‘Hits just keep coming’: Inflation fears could spark retail meltdown

malls

A lethal cocktail of inflation, higher interest rates and surging food and power costs look set to crimp consumer spending, leading to predictions that retailers will soon face the toughest conditions in more than a decade.

The nation’s best known brands, including JB Hi-Fi and Harvey Norman, saw their stock price fall hard on Tuesday during a horror session on the ASX as analysts from Barrenjoey and Macquarie issued some hard truths about the turbulence hitting consumer wallets.

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JB Hi-Fi was among the companies seeing downgrades from analysts on Tuesday.

Barrenjoey consumer analyst Tom Kierath said it was hard to think of when conditions had been tougher for retailers over the past 15 years, with consumers now battling a “cocktail” of higher interest rates, food and fuel costs.

“It’s easy to see why consumer confidence is back to GFC levels. Increasingly, we think [Financial year] 23 will be as difficult as FY19, potentially worse in some categories,” he wrote in a note to clients.

Meanwhile, Macquarie’s equities team placed downgrades on JB Hi-Fi, Harvey Norman and Wesfarmers, predicting “significant pressure on discretionary spending” going forward.

“A rise in inflation increases the cost of staples for consumers, leaving less leftover money to purchase discretionary items. We would expect rising inflation to lower relative demand for discretionary items relative to staple items,” Macquarie’s equities team said.

JB Hi-Fi shares fell 5.7 per cent for the session to $39.31, while Harvey Norman was 5.4 per cent lower to $3.86. Supermarket giant Wesfarmers also weighed down a struggling market, losing 3.8 per cent for the session.

Australian Retailers Association chief Paul Zahra says the rate hikes will curb spending.

Chief executive of the Australian Retailer’s Association, Paul Zahra, said the entire retail sector had emerged from COVID-19 related lockdowns only to fight even more battles.

“They’ve navigated the worst of the pandemic, but the hits just keep on coming from ongoing supply chain issues, staff shortages and the rising cost of fuel and materials. Many of the cost pressures this year are unprecedented,” he said.

Despite this, Zahra said the fact that retail sales have been at record levels should help insulate the sector as interest rates rise.

“Household savings [also] remain up on pre-pandemic levels, which will assist in cushioning the blow from the cost of living pressures many are experiencing,” he said.

Macquarie analysts noted that while consumers may have some cash to spend, a combination of rising costs and big spending on electronics during COVID lockdowns could dampen discretionary spending moving forward.

“The likely overconsumption of goods over the past two years as a key risk to near-term performance,” the group said in a note.

The ASX200 finished Tuesday’s session 3.5 per cent lower but plunged as much as 5 per cent throughout the day after Wall Street entered bear market territory and investors weighed the implications of recession.

Airlines are also keeping a close eye on whether recession fears will dampen appetite for domestic and international travel, which has rebounded strongly.

Air Canada international sales vice president Virgilio Russi told The Herald and The Age that he was “following with great concern” global events like the war on Ukraine, which have pushed up the price of oil and fuel. A plane built for international trips, like a Boeing 747, will use 4 litres of fuel a second.

“It’s very possible that there will be a recession … we’re factoring that in,” Russi said. “I think the world is changing, for the worse.”

Despite the warnings, some ASX-listed retailers remain optimistic that their sectors will not be immediately affected.

Online retailer Adore Beauty chief Tennealle O’Shannessy is confident looming recession risks won’t do much damage to the beauty industry.

“Beauty is an incredibly resilient category, even in times of economic downturn,” she said, pointing out that consumers use skincare and haircare products every day.

“So, while macroeconomic factors may see consumers reduce their discretionary spending, it is unlikely to have a flow-on effect on the beauty category,” O’Shannessy said.

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