Metcash’s market warning

There’s been a swathe of retail closures in the last 18 months and there will be plenty more over the next 12 months. The retail sector – and particularly those categories described as discretionary or non-essential – is being hit by a toxic cocktail of structural change and fragile consumer confidence.

But grocery retail has so far been immune to the downturn, as it usually is. Sales growth rates at Woolworths and Coles have slowed and margins have been under pressure, but we haven’t seen widespread store closures or job losses in the food retailing sector.

Until now.

Grocery wholesaler/retailer Metcash, which supplies the IGA chain and operates the Campbell’s Cash & Carry group, has this morning announced it will make 478 staff redundant, close 15 Campbell’s Cash & Carry branches in regional areas and restructure its struggling Queensland operations.

Most of the staff will be cut from the Campbell’s business, while 163 will be cut from head office.

“These difficult conditions result from continued deflation which is pushing prices and margins down, and a value conscious consumer who increasingly purchases on discount,” Metcash chief Andrew Reitzer said this morning in a statement to the ASX.

Reitzer said the changes at Campbell’s were also driven by changes in the convenience store market that the company supplies, where traditional convenience stores are dying and petrol station stores have gained the upper hand.

But it’s still food retailing. The Metcash job cuts, which are accompanied by the sale of a food distribution business and up to $123 million in impairment charges, suggest that the tough conditions in the retail sector have spread beyond discretionary retail categories.

If the Metcash announcement speaks volumes about retail, then yesterday’s building approvals data speaks volumes about the residential construction sector.

Building approvals slumped a massive 7.8% in February to their lowest level since March 2009. Economists had been expecting a 0.5% rise during the month, so the figures were really, really ugly.

Westpac senior economist Matthew Hassan says the data suggests that the idea that approvals had bottomed last year now looks to be wrong – approvals may be about to enter a period of “renewed deterioration”.

That’s disastrous news for the building and construction sectors, which have already seen a wave of job losses and company collapses. Small tradies have been hit hard, but the collapse of big builders such as Kell & Rigby and franchises within the Cavalier Homes group underlines how even established groups are struggling to survive.

It will be very interesting to see whether the RBA makes any special mention of these sectors when it makes its interest rate decision today. Most economists are expecting rates to remain on hold today, although many are tipping a rate cut in May.

The RBA clearly has a tough job at present, balancing the reasonably strong growth in the mining sector with much weaker conditions in the wider economy.  

But the signs from the retail and building sectors – two big employers – are not good and the RBA may need to act before conditions deteriorate further.