Retail rout

You only need to take a walk around your local shopping centre to see how Australia’s retail sector is travelling.

At my local centre, the sales and discounts never end. Discounts range from 10% to 70%, and even in the supermarkets, where thinner margins mean discounting is harder, big price drops are plastered all over the shelves.

Today on SmartCompany we report on two of the darlings of Australia’s retail sector, Woolworths and Country Road, both of which have reported less-than-impressive results in the last 24 hours.

At Country Road (which seemed to be weathering the downturn brilliantly last year) profit is likely to be down by as much as 20% as a result of sharp discounting throughout the fashion retail sector.

At Woolworths, annual revenue growth is still running at just above 5%, but the company’s ability to clearly outperform its rivals appears to be weakening somewhat.

The big boys are finally coming back to the pack, which suggests just how hard things must be for smaller players.

What really worries me about this prolonged period of discounting is the impact it appears to have had on the psyche of consumers.

As many retail experts have pointed out, customers are simply no longer willing to walk into a store a buy. Every product – from books and clothes to televisions and electronics – needs to be researched with thorough price comparisons.

A customer might start by checking out the best price online, and then, will continue to shop around until they’ve secured what they believe is a bargain.

Through relentless discounting, retailers have effectively trained customers to become bargain hunting machines.

The question is: How do retailers reverse this? Can they even do so?

Consumers aren’t dumb. They now have a very good understanding of how big margins are on certain products (we all now know, for example, that clothing retailers can absorb discounts of more than 25% when they need to) and they will not forget this in a hurry.

The new buying habit – research, compare prices, wait for the sale, compare prices again – will not die easily, which suggests retailers are going to need to reset their business models, and learn to live more leanly.

Clearly a return to strong economic growth would help consumers become less frugal and fortunately for retailers it does appear that the Australian economy is heading for just that.

But as RBA Governor Glen Stevens warned yesterday, and as BHP Billiton has reinforced this morning, the global outlook across North America, Europe and Asia is very mixed and it’s likely to stay that way for at least the next 18 months.

This could be enough to keep Australian shoppers in bargain hunting mode.