The Australian household has changed its buying patterns to a concentration on value, and retailers worry about the long-term effects on their businesses.

Rather than running up the credit card balance or spending freely, most households are paying down their debt loads. Generic house brands are given preference and items not heavily discounted are being left on the racks. Even credit card rewards points have joined the new pattern, as they’re often converted to gift cards or vouchers, or used to pay annual fees or other financial credits.

The new pattern has retailers worried, especially small merchants who must cut into their dwindling profit margins to offer the deep discounts value-conscious customers now expect.

“The average annual growth rate for retail sales is about 6%,” said Margy Osmond, chief executive for the Australian National Retailers Association. “Over the past twelve months it has been 1.2%, 1.3%.

“It’s been genuinely grim for retailers, extremely patchy. There’s been a flight to value and I’m not sure there will be a flight back from it.”

Should retail sales surge, the Reserve Bank will raise interest rates to prevent the economy from overheating. And with the jobs market and consumer confidence improving strongly, economists would expect shoppers to hit the stores at this point in the economic cycle. But this time around, that hasn’t happened.

Blame it on the fading effects of the government’s stimulus handouts, said Justin Smirk, chief economist with St. George Bank.

“Last year, retailers were held up by the stimulus,” said Mr. Smirk. “Now it’s fallen back to the underlying rate. But once we are through this patch we will start to see a recovery in consumer spending.”

“We are looking for a pick-up in consumer spending in the next six months,” said Phil O’Donaghoe, senior economist with Deutsche Bank. “It’s a retail sector in perhaps the most resilient advanced economy in the world, so it’s hard to get too pessimistic about it.”

If the economists are correct and retail sales return to the higher trend level, retailers’ profits will improve. However, that will also ensure the RBA will raise interest rates, just as the holidays approach—again.

Source: http://www.smh.com.au/