After the handouts

For a sector that usually cops the brunt of a recession, the retail sector is coming off a pretty good 12 months. Yes, discounting was rife and margins were under pressure for most of the year, but the carnage that many expected just didn’t eventuate.

However, there are some early signs that the downturn blues were merely delayed, not totally destroyed.

Today we heard from Stan Gordon of Franchised Food Company, which owns the Cold Rock Ice Creamery, Mr Whippy and Pretzel World franchise brands. He reported Cold Rock’s sales were flat in January and the signs are worrying for the year ahead.

“The retail sector experienced a bounce from the Rudd Government’s $900 handout but the benefits of that stimulus package have since passed.

“The economy is settling into a slower grind as consumers return to saving their money. I think retailers can expect only modest sales growth throughout 2010, particularly as more rate rises loom.”

The key point here is the fading of the stimulus payments, which really shielded retailers (and households, of course) from the very worst of the downturn.

But the handouts are now long spent and while consumer confidence is high that just isn’t translating to higher consumer spending. That situation isn’t likely to improve in the short-term, particularly as interest rates keep rising.

Retailers have got some other worries too.

The Federal Government’s IR laws are proving complex and costly for many companies and financing continues to be a real problem.

Just how big this issue is was highlighted by Stockland chief executive Matthew Quinn, who spoke to Business Spectator’s Robert Gottliebsen last week about how that company has been forced to become a sort of “banker of last resort” for some small retailers, providing capital incentives and financing to ensure they can get their shops off the ground.

“We want people in our shopping centres to be upgrading their shops, refitting them to bring them up to modern standards and if the bank won’t provide them with the finance to do that, then we have to make the investment ourselves.”

“I think, bank lending to small business is going to be a key to the economy in the next 12 months. Small business is the biggest employer and without finance they will find it very hard to grow.”

Quinn has an interest in making sure he can get retailers into his centres, but the fact that his company has had to step in shows just how bad this funding situation has become and how much pressure is on the retail sector right now.