Widespread discounting to drive Christmas sales

Australian businesses are indicating that discounting is the required antidote for sluggish spending heading into Christmas, with expectations for selling prices now close to the lowest level in more than two decades. Selling price expectations have fallen nine points over the past two years and are now at an index of 12.

Dun & Bradstreet's latest National Business Expectations Survey reveals Australian firms are confident discounting will result in a significant increase in sales over the Christmas period and accordingly, they are preparing to re-stock to ensure they can meet demand.

Forty nine per cent of businesses expect sales to increase over Christmas. The expected sales index is now at 33 up from 11 last year. Meanwhile, expectations for inventory levels have risen to the highest point since 2000, with more than a third (38%) of businesses expecting to boost their inventories to meet anticipated demand - this is a 21 points rise, up from an index of three during the December quarter 2011.

The anticipated reliance on discounting to deliver sales during the December quarter reflects the approach taken by many firms during the June quarter 2012. The selling price index fell nine points to three during the June quarter - the lowest index level since 1997. Concurrently, sales rose to an index of 22, up from an index of five the previous year.

Expected and actual selling prices Dec Q 2009-Dec Q 2012

BEX October graph

According to Dun & Bradstreet's CEO, Gareth Jones, businesses are being forced to discount much more regularly than they would have prior to the GFC.

"Five years ago, discounting was a seasonal tactic that was primarily limited to post-Christmas and end of financial year periods," said Mr Jones.

"However, discounting is now the norm as consumers have become accustomed to sales and are unwilling to buy at full price. For businesses heavily exposed to consumer spending, particularly non-essential spending, it's difficult to get stock moving off the shelves without a price cut.

"Consequently, while businesses are expecting an uptick in sales numbers over the Christmas period, they are alert to the fact that discount campaigns will negatively impact margins and overall profit."

The implementation of discount campaigns is expected to impact margins in the coming months. While profit expectations are elevated compared with the same period last year, one in five firms expect profits to fall during the December quarter. Retails have expressed the most conservative expectations for profits in the coming quarter, with a profit outlook 14 points below the all firms average at an index of seven.

Plans for employment are at odds with sales expectations and are more closely aligned with the profit outlook. Staff levels fell during the June quarter to an index of -4 and employment will remain flat heading into Christmas, with expectations just in positive territory at an index of one. 

According to Dun & Bradstreet's economist, Stephen Koukoulas, the survey is good news for the economy, with sales expectations buoyant and profitability rising to respectable levels. 

"The results fit with the general tone of the economy since the middle of the year when overall growth was close to the long running trend," said Mr Koukoulas.

"This solid performance for sales does not however show up in employment expectations, which are broadly flat. This suggests that despite more favourable sales expectations, job creation and the unemployment rate are likely to be stable around recent levels.

"For the Reserve Bank of Australia, a highlight in the results is the sharp fall in expectations for selling prices.  These are close to the lowest level in 24 years and suggest that inflation will remain near or even below the bottom of the RBA target band. This low inflation climate should give the RBA scope to lower official interest rates as it assesses the challenges for Australia from global events."

*D&B Australasia conducted the latest Business Expectations Survey in September 2012 involving 400 businesses. Each quarter 1,200 (400 per month) business owners and senior executives representing major industry sectors across Australia are asked if they expect increases, decreases or no changes in their upcoming quarterly Sales, Profits, Employment, Capital Investment, Inventories and Selling Prices.

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