Christmas Candy Stockpiled in July as Aussie Slump Looms

Christmas Candy Stockpiled in July as Aussie Slump Looms

Andy Adams has already bought his Christmas candy. With the Australian dollar down 12 percent in its longest losing streak since the 2008 financial crisis, he’s stocking his food store early in anticipation of a further fall.

“We basically doubled the size of our last order. We had to,” said Adams, whose British Sweets and Treats store in the Sydney suburb of Bondi caters to U.K., Irish and American expats craving Maynards Wine Gums, Barry’s Tea, and Baby Ruth bars. “We know the dollar’s going to creep down, so we’re trying to grab it now at a reasonable price.”The weakening Aussie, which on July 3 fell below 91 U.S. cents for the first time since 2010, will push up import costs about five percent even if it ends the year at 96 U.S. cents, according to Bank of America Corp.’s Merrill Lynch unit. Retailers must choose whether to swallow higher prices and lose profits, or try to pass them on to customers and risk sales amid weak consumer confidence, the bank said.

“A fall in the dollar can make it pretty expensive” for retailers, Tim Samway, managing director of Hyperion Asset Management Ltd., said by phone from Sydney. “The effect is reasonably predictable: import costs go through the roof.”

Harvey Norman Holdings Ltd. (HVN) is counting on customers accepting higher costs. The country’s largest electrical-goods retailer will increase prices from Aug. 1 and is purchasing as much stock as it has warehouse space to store, according to chairman Gerry Harvey.

Irish Soda

“We’re spending A$200 million ($183 million) to beat the price rises,” Harvey said in a telephone interview yesterday. “We’d buy more if we had somewhere to put it.”

At British Sweets and Treats, Adams is also betting that homesick foreigners will pay more. Reese’s Peanut Butter Cups, made by the Hershey Co. (HSY), will have to rise 50 Australian cents to about A$3 over the next six months, he said, versus the $1.10 cost of a two-cup pack to U.S. shoppers on Amazon.com.

Adams must now pay his supplier about A$2 per can of Club Orange, a popular Irish soft drink made by Britvic Plc (BVIC), an increase of a third. So he has bumped his retail price up to A$3 from A$2.50.

“The stuff flies off the shelf anyway,” he said. “To be honest, I think I’m selling more.”

Still, with retail sales growing less than expected in May amid the biggest slump in consumer confidence in 17 months, others doubt the willingness of Australians to dig deeper.

Aussie Hedge

Price rises “may curb consumer spending amid already weak consumer sentiment,” Moody’s Investors Service said in a July 1 comment. The dollar’s fall is a credit negative for both retailers and mall owners such as Westfield Group (WDC) and GPT Group (GPT), analyst Saranga Ranasinghe wrote.

“It’s very, very difficult to put up prices, so in the short term they’ll absorb it into their margins,” George Svinos, lead Australian partner for retail at KPMG, said by phone from Melbourne. “There’s always short-term pain” when the local currency depreciates against the U.S. dollar, he said.

“The customer would not accept, and we would do our best to buffer, any price increases,” said Bernie Brookes, chief executive officer of Australia’s largest listed department store company, Myer Holdings Ltd. (MYR)

Myer has currency hedges in place for the next 12 months that allow the company to make purchases as if the Australian dollar were still stronger than the greenback, he said on a May 22 media call. After that, he expects wholesale prices to increase if the Aussie keeps falling.

Profitable Period

After rising to $1.0545 as recently as April, the currency traded as low as 90.37 U.S. cents July 3. That makes it the second-worst performer this year, after the Japanese yen, among 10 developed-nation currencies tracked by the Bloomberg Correlation-Weighted Indexes.

Australian stores have boosted earnings in recent years as the stronger currency made imports cheaper, Macquarie Group Ltd. said in a note to clients in January. Gross profit margins at clothing and apparel retailers increased 9 percent between 2006 and 2011 as the Australian dollar gained 34 percent against the greenback, Macquarie said. Goods made in China are typically paid for in U.S. dollars, the note said.

Imports of consumer products such as electronics, apparel, toys and books increased 17 percent over the past five years, to A$39.7 billion in the year ended March 2013, government data show. About 40 percent of Australian retail spending goes to imports, the country’s central bank says.

Petrol Pain

Some retailers will benefit as shoppers start buying more at home rather than from overseas Web stores or on foreign holidays, Paul Zahra, chief executive officer of David Jones Ltd., said on a May 27 media call.

Still, the falling dollar is already squeezing consumers, according to Saul Eslake, Australian chief economist at Merrill Lynch. Gasoline, which responds quickly to currency moves, has risen 12 percent to A$1.4590 a liter in Sydney over the past two months.

“Higher petrol prices are a bit like higher interest rates,” Eslake said by phone. When consumers “spend more on petrol, they have less to spend on discretionary items.”

That will make it harder for stores to charge more for their wares, according to Tim Hannon, chief investment officer of Evergreen Capital Partners Ltd.

“Prices should rise. The question is whether the environment allows them to pass that on,” he said. “The Australian dollar is just another headwind for the retail sector in the short term.”

To contact the reporter on this story: David Fickling in Sydney at dfickling@bloomberg.net