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Retailers expect consumers to spoil themselves

9th Oct 2020 | Retail

Article By: Sue Mitchell

Retailers expect consumers to spend rather than save the income tax cuts unveiled in the budget, boosting retail sales in the run-up to Christmas.

Citigroup estimates the personal tax cuts, which are worth $12.5 billion this year, together with a further $2.5 billion in pensioner payments, could boost retail sales by 1.5 to 2.5 per cent, potentially lifting retailers' earnings by 3 per cent to 7 per cent.

The question is whether consumers will have the confidence to spend the extra cash – estimated to be worth $20 to $48 a week for the people who get them – or, with unemployment mounting and house prices falling, whether they will save it for a rainy day.

Ikea Australia country manager Jan Gardberg expects consumers to spoil themselves at Christmas but start saving or paying off credit cards from February.

"It’s a good thing for sure – people need support and help during this difficult period – I think we haven’t seen yet the full effect of lockdowns and COVID-19," Mr Gardberg said.

"I believe people are ... looking forward to the holiday period and Christmas and a lot of people will say; 'If I can't travel I'm at least going to indulge myself and my friends and family with a nice Christmas'," he said. "'When I need to start to save I'll do that from February on'."

"People understand that tough times are going to continue from an economic perspective. But sometimes we want to have a little bit of fun before we pull the belt tighter."

Praise all round
Retail leaders unanimously welcomed the budget, saying it would boost consumer confidence and spending as the stimulus from JobKeeper and the JobSeeker supplement started to unwind.

“In my business career I have never witnessed such a well-thought-out budget, one that benefits nearly every single business in the country," said retail veteran Solomon Lew, the chairman of Smiggle and Peter Alexander-owner Premier Investments.

"It cannot be understated just how much this will provide a shot in the arm to employment, youth job creation, consumer confidence and spending," he said. "This budget will help bring the Australian economy out of the doldrums and back to where it needs to be.”

Wesfarmers managing director Rob Scott said the budget rightly focused on many of the critical short term impacts of COVID-19 – jobs, investment and household incomes – and would give businesses more confidence to employ and invest and encourage households and families to invest in their future.

"We support the government’s recognition of how important it is to target youth unemployment but this is a highly stimulatory budget generally which will ensure it helps to maintain and create jobs for all ages," Mr Scott said.

"Our businesses have always recruited on merit and need and will continue to do so – Bunnings in particular is known for its employment of many older Australians because of the skills and experience they bring. The stimulus and initiatives in this budget will both support work for our existing teams, and more work for new team members, young and old.

"On broader and more fundamental tax reform, there still remains much to do and we look forward to seeing more on this over the next year."

Woolworths CEO Brad Banducci said the budget would help move the economy back towards a path of sustainable economic growth and job creation.

"I wanted to particularly call out the increase in funding for mental health services, which are absolutely critical in supporting our collective wellbeing in these challenging times," Mr Banducci said.

Citigroup's head of research, Craig Woolford, said the budget would result in a significant drop in the total stimulus provided to households in calendar 2021 compared with 2020.

The need to restore consumer confidence was vital, particularly as we head into Christmas, and these tax breaks will go a long way to achieving that.

— Dominique Lamb, National Retail Association

The outcome for retail spending this year would depend on consumers' willingness to dip into their savings, which have risen during the pandemic, and the impact of the budget on employment and housing.

"The personal income tax cuts and additional pensioner payments may provide $3 billion to $4 billion a quarter extra to household income, but this pales in comparison to the $60 billion to $70 billion a quarter paid in June and September 2020 in order to manage through COVID-19," Mr Woolford said.

"This level of stimulus keeps us cautious on the retail sales outlook next year," he said.

Citigroup estimated JobMaker hiring subsidies could help retailers – especially major chains such as Woolworths and Coles, which employ large numbers of younger workers – reduce wage bills, boosting earnings by up to 1 per cent.

The JobTrainer fund, which is designed to support 100,000 apprenticeships, could boost hardware and IT sales – helping retailers such as JB Hi-Fi, Harvey Norman and Wesfarmers' Officeworks – but will have a modest impact on wage costs given the low levels of apprentices used in retail.

Retailers with sales of less than $5 billion – including Mr Lew's Premier and Breville Group, Super Retail Group, Accent Group, Kogan.com, Temple & Webster and Nick Scali – also stood to benefit from the expansion of the instant asset write-off scheme.

The ability to write off 100 per cent of capital investments could boost retailers' operating cash flow by between 5 and 10 per cent, Citigroup said.

"Retailers with high wage/sales ratios and high capex intensity are the biggest beneficiaries," Mr Woolford said.

Industry groups welcome measures
The Australian Retailers Association and the National Retail Association also welcomed the budget, saying personal tax cuts and cash payments of $500 for those on welfare would help stimulate spending, while the $105 million loss carry-back scheme would be a boon for smaller retailers forced into the red by the coronavirus pandemic.

"As we have seen from the protracted Victorian lockdowns, many retailers have, through no fault of their own, found themselves in a loss-making situation with mounting debts," ARA chief executive Paul Zahra said.

"This measure allows businesses to bolster their cash reserves so they have an opportunity to rebuild in 2021 when trading conditions are more stable."

NRA chief Dominique Lamb said the timing of the budget measures couldn’t be better, with the retail sector about to head into its busiest time of the year.

“Last week’s ABS retail trade report for August showed a decline in retail sales of 4 per cent nationwide," Ms Lamb said.

"Bringing forward and backdating tax cuts for low- and middle-income earners will mean that everyday Australians will now have more money in their hip pocket to spend at the shops.

"The need to restore consumer confidence was vital, particularly as we head into Christmas, and these tax breaks will go a long way to achieving that."