* Retail price war may halt modest pick-up in inflation
* Households seen cutting back on discretionary spending
* Amazon's entry set to worsen retailers' woes, keep prices
* Foreign retailers enticed by high margins in Australia
By Swati Pandey
SYDNEY, May 8 A fierce price war among retailers
is threatening to keep a lid on improving inflation in
Australia, compounding the problems of policymakers struggling
to support still-weak domestic demand.
An uptick in consumer inflation has lowered the chance of
another rate cut this year, but competition from global
retailers such as Amazon.com Inc is set to keep prices
under pressure - good news for shoppers but worrying for the
The country's biggest retailers are suffering from a long
spell of deflation that is unlikely to subside soon. Amazon and
German supermarket chain Kaufland want to fortify their global
presence Down Under and will join recent entrants such as H&M
, Uniqlo and Aldi.
The Reserve Bank of Australia (RBA) said on Friday that
"heightened competitive pressures" in the retail sector were
among key factors keeping inflation subdued.
"The arrival of further new foreign retailers will be an
important influence on final retail prices over the next few
years," the RBA said in its quarterly statement on monetary
policy in which it expects underlying inflation may only fully
return to its 2-3 percent target band by mid-2019.
Worried about deflation risks, the RBA slashed rates twice
last year to a record low 1.50 percent. It is widely expected to
hold rates until mid-2018 but subdued consumer prices could
become a trigger for a move lower, and push the Australian
"While consumers will benefit from lower prices, ongoing
weakness in retail inflation is a key factor weighing on the
broader inflation outlook," said ANZ economist Jo Masters.
There was some relief headline consumer prices rose in the
first quarter, taking the annual pace to its fastest since 2014
at 2.1 percent. But five of 11 sectors - about 30 percent of the
CPI basket - saw price falls. Prices for women's clothing, for
example, were at their cheapest on record.
A study by Capital Economics shows price increase in what it
classifies as 'luxuries' - clothing, alcohol and recreation -
halved to 0.6 percent from 1.2 since the start of last year.
Inflation in 'essentials' - food, electricity and insurance -
accelerated to 3.4 percent from 1 percent.
"In other words, it now costs much more to live, but not
much more to have fun," said economist Paul Dales, adding that
this situation was hitting household spending on discretionary
items. "It implies that consumption growth will be a little bit
Clothing and homeware prices have fallen due to cut-throat
competition among major retailers, which only intensified with
the arrival of foreign chains to Australia.
While there are few details on how Amazon will position
itself, the retail giant's expected entry this year will worsen
the pain of a retail industry that has been largely insulated by
a housing boom and pick-up in global growth, analysts said.
Jefferies expects Amazon to capture between A$3 billion to
A$8 billion ($2.25-$6 billion) of sales in Australia - about 30
percent of current online retail sales.
WHO MOVED MY CHEESE?
Amazon will "eat all our breakfasts, lunches and dinners",
said Wesfarmers group managing director, Richard Goyder
last year, although he has since softened his stance.
"I'm less worried about Amazon in food," he said, after the
company's quarterly sales results last month which showed its
Coles supermarket chain has suffered 24 consecutive quarters of
price deflation. "There are plenty of disrupters
and plenty of competition around at the moment."
Gerry Harvey, founder of Australia's top electronics and
homewares retailer Harvey Norman, has vowed to "match
or beat" Amazon's aggressive pricing.
Australian retailers are being forced to change their
business models but four major firms going into voluntary
administration in the first two months of the year highlights
the deepening crisis.
Not surprisingly, the sector has been shedding jobs, with
more workers lost in the year to November 2016 than any other
"Foreign retailers are attracted by relatively high margins
in Australia and will continue to enter the market as long as
that additional margin is on offer," said Masters of ANZ.
So far, only 16 percent of the world's top 250 retailers
have a physical presence in Australia, according to Deloitte.
Average five-year operating margin for Harvey Norman was
18.7 percent, and for Wesfarmers 7.6 percent, according to
Thomson Reuters data. That compares with 6.1 percent for Amazon
and 5.3 percent for Best Buy.
($1 = 1.3316 Australian dollars)
(Editing by Jacqueline Wong)