Retail and the rates riddle

Veteran retailer Solomon Lew couldn’t have got his timing much better.

On Friday, the chairman and major shareholder of retail group Premier Investments – which owns the Just Jeans group and the Smiggle chain – released the group’s 2011-12 profit results and made what has become his familiar plea: RBA, bring down those rates.

While Premier’s results weren’t too awful given what’s happening in the retail sector – net profit rose 68.4% to $68.24 million, although the jump was largely due to restructuring costs last year – Lew never misses a chance to give the Reserve Bank a whack for keeping rates too high for too long, and putting the retail sector in peril.

“The evidence of the damage that is currently taking place we can see as businesses fail and close, so it’s a real issue and it’s in the national interest that interest rates should continue to move down,” Lew said on Friday.

“We need to improve consumer and business confidence, otherwise jobs are at risk early next year.”

And within hours, Lew’s point was made.

Payless Shoes, a well-known footwear chain with almost 230 stores around the country and a workforce that would have to number more than 1,000, was placed into the hands of receivers from Deloitte late on Friday, with debts estimated at $10 million.

The race is now on to sell the business, which is likely to have suffered increased competition from a more aggressive Kmart, Big W and Target.

While your thoughts immediately go to the staff, it’s also worth remembering that the chain’s stores are located in most of Australia’s biggest shopping centres, so this is a collapse that will leave more holes for our big retail landlords to fill.

The Payless collapse and the cries of Solomon Lew will of course have very little bearing on the thinking of Glenn Stevens and his team at the RBA, but it does seem likely that the retail sector will get its rate cut wish.

Most economists are now tipping a cut in October, with some – most notably Bill Evans at Westpac – tipping a cut in November will follow. Evans also expects more cuts in the first quarter of 2012.

The two cuts would take the official rate from 3.5% to 3%. But the question remains: Will that be enough to get the cash registers ringing again?

ANZ’s economics team made a really interesting point about the impact of interest rate cuts – they simply don’t move the needle as they used to.

“The responsiveness of the economy to policy stimulus may have waned because those parts of the economy traditionally sensitive to interest rates have not and will not, in our view, respond to lower rates as aggressively as they did over the past decade or two,” ANZ’s team said on Friday

“The key reason for this is that the appetite for debt among households and businesses has waned significantly since the financial crisis. The days of double-digit credit growth for extended periods are behind us and we should expect credit to grow more in line with the broader economy going forward.”

Solomon Lew is right when he says retailers would love another rate cut. But ANZ’s message is clear – rate cuts are not the magic bullet they once were, and we need to get used to it.

James Thomson is a former editor of BRW’s Rich 200 and the publisher of SmartCompany and LeadingCompany.