Risk profile ramps up for small retail

AUSTRALIAN retailers face “a number of risks” amid intense competition, slow spending growth and changing consumer preferences, a senior Reserve Bank official says.

And some smaller and unlisted retailers are showing “signs of financial difficulties”, RBA assistant governor Michele Bullock says.

But the difficulties weighing on the sector appear “unlikely to pose a significant risk to the banking sector”, Ms Bullock says.

Speaking in Toowoomba yesterday, Ms Bullock said small retailers were more vulnerable at the moment than bigger chains.

Many in the sector were carrying worrying levels of debt, with gearing ratios – their debt relative to the amount of equity in their businesses – above 100 per cent.

That could make them prone to asset writedowns and losses, Ms Bullock said.

Banks are major lenders to the retail industry, meaning a contraction in retail can have a significant knock-on effect for the banking industry broader economy.

“Domestic retailing, particularly bricks-and-mortar retailing for discretionary goods, has been experiencing challenging conditions in recent years,” she said

“Competition from both large international and online retailers has been intense; consumer spending is growing slowly and consumer preferences are changing.’’

RBA staff had assessed potential risks by the retail sector to the stability of the financial system, Ms Bullock said. and

“Broadly, they concluded that, although retailers and investors (in the retail sector) face a number of risks, there is currently no strong evidence of widespread vulnerability, or that risks to banks are high,” she said.

Ms Bullock said listed discretionary retailers “generally appear sound”. She did not name any such retailers but prominent listed discretionary retailers in Australia include JB Hi-fi, Harvey Norman, Myer and Premier Investments, owner of Just Jeans, Jay Jays and Smiggle.

“Unlisted retailers, on the other hand, are not so well positioned in terms of gearing and liquidity,’’ she warned.

Ms Bullock said more than a quarter of unlisted retailers were highly indebted, with gearing ratios above 100 per cent.

“Another negative development in this sector is that the share of loss-making retailers has increased over the past few years,’’ she said.

These retailers were on average smaller, accounting for about 10 per cent of total retail sector debt, she said.