A tough road ahead for consumer discretionary businesses
In late-2022 Australian household deposits were $175 billion above trend, and this “extra cash” was largely in the hands of the 65+ years of age cohort. After many years of financial repression, these older Australians will enjoy earning a more reasonable return on their spare cash.
On the other side of the coin, we have calculated $600 billion worth of Australian’s mortgagees, including $164 billion from the Commonwealth Bank of Australia and $143 billion from Westpac, will be reset from fixed to variable over the 2023-2025 period.
It is argued 30 per cent of variable-rate borrowers would deplete their liquidity buffer by mid-2023 while a further 15 per cent of variable-rate borrowers would deplete their liquidity buffer eighteen months later, by late-2024.
Harvey Norman results
In their half-year results to December 2022, Harvey Norman (ASX:HVN), across their 547 franchisees in Australia, 196 franchised complexes in Australia and 109 overseas company operated stores, reported total system sales revenue of $4.98 billion, up 1.4 per cent on the $4.91 billion recorded in the six months to June 2022, but down 4.8 per cent on the $5.23 billion recorded in the six months to December 2021.
The revenue trajectory is worth highlighting, with New Zealand moving from a positive 5.8 per cent September 2022 quarter (on the previous corresponding period) to a negative 12.7 per cent in the December 2022 quarter (on the previous corresponding period). Australia went from positive 11.5 per cent in the September 2022 quarter, followed by negative 5.0 per cent in the December 2022 quarter.
For context, total pre-tax profit has come down from $644 million in the December 2021 half-year to $612 million in the June 2022 half-year to $523 million in the December 2022 half-year.
Franchising Operations, accounting for 45 per cent of pre-tax profit, declined 19 per cent to $238 million, whilst Overseas Company Operated Stores, accounting for 19 per cent of pre-tax profit, declined 22 per cent to $100 million.
The big news, however, was that Australian Franchisees recorded a ten per cent decline in sales in January 2023, whilst New Zealand recorded an eight per cent decline. Northern Ireland is haemorrhaging – after recording a 20 per cent decline in the December 2022 half-year, the decline in January 2023 was 27 per cent.
Those businesses exposed to discretionary expenditure, especially to the over-leveraged middle-aged households, who account for one-third of total consumption, are expected to experience a tough period ahead.