interest rate environment, a strong housing market and improving consumer sentiment and business confidence.
The influence of offshore investors on Australian property markets is also relevant for retail.
While wages and salaries growth remains soft, reflecting weakness in the labour market and job security concerns, leading indicators of employment demand are moving in a positive direction.