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Retail Forecasts, February 2013 – Cost control


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13 March 2013:  After showing a lot of promise, 2012 was a disappointing year for retail.  Retail sales growth was strong in the first half of the year but momentum tailed off in the second half, and many retailers continue to struggle in a highly competitive environment.

Across calendar 2012 the better performing sectors were food, cafes and restaurants, and the other retailing sector (which includes a number of pure play internet retailers).  Those on the wrong side of the dividing line were the usual suspects of late – household goods retailers, clothing retailers and department stores.

The underlying economic story in Australia is currently not as strong as it has been in recent years.  Mining investment is very likely to reach a peak in the next year, after which it will detract from growth.  Many other parts of the economy remain lacklustre.  Hence the RBA has been cutting interest rates to kick-start a sluggish economy, and to counteract the effects of a $A which remains higher than economic fundamental would suggest.

No surprise then that retail spending is still below trend.  Retailers waiting for the cavalry to arrive are increasingly focusing on containing their costs in order to stay viable.  Cost control is always imperative, but even more so when trading conditions are as they are today.  While discounting can assist sales in the short term, it is often at the expense of profit margins.  In order to keep prices low on a sustainable basis, and remain competitive in the market, cost control is the key.  

A key item for retailers is labour costs, and wage growth in the retail sector recently slowed to the same pace it saw in the immediate post-GFC environment, suggesting that retailers are having some success in containing their cost growth in a tough environment.

While the start of 2013 may see a soft demand environment continue for retail, there are some positive signs on the economic horizon.  Low interest rates have yet to fully work through, asset price gains may be finally becoming a positive support to spending, consumer confidence is on a rising trend, housing activity has finally started to lift, and the household savings rate has levelled out, so future consumer spending growth should at least match income growth.

By financial year, real (inflation-adjusted) retail sales growth is expected to record a gain of 2.2% in 2012-13.  Retail growth may lift marginally in 2013-14 (2.5%), before improving to 3.6% in 2014-15 as broader economic conditions and housing activity improve.

Across the country retailers continue to face mixed fortunes.  Western Australian retailers have just enjoyed two years of very strong retail growth, while over 2012 retail has also done well in the NT.  Retail sales have seen solid growth in Queensland despite a patchy economy and in the ACT, defying Federal government restraint.  The New South Wales retail market has under performed for some time, but may be finally starting to lift thanks to deep interest rate cuts and resulting signs of life in the NSW housing market.  Over the past year retail has had a dismal run in Victoria, South Australia and Tasmania – a lower $A would be a wonderful tonic for all of these State economies, and retail sales may grow only slowly until that eventuates.

See Deloitte media releases and research at www.deloitte.com.au

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