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Retailers make hay while the sun shines


Retailers make hay while the sun shines

Furniture and appliance retailers, like JB Hi-Fi and Harvey Norman, are enjoying their best trading conditions in a decade, buoyed by low interest rates and a renovation boom.  Alas, these sunny conditions won’t last.  And there’s more for the retailers to worry about than rising interest rates putting a clamp on demand.  There’s also the small matter of Amazon setting up ‘down under’.

Retailing is a cyclical business, and for retailers of household appliances and furniture, the repeating cycles are all too well-known.  Declining interest rates trigger a borrowing binge, fuelling rising property prices and a renovation boom, both of which lead to increasing demand for interior bling.  Winning Appliances chief executive David Woollcott was recently reported as saying the firm is selling twice the number of $25,000 to $35,000 fridges it was selling three years ago.

JB Hi-Fi, which recently acquired The Good Guys business, and Harvey Norman are two businesses at ground zero when it comes to exposure to the building and renovation boom….and subsequent bust.

A quick look at the Harvey Norman share price over the last 15 years reveals the fortunes of a mature business serving the needs of a small and slow-growing population.  Inevitably, when the boom ends, these companies survive, take market share and remain well placed to benefit from the next cycle – but investors must be aware of the cycle to take advantage of it.

And now is probably not the time to be taking a big bet that everything will remain well, despite the fact that loans to property investors continue to grow amid historically low interest rates.

You see, interest rates won’t remain low forever.  In the US for example, the ten-year Treasury bond rate hit a 300-year low of 1.36% in July 2016 but has since risen to 2.50% this month.  Why is this important?  Well, Australian bond rates have followed suit and mortgage rates have a strong correlation to the Australian three-year bond rate which has also risen – from 1.40% in August last year to almost 2.14% just before new year’s eve.

When mortgage rates do rise and/or banks are required to slow lending to investors, it is likely to crimp demand for residential investments above and beyond the foreign investor enquiry slowdown already being experienced by real estate agents.  I note for example the negligible foreign exchange outflows from China in December, the 40% year-on-year plunge in residential sales in Vancouver, Canada as a tax on foreign buyers bites, as well as the significant surge in depth-ad volumes on Realestate.com.au, which indicates vendors are willing to pay more to sell their home and want it highlighted.

But for Australia’s premier retailers, the change in landscape might not come from the RBA, banks, regulators or a property downturn but from Amazon. Amazon is reportedly setting up shop in Australia with local warehouses expected to be ready for operation in September.  Customers ordering from the world’s biggest retailer will soon be able to expect cheaper prices while also enjoying shorter waiting times for deliveries, providing another challenge for Aussie retailers whose share prices are at cyclical highs.

Retailers of furniture and appliances are simply enjoying the best conditions in a decade.  For Harvey Norman, its lower quality property revaluations amounted to $48m, or 10% of profit before tax. In the first half of this financial year alone, property revaluations amounted to a whopping $70m – the highest revaluation since the GFC and well above the $20.6 million of the previous corresponding period.

It simply won’t last.  It never does.

Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.


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This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564) and may contain general financial advice that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking advice from a financial advisor if necessary.


  1. I haven’t seen you comment much on insurance, do increasing bond yields and rate rises present a case for say IAG or QBE, or are they not worthy of ‘great business’ status regardless?

  2. Hi Roger, how much threat do rates and Amazon present to VTG? Or at current prices is it even irrelevant?

    • We don’t yet know what Amazon is going to sell. Refurbished iphones, for example, are available already on AMazon which hasn’t dented sales of bundles and packages by Telstra resellers.

  3. Roger I appreciate your views on the australian retail sales competition and anticipated decline, howver this may take years to play out.
    In addition the Australian retail market has proven to be unique and difficult to judge.
    There has been a a 30yr bull market in household retail (with corrections) growth. The economy has run on immigration and still will.

    It’s easy to join the dots or come to a confirmation bias conclusion. What separates you from other “doomsday” merchants ?

    Amazon could be the pivoting disruptor but it may not be so given our isolation and limiting efficiencies of scale.

    What investors need to know is WHEN this will happen to take full financial advantage. Otherwise predictions of one economist just become a blur in the sea of others.

    Kind Regards,


    • Hi Lindsay, As we are investors in businesses, and businesses take years to grow in value, our timeframe and thinking processes must consider those multi-year time frames. If we were stock traders and simply betting on the rises and falls of share prices, the exact timing would be more important. Having said that, it would be great to be able to accurately precict “April 12, 2019 at 4pm” but clearly that is not knowable.

  4. What about the impact of Amazon on Nick Scali in particular? (notwithstanding the likely property slowdown). Given that they focus on the high-end furniture market, do you think Amazon would eat into their business at all?

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