Retail sales in Australia have recovered to levels higher than before the pandemic, but headwinds loom as inflation is expected to climb.
With total expenditure forecast to decline starting in H2 2022 and retailers dealing with a move to value purchases, margin pressure, and growing business expenses, the country’s inflation problems might become more serious, according to Deloitte Access Economics’ latest quarterly Retail Forecasts.
Consumers’ frenzied purchasing in February and March overrode any effect of the COVID measures. As a result, real retail turnover increased by 1.2 per cent compared to the March quarter. Real retail expenditure levels now outpace the pre-COVID trend by 6.2 per cent because of all this development.
While colder weather is anticipated to encourage wardrobe upgrades after customers have spent the past two winters in lockdowns, the report noted that hospitality is benefiting from pent-up desire for social connection.
“The growth outlook is positive, but it still presents a number of challenges for retailers,” Principal report author, and Deloitte Access Economics partner, David Rumbens, said.
“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.”
Retail price rise is anticipated to reach a peak in the year ending in December 2022 at 5.5 per cent (food retail prices will increase 7.6 per cent during this time). Prices, not sales quantities, will be the primary driver of retail turnover increase in H2 2022, 2023, and 2024. In contrast to retail pricing rise, which is expected to average 1.9 per cent annually from 2023 to 2025, retail sales volume growth may only be 1.1 per cent on average.
“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.”
The report said inflation will make retailers need to balance raising prices while maintaining competitive.
Therefore, the report said companies would need to consider other strategies to save expenses and minimise operational disruptions. In order to effectively manage supply chain visibility and communication, this can include diversifying and creating more robust supply chains or changing to a more vertically integrated structure.
Alongside inflation pressures, the report said wage pressures remain high and that businesses may need to maximise staff retention to lower costs.