Retail caution urged despite low inflation rate

Start-ups in the retail sector have been advised to tread with caution this Christmas despite an unexpectedly low inflation rate and the low chance of another interest rate rise this year.

Figures show Australia’s annual and underlying inflation rates crawling along at 2.8% and 2.4%, both down on previous rates.

Australian National Retailers Association chief executive Margy Osmond says the figures show inflation is under control.

But retailers are facing tough conditions because lower shelf prices are making it harder to recoup rising costs.

Metcash chief executive Andrew Reitzer told The Australian Financial Review “… [retailers] have no selling price inflation but they have cost inflation.”

RBS retail analyst Daniel Broeren says price deflation is creeping into more categories, becoming a widespread issue across the board.

“For a large-scale retailer, their selling price is coming down but the number of units that they’re selling is actually going up,” Broeren says.

“Volumes are going up so therefore your costs are going up, so you need more salesmen on the ground, you need more or higher requirements of your supply chain.”

“So there’s a risk going forward that you’ve got gross profit compression because you’ve got price deflation exceeding volume growth. Then on the other side, you’ve also got your cost base increasing.”

Broeren says this environment could prove to be even more challenging for small businesses because they lack pricing power.

“It’s certainly something you need to be mindful of; that pricing power at the moment is pretty weak, even for the large-scale players that have commanding market shares,” he says.

“One way you’d defend yourself is to have a differentiated product range so you’re not going to be required to compete directly on price.”

Neither Broeren nor Osmond expect another interest rate rise before Christmas.

Osmond says this Christmas is vital to the retail sector and a rate rise could be “the straw that breaks the retail camel’s back in 2010.”