Even Vegemite Feels the Bite as Australia's Downturn Hits Stocks

(Bloomberg) -- Vegetables, vitamins and Vegemite are taking a hit as consumers rein in spending amid weakening economic growth in Australia. The stock market is feeling the pinch too.

Consumer staples are the nation’s worst-performing shares this year after a disappointing earnings season. The S&P/ASX 200 Consumer Staples Index is up only 4.3 percent, while the benchmark gauge climbed 9.5 percent, and the outlook isn’t all that rosy as households spend less.

“Weakness in housing markets is causing consumers to feel less confident and defer spending,” said Natalie Tam, investment director for Australian equities at Aberdeen Standard Investments.

As consumer spending waned -- it accounts for almost 60 percent of Australia’s gross domestic product -- the economy experienced its weakest six-month expansion since the global financial crisis. It didn’t help that the nation is enduring its worst property downturn in a generation, with dwindling housing prices and a credit crunch weighing on households. In March, consumer confidence plunged to its weakest reading since September 2017.

Grocery stores, which make up more than half of the consumer-staples index, are also pessimistic on their customers’ spending power.

Australia’s largest supermarket chain, Woolworths Group Ltd., which accounts for 44 percent of the subgroup, said in February it expects a subdued consumer environment for the foreseeable future, flagging that earnings at its second-largest unit would fall. Rival Coles Group Ltd., which makes up 15 percent of the grouping, started a review of its business because a drought that’s been gripping parts of the country has pushed up costs. Other companies such as Vegemite maker Bega Cheese Ltd. have also come out with disappointing results.

The grim outlook on spending comes as frugal shoppers look to discounters like Aldi and emerging entrant Kaufland for deals on everyday items. But bargain retailers aren’t exactly cashing in -- Aldi’s growth is moderating and Kaufland’s Australia rollout has faced delays, prompting Morgan Stanley analysts to lower the two grocers’ sales forecasts in an April 4 note.

And while the federal budget unveiled this week tax-relief provisions meant to make consumers feel a bit richer, Credit Suisse Group AG analysts said the policies won’t be significant after factoring in the effects of people being pushed into higher tax brackets as they earn more, according to an April 2 note.

Of course, not every consumer-staple company is lagging -- sales abroad have helped protect some of them from the declining domestic economy.

Organic food producer Bellamy’s Australia Ltd., which derived more than a quarter of its revenue from overseas in 2018, has soared 49 percent this year. For Kiwi dairy company a2 Milk Co., up 33 percent on the Australian exchange, almost a third of sales came from outside the antipodean nations.

Still, overseas exposure isn’t always a plus. Vitamin maker Blackmores Ltd., which generated about 30 percent of its sales from China last year, has tumbled 23 percent since the end of December as the world’s second-biggest economy struggles with softening consumer sentiment. That’ll lead to weak third-quarter sales, Citigroup Inc. analysts led by Sam Teeger wrote in an April 3 note.

To contact the reporter on this story: Jackie Edwards in Sydney at jedwards160@bloomberg.net

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Cecile Vannucci, Teo Chian Wei

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