Deloitte: Opportunity to make some money this Christmas

By Rob Starr, Content Manager, Big4.com

A faster rate of money through the tills this Christmas will be welcome news to a retail sector which has struggled over the past couple of years, and indeed there have been a number of high profile casualties.  There may also be a price to pay in generating that cash flow, which is compression of margins.  The Deloitte Christmas Retailers’ Survey, shows that almost a third of retailers who are expecting to discount plan to do so by early December.

For  the first time in three years the macroeconomic environment is providing retailers with an opportunity to make some money this Christmas.  (The last two years have seen real retail sales per capita decline).

It’s hardly a perfect set of circumstances – jobs growth in Australia remains anaemic.  But interest rates have been slashed, wages growth is solid, house prices are stabilising, and consumer confidence has picked up.  Consumers’ appetite for spending has been stronger in 2012 than it has been for some time.

Decent cash flow

For retailers it won’t be the Christmas of their dreams, but it may provide them with a vital ingredient which has been missing over the previous two years – decent cash flow.

A faster rate of money through the tills this Christmas will be welcome news to a sector which has struggled over the past couple of years, and indeed there have been a number of high profile casualties.  There may also be a price to pay in generating that cash flow, which is compression of margins.  The Deloitte Christmas Retailers’ Survey, shows that almost a third of retailers who are expecting to discount plan to do so by early December.

Retail trade growth

Retail trade growth over the year to December 2012 is expected to come in at 3.7% in real (inflation adjusted) terms, and 4.4% in nominal terms- a sound outcome by recent standards.

While it may be a brighter Christmas, it’s likely to be back to the reality of a hard slog for retailers in 2013.  The labour market is weak and there is no immediate fillip to support employment growth (though an expected decline in the $A may help over time).  In the meantime, real wages growth may moderate as inflation picks up further from its recent cyclical lows.  Interest rates are low and possibly heading lower while house prices are showing signs of life, so there are some supports, but perhaps not enough to maintain short-term momentum.

Australian retail sector outcomes across the country are showing nearly as much diversity as the Eurozone at present.  They range from recessionary retail conditions in Tasmania (where retail sales have fallen by 2.7% over the year to September in real terms), to continued boom conditions in WA (up 8.9% in real terms over the year to September).  That disparity in performance is likely to narrow going into 2013 as lower interest rates support more businesses in the south east, while mining investment levels start to approach a plateau.  But WA and Queensland still remain the best longer term bets for retail sales growth over time.