What's killing off retailing? Retailers are paying the price for consumer caution. Photo: Tamara Voninski A middle-aged woman from a middle-class suburb sits among a group of people and is asked why she isn't spending money at the shops. She pauses, thinks, and in her lengthy answer touches upon a hotch-potch of real and imagined worries that make the action to reach for her purse feel almost impossible. Then she mentions the "US fiscal cliff"; asked to explain what the fiscal cliff actually is, she is unable to define it but blames it for her lack of spending anyway. 'It's difficult to really get a good handle on it' said Richard Goyder from Westfarmers. This is a real discussion taken from a recent focus group run by one of the nation's best known retailers and goes to the heart of all that is wrong with consumers today - they have reined in their discretionary spending, but many just don't really know why. House prices are at record highs but consumers still feel poor. Unemployment remains low, especially against the double-digit jobless rates stalking recession racked Europe, but most Australians fear for their jobs. Not even historically low interest rates of 2.5 per cent are enough to coax a return to retail spending. Then there is the election, finally being held on Saturday after nearly eight months of campaigning, and the general noise and distraction of the campaign which typically puts the brakes on spending. But for many retailers there is the nagging fear that keeps them up at night: what happens if the election has nothing to do with the slide in consumer confidence and nothing changes come Sunday? Retail trade figures released during the week put the spotlight on the problem, namely that retail spending remains one of the weakest components of the Australian economy. And has been for some time. Retail spending registered an anaemic 0.1 per cent rise in July following a flat performance in June, and spending at department stores was a disaster, crashing by nearly 8 per cent. Some of that money is being stashed away in bank accounts. The annualised savings rate was 9.8 per cent in the June 2013 quarter, up from 9.5 per cent last year - signalling that so far higher house prices recorded across most east coast capital cities have not led to lower savings. "It's difficult at the moment to really get a good handle on it," says Richard Goyder, chief executive of Wesfarmers which through its businesses such as Coles, Bunnings, Target and Kmart rakes in nearly $50 billion of year in sales and has a huge exposure to the consumer. "Some consumer surveys are pretty negative, we are seeing a mixed environment," he says. Interest rate reductions have helped, I think getting the election out of the way will just get some noise out of that place, so I guess I hope that towards the end of the year we see some improvement in consumer confidence - but who knows. Who knows indeed. Retailers, economists, business owners and analysts are perplexed by the state of the Australian consumer. They have everything to be happy about, especially when they compare their lot in life to the average Spaniard, Greek, Italian or American, but they just aren't showing it when they dispose of their discretionary dollars. People are still spending money it seems, but what is emerging is that as confidence drops consumers are directing their spend into other areas that don't end up in the hands of traditional bricks and mortar retailers. A schism has opened between the consumer and traditional retail, where the nexus that joined people's wallets to the shops has weakened and may never be properly repaired. Citi analyst Craig Woolford says consumers are spending money, it's just going elsewhere, with GDP figures for June highlighting a trend that should concern all retailers. Driven by both necessity and desire, shoppers are spending money elsewhere. In the June quarter, total consumption expenditure grew 4 per cent compared with retail spending growth of 1.9 per cent," he says. Woolford describes the situation as one in which the "consumer is solid, but retail is weak." Since 2010, retail spending has been weaker than broader consumer spending. For the June 2013 quarter, Australians spent more of their income on utility bills, education, health, telecommunications and overseas travel. Most of the recent retail weakness reflects greater pressure on households from necessities. It's a situation many retailers are keenly aware of. "Consumers are still spending but they are spending in areas that we haven't seen before," says Patties Foods managing director Greg Bourke, whose business is the market leader in meat pies with its iconic Four'N Twenty brand, while it also holds a large share of the frozen desserts category - consumer staples that should appear in most shopping baskets. They are spending on things like food and some restaurants and cafes, but also on travel and on clothing imported on the internet. But it's the leakage of spending that once found a home in stores that is emerging as a key suspect in the hunt for who is slowly snuffing the life out of the retail sector. "Poor retail outcomes are slightly at odds with sound household balance sheets, rising real wages and interest rates at stimulatory levels," says Michael Workman, senior economist at CBA. We suspect that 'spending leakages', around significantly higher utility and petrol prices, and elevated levels of job security concerns, are combining to negate the impact of what we see as the economic positives. Workman says the higher cost of living is pinching the wallets of lower income earners. While paying utility bills makes up roughly 2.5 per cent of average household income, when viewed through a strata of income groups some households are spending as much as 15 to 20 per cent of their income on keeping the lights and heating on. Tim Salt, the boss of the local offshoot of global beverages giant Diageo, says this has become a constant theme in customer feedback. The two things that we get said back to us continually is the cost of basics, and by that I'm thinking about electricity and fuel prices, and that comes through very clearly from consumers. That in itself sort of worries people. The other thing is around the political uncertainty, we are in a policy void from most people's perspective, and you have people talking the economy up and you've got others talking it down, and I think that whole uncertainty from the political scene is flowing through to the consumer. I don't think we are going to see that resolved until not only the election is over ... but also until people can see that there isn't going to be a a big downturn in the market. The chief executive of Australia's biggest retailer Woolworths, Grant O'Brien, is also hoping that from Monday there will be a shift in consumer sentiment with the election out of the way and a clear winner named. "The return to certainty post the election is the most important thing for us," O'Brien says. Workman says that behind the scenes there is a dramatic structural shift going on in the minds of consumers, with higher cash deposits being held by households and businesses. Whereas retail spending makes up about 31 per cent of household consumption, if you went back 20 years the numbers were up in the 40s."The 'new norm' is relative consumer restraint." This has forced many retailers to resort to drastic discounts to draw in customers, crushing their own margins and turning once profitable retail businesses into operations that are starting to look precarious. Antony Resnick, a principal at insolvency and advisory firm BRI Ferrier, has worked on a number of retail collapses this year including Mothercare and House of Knives. "The average rent for many shops is too high as a per cent of sales or turnover, and some have in excess of 20 per cent [rents as a proportion of sales] and that makes it hard to be profitable," Resnick says. The bad news is things could get worse after Christmas. "I think a lot of retailers are holding on to do their best and stock up for Christmas, and I think a lot of shoppers are going to be doing their Christmas shopping after Christmas, and that means you can anticipate a mediocre December sales and boosted January sales," he says. Scary news for the retail businesses that employ hundreds of thousands of Australians and forms a vital pillar of the nation's economy.