Retail spending edges up but profit margins still under pressure, expert warns

Retailers will enjoy increased sales this Christmas as conservative shoppers finally unlock their savings, but one economist warns higher turnover may not necessarily translate into profit as discounts plague the market.

The warning comes as the new CommSec Business Sales Indicator report, which tracks the value of credit and debit transactions through Commonwealth POS terminals, rose by 0.1% in August in the first positive result in 10 months.

CommSec economist Craig James says while the upcoming Christmas period may see more retailers increase turnover, continued discounting means they won’t be able to bring in higher profits.

“I think Christmas could be the time when people will be a little more confident and begin to spend, but the case is still there that everything is being competitively priced. Shoppers are still looking for discounts.”

“Having this coupled with the fact people are reluctant to buy, we may see a situation where retailers keep offering discounts and we could have higher sales, but that may not be necessarily translated into profitability.”

The BSI results show that although the index increased by 0.1% in August, it is still down by 2.7% in trend terms over the year – a six-year low. The value of spending transactions fell in five of the 20 industries in the August result, with retail stores, mail order and automobile services all recording declines.

James says the result is an indicator the retail environment may be improving, but it is a far cry from any sort of sustained recovery.

“I don’t think we’ll be popping champagne corks just yet. The result is surely positive, and it is reason for optimism. But we know that consumers have the dollars in their pockets, and have the potential to spend, but they’re just holding out.”

“Certainly the job market is in good shape, and you have discounting among retailers which is drawing people in. Wealth levels are at record highs, there are plenty of reasons to spend but uncertainty over the global economy is holding them back.”

The issue, he argues, is time. The current trading environment is simply too soon after the financial crisis for a recovery to be sustained. However, he says as long as unemployment continues to fall and wages rise, retailers should see improvements over the next 12 months.

“People have generally just become more conservative in response to the financial crisis and they are simply very selective. We also think many more people are opting to use cash to a greater extent.”

“I think time cures all ills, and people will become more confident once they only have hazy memories of what’s happened in the past. I think the fact you’ve got a strong job market, wage increases and other sorts of things add in to the fact people have the ability to spend, and they’re just waiting for the right time.”

The BSI found the strongest results were found in the services sector, up 22.9%, utilities up 7.4% and personal service providers up 7%. James said in the report the result should give the RBA reason to pause at its next meeting, suggesting inflation data is a better indicator of when rates should rise.

“The longer the Reserve Bank keeps interest rates on hold, the more confident consumers will become about opening their wallets. But the RBA would need solid justification from a higher inflation reading to lift rates in the next few months.”

“Provided interest rate settings remain unchanged, the outlook for spending is quite positive. The jobs market is in good shape, wealth is at record highs, businesses are discounting to move stock and confidence remains at high levels. But consumers and businesses are still very conservative, preferring to save rather than spend.”