Here's proof Australian corner stores are struggling

Photo by Justin Sullivan/Getty Images

Australian retail sales, despite signs of strengthening labour market conditions, remain subdued. According to data released by the ABS last week, they increased by just 3.65% in the 12 months to September, the slowest pace seen since January 2015.

While in absolute terms the trend is solid without being spectacular, according to a report from Deutsche Bank economist Phil O’Donaghoe released on Monday, there is a clear divergence forming across Australia’s retail sector: large stores are outperforming their smaller peers, and by some margin.

According to O’Donaghoe, in the past year, turnover at large retailers increased by 6%, outperforming that for small retailer which recorded growth of just 0.25%.

“This is the latest observation in a period of underperformance by smaller retailers that began to take hold at the end of 2007,” notes O’Donaghoe.

“Since then, turnover at small retailers has grown at an average annualized pace of 1.5%. Larger stores, over the same period, have seen average annualized growth of 5.0%.”

The charts below, supplied by Deutsche Bank, reveal the divergence performance in turnover between large and small retailers.

O’Donaghoe believes one factor that may be driving the divergent performance is a “cost conscious shift in household behaviour that larger stores have been better able to accommodate”.

Essentially, households have become more cautious towards their spending habits, increasing the amount they save in response to a sharp slowdown in income growth.

“The household saving rate has increased from 3.4% at Q4-07 to 8.8% at Q2-15. Nominal growth in gross household disposable income has slowed from around 11% yoy in 2007 to around 3% yoy so far in 2015,” says O’Donaghoe.

“Larger stores would be better placed to respond these changes to the extent they have a greater capacity to compete on price.”

In other words, given their sheer size and economies of scale, large retailers have a greater ability to offer price discounts to attract customers than their smaller rivals.

With household caution likely to prevail in the period ahead, O’Donaghoe believes that “less rigidity around labour and trading hours, for might enhance the ability of smaller stores to compete on price”.

With state and federal governments unlikely to resolve that complex and, to some, controversial issue over the near term, for those who are fans of the local corner store, and have leeway on the amount they can spend, perhaps it’s time you paid a visit to your local retailer to offer some much needed support.

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