Deloitte Access Economics’ latest issue of Retail Forecasts reports that retail sales have come out of the pandemic better off than if COVID had never happened. Retail spending surged at the end of 2021 and followed that with a further 1.2% gain in real turnover over 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).
Returning mobility, record employment and pent-up demand are likely to drive further gains in retail spending over the near term. This is especially true for hospitality as Deloitte’s Global Consumer Tracker shows increasing sentiment for social interaction, while the colder weather is likely to support wardrobe updates after consumers have spent the last two winters in lockdowns (benefiting apparel and department stores).
In all, 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.
Chart 1: Nominal and real Australian retail turnover
Source: ABS Retail Trade, Deloitte Access Economics
However, the forward outlook presents a number of challenges for retailers.
The inflation challenge is now a reality, such 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 (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. These forecasts show retail price growth peaking at 5.5% over the year to December 2022 (with food retail prices up 7.6% over the same period).
Hence the majority of retail turnover growth for H2 2022 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 initial signs of encouragement in relation to shipping costs. Most notably, the Reserve Bank is looking to actively suppress price growth through a sequence of 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. 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.
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.
Download the executive summary of Retail Forecasts here.