Retailers on the verge of recovery after shock April sales rise, but discretionary categories still suffering

Retailers are starting to see the light of recovery, according to surprise figures released yesterday showing a 0.9% rise in sales for April, with experts suggesting Australians are finally spending again as prices hit a 30-year low.

But the industry warns there are still some weak points in the discretionary spending categories and Kmart chief executive Mark Russo attacked some retailers this morning saying they are discounting without building a strong model.

“It was only a matter of time before it started to turn around,” CommSec economist Savanth Sebastian told SmartCompany this morning.

“To a great degree, sales have been depressed…and we know that households have been holding onto cash in this type of environment.”

The figures showed sales rose by a seasonally adjusted 0.9% to $21.23 billion, after a rise of 0.3% in February and 0.4% in January. Cafes, restaurants and takeaway food services rose 0.8%, food retailing was up 0.6%, and department stores were even up 0.5%.

The result comes after months of poor results for retailers, which have been complaining over rising labour costs and declining sales and profitability. Although confidence has remained fairly high for personal finances in the past several months, Sebastian says it’s lower prices that have caused people to spend.

“Households have been holding onto cash, and in this type of environment it seems people want to spend more of those dollars. But, in addition to that, I think we’ve seen the largest fall in retail prices in 30 years.”

“The real winners have been those cafes, restaurants and food stores that have seen the largest increases – and cheaper prices have a lot to do with it.”

Sebastian points out this survey was taken even before the latest rate cut came into effect. CommSec expects another 25 basis point cut in August, while ANZ expects as many as three over the course of the year – which either will provide some much needed relief to the industry.

Other economists agree. Westpac chief economist Bill Evans said the report was a “bolt in the blue”, and even said the report was so good that it seems “hard to believe”, given the current state of consumer and business confidence surveys.

The Retailers Association has been calling on the Reserve Bank to cut rates for several months – and yesterday welcomed the retail sales growth – but also warned there is still a lot of weakness in discretionary categories.

“Despite some welcome news of an increase in consumer spend, the category breakdown shows confidence hasn’t extended to discretionary spend, with year on year growth across the clothing and footwear (0.4%) as well as department store (1.4%) categories still weak and below the rate of inflation,” executive director Russell Zimmerman said in a statement.

“Growth in the food retailing categories (0.9% and 2%) show food is buoying up the sector, and to a lesser extent household goods are also contributing to the boost with some below CPI yearly growth of 0.6% for March.”

Those rate drops are coming, according to economists – and Sebastian says it’s likely retail sales will continue to improve.

Especially when prices are still at their lowest in several decades, combined with low inflation.

“For prices to really pick up, it’s going to take some time. We’re in a low inflation environment for a while now, and although the Business Sales Indicator was recording some growth, it didn’t filter through until this result.”