"Flood" tax an extra headache for Australia retailers

Australia's new "flood" tax is likely to deal another blow to the nation's retailers, already struggling to deal with more frugal shoppers, online competition and a hawkish central bank.
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Updated on Jan 27, 2011 11:58 AM IST
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Reuters | By, Sydney

Australia's new "flood" tax is likely to deal another blow to the nation's retailers, already struggling to deal with more frugal shoppers, online competition and a hawkish central bank.

The government's new income tax of up to 1 %, on middle to higher income-earners, will raise A$1.8 billion to help fund flood reconstruction work -- a boon for builders and engineers but yet another dampener for household budgets.

"With consumers already cautious, a new tax is not a positive -- it's another headwind," Su-Lin Ong, senior economist at RBC Capital Markets, said after Canberra announced the temporary tax to fund a massive flood-recovery effort.

Australia's retail sector, dominated by a handful of domestic chains long accustomed to fat profit margins and limited competition, has emerged from the global financial crisis to find households in a new, more conservative mood.

Worryingly for the big retailers, such as department stores Myer Holdings and David Jones Ltd , there are some signs that consumer habits are changing for good.

"Frugal is the new black," said Margy Osmond, chief executive of the Australian National Retailers Association, which represents the nation's major retailers.

"The Australian consumer is considerably more conservative than ever...and will shop only if there is a bargain."

The retail sector is struggling at a time when the wider Australian economy is in good health.

Despite floods inundating huge areas of eastern Australia over the past month, causing up to $10 billion or more in estimated damage and losses, Australia remains on a growth trajectory, powered by a commodities boom.

Australia sailed through the global downturn of the past two years without a recession, but households still received a fright, with interest rates climbing sharply, prompting them to pay down debt or save like they had rarely done before.

Tight purse strings
Australian retail spending grew by only 1.3 % in the year ended in November, compared with an annual historical growth of 5 to 6%.

This year consumers appear to be just as miserly, even as incomes increase and the jobless rate falls to 5.0%.

Retail sales account for a quarter of Australia's A$1.3 trillion economy and the sector is the second-biggest employer after health with about 11 % of all jobs.

"We don't see a real bright prospect for 2011, it will probably be the same as last year," said Russell Zimmerman, head of the Australian Retailers Association (ARA), a lobby group that says it represents the entire retail industry.

Some attribute Australia's lacklustre consumption to poor quality of service compared with offshore retailers.

"Perhaps retailers need to look back at themselves and see what services they are giving because there is a lot of talk by consumers that they are unhappy with the service level they are getting," said Zimmerman of the ARA.

Staff at large Australian department stores in particular have been criticised for being rude and slower and less efficient than in other major world centres, particularly the United States, parts of Europe, Hong Kong and Singapore.

Standard trading hours in Australia are also much shorter than offshore peers, with most shops closing between 5pm and 6pm and even earlier on Saturdays.

Australian retailers have also been criticised for offering a limited range of products at prices inflated by heavy taxes and higher wages.

A Clinique lip balm, advertised by the cosmetics firm in its US and Australian websites, costs $14 in the United States but A$32 in Australia, though the two currencies are near parity.

Similarly, Apple Inc's iPhone 4 with 16 gigabytes of memory costs A$859 in Australia, a 43% premium over the $599 price tag showed on Apple's US websites.

Going online
As a result, Australians are increasingly shopping online. Online sales, which are not necessarily captured by official statistics, are expected to grow 5% in the year to June, according to research firm IBISWorld.

Experts point out that Australians save up to 50 % off retail prices by shopping on overseas sites, particularly so with the ascension of the Australian dollar.

The Aussie dollar gained 8 % against the US dollar in the past year and a stunning 15 % against the euro.
The luxury industry, which has stayed away from discounting campaigns, could emerge as one of the rare winners this year.

"Some of (the luxury retailers) have done quite well and as the economy comes better... it's an area where we probably will see some growth," said ARA's Zimmerman.

In contrast, fashion and footwear will likely struggle as the price of cotton has soared and labour costs in China have climbed, he added. Electronics retailers may also suffer because of higher-than-usual deflation due to a strong
Australian dollar, eroding retailers' profit margins.

But restrained shopping is far from displeasing everyone.

Indeed, the central bank welcomes a more sober attitude by consumers, to help make room for the nation's booming mining sector to expand without adding further to price pressures.

It has lifted its cash rate 175 basis points (bps) since late 2009, taking it to 4.75%. The market is now pricing in 30 bps of tightening for the next 12 months.

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