Australian shoppers have become increasingly careful in their spending habits as a slew of consumer-facing companies reported tougher conditions and a closely watched survey showed the entire service sector shrank in July.
Big guns including Qantas and Coles saw a dip in profits over the past 12 months, with the airline reporting weak demand for flights and the supermarket noting that the appetite for its cheaper own-brand label products was outstripping that for other goods.
The troubled discount retailer The Reject Shop plunged to a $16m loss for the full year, highlighting the pressure on retailers in the face of stagnant wage growth and uncertainty about the economic outlook.
Although profits at Flight Centre inched up by 0.1%, the company said a “soft” performance in Australia had been compensated only by stronger results from its overseas businesses. Its rival Webjet reported healthy results but said the domestic travel market was tough, impacted by the federal election as well as slowing economic conditions.
Australia’s slowing economy meant weak consumer sentiment was eating into discretionary spending, one analyst said, despite a modest boost from federal income tax cuts.
“These tax cuts aim to stimulate household expenditure and kickstart the domestic economy,” said Tom Youl, senior industry analyst at the market research firm Ibis World. “However, poor wage growth over the past five years has caused many households to reduce savings to make ends meet.”
The results came as a survey by the Commonwealth Bank on Thursday showed a decline in business activity in the service sector in the face of headwinds from the US-China trade war. In August the headline index fell to 49.5, down from 52.1 in July – with readings below 50.0 indicating recession. It was only the second time the CBA’s composite purchasing managers index (PMI) had shown a contraction since being set up in 2016.
CBA’s chief economist, Michael Blythe, said there was a “persistent concern” that the mounting clash between the world’s economic superpowers “will dent global capex and consumer spending as cautious businesses and households retreat to the sidelines”.
“Australia is not immune to these global risks,” he said, although the corresponding PMI for Australian manufacturing pointed to growth.
Qantas said its pre-tax profits for the last financial year were down 17% to $1.3bn, largely due to increased fuel costs and a weaker Australian dollar. But its chief executive, Alan Joyce, said demand was sluggish.
“Domestically, we’re seeing weakness in the price-sensitive leisure market but premium leisure demand is steady,” he said, adding that in the corporate segment strong demand from workers in the resources industry had offset a drop in travellers from the financial and telecoms sectors.
Coles’ profits were down 9% to $1.43bn, dented by lower petrol prices, that which saw smaller profits from the Coles Express division.
Its supermarket sales increased but the chief executive, Steven Cain, noted that sales of its cheaper own brand products were selling twice as fast as other products. Coles is expanding its range of own-brand products and has increased their sales share to 29.5%, with a target of 40%.
Also in the retail space, the Westfield shopping centre operator, Scentre, reported a 49% fall in profits on Thursday owing to revaluations of its massive property portfolio.
