In Brief: The Amazon Threat, Expensive Banks, Houses & Retail Sales

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The threat to incumbents posed by Amazon Australia; the rally for Australian bank shares queried; flat 2024 house prices; and emerging signs of a potential boost for retail sales.

-Amazon Australia’s rising threat to incumbent retailers 
-Citi questions the recent share price rally of Australian banks
-Flat 2024 house prices, residential construction to remain weak
-Fledgling signs of a stronger consumer to potentially boost retail sales

By Mark Woodruff

The threat posed by Amazon Australia to incumbents

Following the release of 2023 financials for Amazon Australia, Jarden suggests general merchandise retailers in Australia that rely on third-party brands are most at risk from the behemoth.

Falling into this danger category, according to the broker, are JB Hi-Fi ((JBH)), Kogan.com ((KGN)), Wesfarmers ((WES)) and Myer ((MYR)).

Considered less at risk are Accent Group ((AX1)), Temple & Webster ((TPW)), Premier Investments ((PMV)), Woolworths Group ((WOW)), Coles Group ((COL)) and Nick Scali ((NCK)).

In 2023, Amazon Australia expanded its Prime share, introduced Prime free same-day delivery, and announced its new 209,000sqm fully automated Craigieburn distribution centre in Melbourne, the second in Australia. 

By the end of 2024, the analysts predict Amazon will take an around 8% share of incremental retail sales growth in Australia, led by growth across both food and the discretionary non-food space.

Amazon's market share will step-change higher, suggests Jarden, as shorter lead-times expand its addressable market and grow share of the customer’s wallet.

The rising risk for incumbents runs via lost sales and increased price competition, as shoppers are increasingly using Amazon as their first point of purchase.

The global e-commerce leader accounted for around 15% of non-food online sales in 2023, and Jarden forecasts an increase to circa 18% in FY24.

As sales will be harder to come by, and price competition will intensify, the analysts suggest more investment will be needed by existing players into loyalty, services and the supply chain.

To illustrate the current size of Amazon Australia, Jarden points out the company’s gross marketplace value (GMV) is now larger than the combination of Access Group, the Reject Shop ((TRS)), Beacon Lighting ((BLX)), Temple & Webster, Premier Investments and Universal Store ((UNI)).

Citi questions why shares of Australian Banks continue to rally

Reporting season for Australian banks revealed lower-quality earnings beats, and confirmed Citi’s view core earnings will continue to be impacted by rising funding costs.

Despite the broker’s outlook, the bank index climbed to 12-month highs following results, supported by a strong rally for the majors. The sector has outperformed the wider market by 8% since the beginning of November last year, half of which occurred post-results.

Citi feels investors perceived the sector was relatively defensive and bought bank shares based on the absence of bad news within the results, particularly the lack of asset quality issues across loan books, along with mildly positive earnings revisions.

However, the positive earnings revisions for ANZ Bank ((ANZ)), National Australia Bank ((NAB)) and Westpac ((WBC)) were of low-quality, suggests Citi, as they were primarily due to robust market and treasury income in core earnings, and better-than-expected bad and doubtful debts in cash earnings.

CommBank ((CBA)) and Bendigo & Adelaide Bank ((BEN)) issued weaker earnings reports, according to the broker, leading to negative second half consensus core (pre-provision) earnings revisions. This outcome was primarily driven by elevated net interest margin (NIM) contraction as deposit competition, and switching to higher-yield deposit products, overtook asset-pricing concerns during the period, explain the analysts.

As the economy will likely slow, Citi suggests banks are not a defensive holding and retains an Underweight recommendation for the sector, with an expectation share prices will retrace. Both consensus and the broker forecast a declining earnings trajectory for all the names in the sector.

Citi has Sell ratings for CommBank and National Australia Bank and is Neutral rated on both ANZ Bank and Westpac. The broker also has Sell recommendations for Bank of Queensland ((BOQ)) and Bendigo & Adelaide Bank.

Flat house prices in 2024 and ongoing residential construction weakness

Morgan Stanley forecasts flat house prices in Australia for 2024 as migration slows and housing supply improves from low levels. Based on prior RBA tightening cycles, the analysts suggest interest rate cuts, not a shift to a holding pattern, are needed for a broader turn in the housing cycle.

The broker anticipates ongoing weakness in 2024 for residential construction, which will be largely responsible for a slowing in broader activity and the labour market.

Residential construction activity in the fourth quarter of 2023 slowed by -5.3%, entirely due to an -8% quarter-on-quarter slump in detached building activity, note the analysts, with apartment construction flat over the year.

Housing supply is expected to improve as purchase/rental inventories rise, while demand is likely to be supressed by record poor affordability levels and slowing population growth.

February national house price numbers showed month-on-month apartment price growth of 0.7% compared to 0.6% for detached housing, which was a slight increase in pace compared to prior months.

Despite a stronger start to 2024, buyers in the housing market are still being selective, according to a panel of Sydney mortgage brokers recently hosted by Jarden, and housing market strength is still “patchy”. In particular, multiple property investors continue to sell down their portfolios, which is evidenced by a significant rise for unit listings.

The mortgage brokers believe the market is mostly being driven by higher income, higher wealth buyers, with lower income buyers largely priced out of the market. Recent research by the broker also arrives at a similar view.

On the rental scene, Morgan Stanley notes there has been little slowing in the pace of asking rent inflation, which increased to 8% year-on-year.

This broker sees little sign at present of a meaningful loosening in the labour market, given vacancy rates have re-tightened in recent months and currently sit at around 1% nationally.

Fledgling signs of greater consumer spending power, which may boost retail sales

Roy Morgan sees an ongoing flattening trend for retail sales over the next year in Australia, though there are some factors which could potentially boost the spending power of consumers in the second half of 2024. Retail sales are still expected to be sitting around 8% above the pre-covid trend by the end of 2024.

Factors which may boost consumer spending include an ongoing drop in inflation, likely interest rate cuts, and stage 3 tax cuts which are set to provide a boost for middle income earners. Roy Morgan also points to a drop in electricity prices, courtesy of the -50% drop in the wholesale cost of energy expected to flow down to retail prices from July.

Following the announcement of lower-than-expected inflation numbers this January (and the November prior), hopes have risen for interest rate cuts sooner rather than later. The ANZ Bank-Roy Morgan Consumer Confidence Index is starting to climb back up over 80, having lived at recessionary lows below 80 during 2023 for 31-straight weeks.

Spending growth on the non-discretionary Food category, which comprises about 40% of total monthly retail sales, is set to grow at twice the rate of discretionary Non-Food categories during 2024.

Roy Morgan’s preliminary forecast for retail sales growth is 1.2% for 2024, based on historical spending data from the Australian Bureau of Statistics (ABS), along with numbers compiled for population growth, income, unemployment, inflation, and interest rates.

Population growth continues to be the key factor supporting retail sales growth, according to Roy Morgan, with 518,100 extra people (in the year to June 2023) helping Australia avoid recession. While population growth will moderate in 2024, it is expected to continue to support retail demand.

Along with this 2023 population growth, ongoing strong employment and the dwindling remains of record household savings helped steady retail sales and avoid the much-feared consumer spending ‘cliff’, suggests Roy Morgan.

In an outcome few would have predicted (including Roy Morgan), a new market for ultra cheap, low quality, throw-away goods has been created by the rise of online Chinese retailers Shein and Temu, which are on track for annual sales of over $1bn each in Australia.

‘Mortgage stress’ is still hovering at concerning levels seen only a handful of times since the GFC. The latest Roy Morgan Mortgage Stress indicator shows that 1,609,000 mortgage holders were 'At Risk' of 'mortgage stress' in the three months to January 2024, following the November increase lifting rates to 4.35%.

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