Businesses in the retail industry are expecting growth that will never come and are staffing too many employees as a result, a new Merrill Lynch report has found, which also predicts that the recent shift towards paying down debt and saving is a permanent one.
The prediction comes as retail veterans continue to complain over low consumer sentiment, with Harvey Norman chief Gerry Harvey saying that customers are acting as if unemployment is higher than it actually is. “I don’t see any light on the horizon,” he says.
The new Merrill Lynch report, A Tale of Two Cities, focuses on Sydney and Melbourne which it says are the “epicentres of weakness”, containing 40% of the country’s population. “What happens there has a massive impact on the rest of the country”.
And shoppers in those cities are paying down more debt than ever before and are saving at unprecedented rates.
“We believe that consumers – knowing wealth will no longer be built from seemingly endless rises in house prices – with the ability to save more have scaled back discretionary consumption.”
But while many businesses believe this is just a temporary shift, report author Joshua Kirkwood says this marks the beginning of a permanent shift in consumer thinking. He points to savings rates which have been steadily rising since 2004, before the financial crisis.
“This started well before the financial crisis, and when times in Australia were very good. When you look at a chart of savings rates, it troughed in 2005 and since then it has absolutely skyrocketed.”
In Melbourne, savings rates have risen from just under 7% in 2004 to about 22%, while in Sydney that figure is about 21%.
Rising housing prices are part of the reason for this increase, Kirkwood says, and the notion that prices will stagnate will keep people saving even more.
“Savings rates are not going to go down, even halfway to where they were. You had decades of under-savings, and during that time people didn’t have to try hard to build wealth, they bought a home and prices rose.”
“But that game is basically over now.”
The report says that many financial services companies benefited from decades of high credit growth, but now that savings rates are dropping many industries – including retail – are actually overstaffed.
“Our argument is that many workers in Sydney and Melbourne are being cautious because they have genuine concern about the prospects for their job.”
Kirkwood says retailers now have to prepare for the fact they will never see growth rates they experienced during the past decade.
“Retailers are at the pointy end now. They’re having to grapple with lower store growth. But I think there are much broader implications for any company that has exposure to the consumer wallet… airlines, transport companies and so on.”
“I think for a lot of them, businesses are staffed at top-line growth levels that they’re not going to see for a long time. Over a period of time, they’re going to have to look at staffing numbers.”
Meanwhile, Harvey Norman chief Gerry Harvey has pointed to the recent announcement from Westpac that interest rates are expected to fall by one percentage point in the next 18 months, saying the subsequent weekend saw better than expected trading.
“It was the best headline that we have seen for ages. We had more people in stores on weekend mainly due to, ‘Oh, interest rates aren’t going up’. Positive news has this wonderful effect,” he said.
“We’ve still got a low 5% unemployment but people are spending like it’s 12% I don’t see any light on the horizon.”
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
