David Gordon, Principal - Retail Industry Advisory

Reduced local demand

Let's start the discussion with a simple observation: consumer confidence is at relatively low levels and as a result consumers have opted to make a larger proportion of their disposable income, non-disposable: that is move this into savings or to reduce their debts, credit card levels and so on.

Thus there is less left over to spend. This has nothing to do with exchange rates and creates a reduction in local demand as a consequence.

However, as you can see in the diagram from the quarterly (from the June WHK SME Pulse Survey), an increasing number of small and medium sized Australian businesses see the Australian dollar as a negative.

There are two sides to the Exchange Rate debate.

1. The impact this has on consumer behavior

2. The impact it has on business margins and sourcing

Consumer behavior

When there is a high AU$ there is an obvious behavioral change spending. As a proportion of disposable income, spending actually reduces as more dollars go overseas. This again creates lower demand locally and retailers, importers and consumer goods manufacturers in Australia are currently dealing with a reduction in consumer traffic and spending in stores.

How much of a reduction?

Quoted figures suggest that the Internet accounts for 4% to 7% of retail spending. This is increasing due to a number of factors, including the higher AU$. But is this the only reason?

Other issues to consider include:

• The amount of discussion around Internet shopping has raised aware of this alternative
• With low barriers to entry and start up costs, there has been a flurry of new Internet shopping sites
• As a consequence of the above, this industry has become attractive to investors, enabling sites to increase marketing & advertising reach

What about the issue of the Internet accounting for 4% to 7% of retail sales and growing? We know that a large percentage of this sits in the area of travel (flights and accommodation) and other specific categories including books, music, bikes and other larger appliances.

Companies operating outside the strong Internet categories see much less of their potential market choosing the internet. We can therefore assume that the impact of a strong Australian dollar on local demand is mixed at best, and in some categories might have only minimal impact!

Business margins and sourcing

Most of our consumer products are sourced and manufactured overseas. This delivers a number of very positive alternatives to Australian companies:

• Use the lower cost prices to decrease prices, encouraging consumer demand
• Leave the retail price as is and strengthen gross margins
• Use the greater margins to provide higher discounts on products which have slower off take levels, reducing inventory and increasing cash flow

To summarise

The issue of reduced demand is, dependent on the category, not significantly affected by the higher exchange rate. We do know that demand is impacted far more by the general economic conditions and resultant consumer confidence levels.

In fact, we might even go so far as to make the bold statement that the high Australian dollar is a positive, and this has greatly contributed to the survival of many, many smaller to medium sized businesses in Australia.

One last thought: imagine the current situation with an Australian dollar at below 90c exchange rate levels giving retail companies no chance to influence demand through discounts and lower prices, or to use the margin difference to maintain vital cash flow!