Retailers are scrambling to avoid a "liquidity crisis" after in-store foot traffic fell 8 per cent between Black Friday and Boxing Day, compared to 3 per cent over the same period in the previous year.
"Foot traffic appears to have been weak as shoppers continue to shift December shopping trips online and pull forward purchases into Black Friday in November," said Citi in a note reviewing the past Christmas season.
Citi said that discounting had not increased, and in some cases retailers had pulled back after "several years of discounting ramping up to unsustainable levels in some categories".
But even as some retailers questioned the value of extreme promotions, Citi said levels of discounting remained high and that "discounts were required to get shoppers into physical stores''.
James Stewart, partner at Ferrier Hodgson, said retailers still relied on discounts to "clear their products, otherwise they would have a liquidity crisis''.
"They don't want to do it. They'd really rather not. But they have to do it," he said.
Analysts attributed the steep decline in foot traffic to three broader trends: the rise of online shopping, shifts in the retail calendar, and growing cost-of-living pressures.
First, with the global rise of digital and mobile retail, Australian shoppers are staying out of physical stores in favour of the web.
Pointing to the rise of online sales, Credit Suisse analyst Grant Saligari said that declining in-store traffic was not necessarily bad for retailers from an overall perspective.
"You have to take a helicopter view: most retailers are seeing mid to high-teen growth in online sales," he said. "Almost by definition, foot traffic must be at lower levels."
But Mr Saligari warned that the benefits of digital retail may not be distributed evenly. "In general, digital is scalable. That might favour the larger companies," he said.
Second, consumers were pulling forward their Christmas shopping into November, inspired by the burgeoning cluster of retail holidays like Black Friday and Cyber Monday, which are US traditions centred on the Thanksgiving weekend.
In 2018, Black Friday brought in $400 million in sales in Australia. In the US, the number was closer to $US6.2 billion ($8.5 billion).
Third, the declining in-store traffic was linked to rising cost-of-living pressures on consumers as they struggled against falling house prices and weak income growth.
"Consumer spending is brittle. House prices are falling in metropolitan cities for the first time in 20 years," Mr Stewart said. "That affects the psyche of the consumer: you don't feel as wealthy as you did."
Analysts said that in this depressed climate, it was encumbent on each retail outlet to devise an individual strategy for future success.
"More than most years, Christmas trading was dependent on retailer performance (promotional programs, in-store execution, etc.) rather than a broader positive or negative sales trend across the market," Citi said.
The tough Christmas season has already thrown up one loser in adventure goods retailer Kathmandu Group, which issued a surprise profit warning in the first week of January off the back of weak Christmas sales. Its stock tumbled by 14.1 per cent on the day.
Citi predicted supermarket giants Coles and Woolworths, and footwear retailer Accent Group would outperform expectations, while fast fashion jewellery chain Lovisa and under-pressure department store network Myer had the potential to deliver disappointing earnings.
It also said Kmart had likely reached the end of a 19-quarter streak of like-for-like sales growth outperformance against its discount department store rivals, with Big W and Target showing potential to eclipse them in sales growth.
This article was first published in The Australian Financial Review on 8 January 2019.