ANZ: Low wage growth and competition is hurting Australian retailing

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The release today of the wage price index for the fourth quarter of 2015 will reinforce again the slow rate of income growth that Australian workers are now facing.

That’s important because for consumers, and the shops they spend their hard earned cash in, the retardation of wage growth might be the best explanation for why everyone feels in a rut.

It’s a theme Jo Masters, senior economist at the ANZ, picked up on in a note to clients this week. Masters said:

Retailers are facing a period of soft growth for both private consumption and income. Consumption rose by 2.7% y/y in Q3 2015, well below its long run average of close to 3.5%, amid anaemic wages growth and mediocre consumer sentiment.

In this environment, consumers are price sensitive, particularly for discretionary items. Moreover, retail sales represent a declining proportion of overall consumer spending, as growth in spending on services has outpaced that of goods.

This slowdown, along with “a more competitive retail environment is limiting pricing power and encouraging increased use of promotions, sales, discounts, and loyalty programs,” Masters said.

She also argues that this means the CPI is overstating the true picture of inflation in Australia because many of these discounts are not picked up by the CPI survey.

She highlighted the incredible impact of Coles and Woolworths drive to reduce prices over recent years.

The impact of discounting is most obvious in food inflation. Woolworths and Coles release measures of average prices paid at the till, and in both cases these measures have been falling and consistently running below the CPI measure of food inflation. At present, the discrepancy is significant, with both Coles and Woolworths prices around 150ppt below CPI food inflation.

The ‘down down’ campaign by Coles reduced the price of over 1,400 items and the ‘deeper down down’ campaign added over 50 products with discounts of up to 34%. Woolworths invested AUD100m in driving prices lower in in Q1 2015-16, with the aim of boosting market share.

Masters also noted more offshore retailers are coming to Australia in the months and years ahead. That simply serves to highlight what a tough market it is for retailers to raise prices and pass on the impact of a lower Australian dollar.

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