Deloitte Access Economics’ latest issue of Retail Forecasts suggests that Australia’s retailers need to prepare for two futures.
The first is here and now – one where consumer sentiment is weak and retail sales in real terms are going backwards. That was the reality of the final quarter of 2022, and much of 2023 may see a similar environment.
The other future is a brighter one – where migrants and tourists are back in big numbers and consumers have regained spending power. This future could emerge as soon as the end of 2023 and means Australian retailers should also have an eye to growth.
Today’s National Accounts data on Q4 2022 gave us a glimpse of the more sombre current environment. Real economic growth slowed over the December quarter, increasing by 0.5% compared to 0.7% over the September quarter. Similarly, while household consumption increased - stoked by spending on discretionary services - growth moderated from 1.0% to 0.3% in the September and December quarters, respectively.
The retail slowdown has come a little faster than expected with end of year sales not enough to stave off consumer caution. Retail turnover in the December quarter was kept afloat by rising prices (+1.1%) as sales volumes fell by 0.2% - marking the first decrease in real turnover since September 2021.
The impact was most pronounced for discretionary goods, with retail turnover declining in Apparel (-2.3%), Other retail (-2.4%), and Department stores (-2.9%) over the quarter. This points to shifts in consumer spending: a pivot towards essential goods as households experience tighter budgets and consumers become cautious of spending on discretionary services (such as travel). Both of which leave discretionary goods out in the cold.
Consumers have already begun changing their spending habits with an increasing proportion of Australians undertaking cost saving measures. According to Deloitte’s Global State of the Consumer Tracker the proportion of consumers purchasing low-cut meats increased to 35% in January 2023 (up from 30% in September 2022). Similarly, the proportion of consumers mostly purchasing store brand products increased to 27% (up from 22% in September).
Non-food sectors are forecast to experience the brunt of the retail slowdown as consumers prioritise non-discretionary items. Real non-food sales are expected to see a contraction of around -3.0%, while food retailing should stay afloat with growth of 2.8% over 2023.
The tight consumer environment risks real retail spending going further backwards over the first half of 2023, and this may result in weak growth of just 0.1% for real retail trade over the 2023 calendar year.
Green light, go.
Despite this, a growth environment where consumers are confident again and seeing gains in real disposable income is on the horizon. This environment features real wage growth (mainly as the RBA succeeds in getting prices down), increased consumer confidence, and stronger population and tourism growth. All of which will stoke growth in the retail sector.
Spurred on by non-food and food retail increasing by 2.4% and 1.5% respectively, real retail turnover is expected to bounce back in 2024 to 1.9%, when price growth should also be far more constrained.
A better growth future for retailers may be with us as soon as the end of 2023.
Chart 1: Real retail growth by category, 2023 and 2024
Source: Deloitte Access Economics
Download the executive summary of Retail Forecasts here.
This blog was co-authored by Shannon Davidson, a Manager in the Deloitte Access Economics team.