Written by Adam Lysle in March, 2007

Famous Australian writers have used words like a dry, hard country for many years but most of us always thought and believed they were referring to Australia’s unique landscape and its inflicting climate. Now, more than ever, the increasing drought of discretionary spending is really beginning to take hold and proving to be a new example of how resilient business people in the retail sector must be in order to Survive.

Australia’s retail sector contributes $51bn to the National Economy and NSW’s slice of that pie is 33% of the total retail sector. With this in mind, it is reasonable to assert that this sector depends greatly on the ability of households to continue to support it with available cash resources or available cash flow on a regular basis.

Australia’s interest rates have increased over 1.5% in the last few years and are not guaranteed to stop there before the next federal election. Oil prices remain high and volatile. As we all know, oil prices did rise by over 20% in the last 12 months and even though there has been some recent relief, it does continue to have a serious affect on individual cash flow and business profitability.

With the combination of the interest rate rises and the increasing fuel costs, it has produced significant heat on discretionary spending in real monetary terms. In the middle of 2002 calendar year, interest rates were just over 4% and fuel was just under $1 per litre on average. Now, the interest rates are over 6.5% and fuel did reach over $1.30 per litre in just on 5 years time which equates to a whopping 65% increase.

In real monetary terms when compared against the average wage, the real effect on households is equal to over 3% of increased interest rates. When taking into account that the average mortgage is over $300,000, this means that households are outlaying $9,000 ($175 per week) more per year than at the end of 2002.

It is only through this illustration that real evidence begins to appear about the drying up of discretionary spending and certainly the 65% increase of fuel costs over a 5 year period has been a major contributor. With the expectation that the fuel costs are set to continue to rise or at best remain volatile, the retail sector needs to take all the necessary steps now to prevent collapses.

Advisors of business including accountants and solicitors should as a general rule, more closely scrutinise the solvency, cash flow and working capital positions of their respective clients. Jones Condon has recently seen a number of retailers even with well known and substantive brands drive their businesses to positions beyond the point where external assistance can actually be of any real benefit only because they were of the firm belief that the business was significantly liquid.

In the past, ‘When the river runs dry’ as a famous band once sung always meant in our hearts a reference to our sunburnt country. Now, it appears that the river may well be both the household pocket and in turn the retail door being open. Australia’s future may well be a dry, hard country in more ways than one.