Australian retail sales have come out of the pandemic better off than if it had never happened.
However, inflation challenges could prove more problematic, according to Deloitte Access Economics’ latest quarterly Retail Forecasts subscriber report:
Overall spending expected to slow from the second half of 2022, with retailers facing a shift to value purchases, margin squeezes and rising business costs.
In the advertising industry, analysts expect ad spend to maintain its strong run to the end of the year.
Zenith's latest forecasts note that ad spend has remained on track despite the macroeconomic headwinds that emerged this year: "For now, consumer spending continues to grow, as consumers demonstrate their strong appetite for the travel and entertainment experiences that were denied to them over the pandemic. Business confidence is generally high, and corporate investment is rising, and there is little evidence of widespread cost-cutting."
But inflation will mean a change in behaviour from consumers.
David Rumbens, Deloiitte Access Economics partner “The growth outlook is positive, but it still presents a number of challenges for retailers.
"Inflation is now a cold, hard reality, to the extent that the majority of turnover growth over the next few years is expected to be driven by prices rather than volumes.
“For households, the price pinch is near unavoidable, with CPI price growth for non-discretionary goods and services
up 6.6%, more than double that of discretionary which was up 2.7%.
"These non-discretionary goods and services are the ones households are less likely to reduce their consumption of, including food, fuel, housing and health, placing significant pressure on other components of spending.
“The March quarter saw retail prices up by 3.2% over the year, driven by a 4.5% increase in retail food prices. And the cost of inputs is unlikely to taper anytime soon as producer prices were 16% greater than pre-pandemic levels in March. This means retailers are likely to feel the brunt of rising costs for a while.”
According to Deloitte Access Economic Retail Forecasts:
- Retail spending surged at the end of 2021 and followed that with a further 1.2% gain in real turnover in the March quarter 2022
- That sees real retail spending some 6.2% ahead of its pre-COVID trend (the level of spending which was expected if COVID disruptions had not occurred)
- Hospitality is benefiting from pent-up demand for social interaction, while colder weather is likely to support wardrobe updates after consumers have spent the last two winters in lockdowns (benefiting apparel and department stores)
- Double digit sales growth is expected for apparel, catered food and department stores over 2022 (compared with locked down 2021), driving a very healthy real retail sales performance of 5.5% growth in calendar year 2022.
Retail price growth is forecast to peak at 5.5% over the year to December 2022 (with food retail prices up 7.6% over the same period).
The majority of retail turnover growth for the 2022 half year to December and into 2023 and 2024 will be driven by prices rather than sales volumes. Retail sales volume growth may average only 1.1% over 2023 to 2025, compared to 1.9%
per annum for retail price growth.
That forecast includes some moderation in price growth after a peak in December 2022. There are some early and encouraging signs in relation to lower shipping costs. Most notably, the Reserve Bank is looking to actively suppress price growth via interest rate rises.
“For now though, businesses may need to look to ways to lower costs and reduce disruptions to operations to avoid losing competitiveness,” Rumbens said.
“This could involve diversifying and building more resilient supply chains, or shifting to a more vertically integrated structure to better control supply chain visibility. With wage pressures high, businesses may need to maximise staff retention as much as possible through investment in the likes of training, talent pipelines and automation.
“Overall, the cost of living squeeze, higher interest rates and preference for spending on services are expected to lead to a slowdown in retail momentum through the second half of 2022, which may then result in real per capita spend on retail falling over 2023 and 2024. That means the speed of return of net migration will become a significant driver of retail’s future growth prospects.”
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